Understanding Articulation

Accounting is a universal technology for accountability. Accounting is a profession.  And that profession has created professional tools for performing the work of the profession.  One of those tools is the double entry bookkeeping model.  That model, called the Venetian Method, is an industry global standard.

The double entry bookkeeping model makes professional accountants very different from the average person that does accounting.  With the professional tool of the double entry bookkeeping model, accountants can (a) more easily detect errors and (b) differentiate an unintentional error from an intentional error (i.e. fraud).

It is said, and it has been my observation given 40+ years as a professional accountant, that "Where there are people there is fraud." The book Fool Me Once points out that fraud is a trillion dollar industry.  Given a gross world product of $84 trillion; total fraud is about 1% of economic activity (my rough estimate here, one trillion in fraud divided by the $84 trillion in gross world product).

Building on the double entry bookkeeping model is the notion of "articulation".  Articulation is the conscious interconnection of the primary financial statements mathematically.  This screen shot below depicts this interconnection: (click here to get to the file)

Notice the core mathematical interconnections that exist between the primary financial statements in this prototype that I have represented using XBRL (Articulation, Test Case), focusing on the mathematics:

• Assets = Liabilities + Equity (connects the two roll ups that make up the balance sheet)
• Net Income = Revenues – Expenses + Gains - Losses (disaggregation of net income)
• Net Cash Flows = Net Cash Flows from Operating Activities + Net Cash Flows from Investing Activities + Net Cash Flows from Financing Activities
• Comprehensive Income = Net Income + Other Comprehensive Income
• Equity = Equity Attributable to Controlling Interests + Equity Attributable to Noncontrolling Interests
• Ending Equity = Beginning Equity + Comprehensive Income + Investments by Owners - Distributions to Owners
• Ending Assets = Beginning Assets + Net Cash Flow

Notice that the associations represented in this prototype appear simplistic, and many accountants might get distracted by the apparent simplicity.  But this would be missing the main point.  The prototype is simple in order to make the point, not show the actual accounting associations of US GAAP or IFRS.  Similar rules exist for US GAAP and IFRS and every financial reporting scheme, or should.

It is these associations, this articulation, that forms the foundation of accounting and reporting, explicitly designed by accounting professionals in 1211 by Italian banks to detect errors and differentiate error from fraud, the double entry bookkeeping model.  This articulation is a consciously designed tool of professional accountants that should be in the fore front of every accountant’s mind.

The double entry bookkeeping model, the accounting equation, and this conscious choice to intentionally interconnect the primary financial statements mathematically differentiates the professional accountant and others that account for things.

Being able to now represent this articulation in machine-readable form using a knowledge graph system is a game changer.  Applying these ideas more generally, I predict that a new modern spreadsheet will become available very soon.  And that modern spreadsheet is going to enhance the professional accountant's capability to detect errors and fraud more easily in the information age.

Contemporary tools are not good enough to handle the increased complexity of multinational organizations, the increased volume of information, the increased velocity of information, and the increased complexity of information.