Understanding Model Based Financial Reporting and its Benefits

The purpose of this article is to explain "model based reporting" and highlight some of the significant benefits of this new approach to creating financial reports as contrast to traditional approaches to financial reporting.  An example of this is, say, the financial statement section of the Microsoft 10-K submitted to the Securities and Exchange Commission (SEC) and made available to the public in the SEC's EDGAR (Electronic Data, Gathering, Analysis and Retrieval) system for fiscal year 2017. (here is that actual submission for 2017)

(As a brief side note; the SEC's EDGAR system was made available around December 1993.  Public companies began submitting their financial information to the SEC as a result of the 1933 and 1934 acts.  Specifically, the 1934 act required public companies to submit periodic financial information quarterly and annually.  This was before the copier, the word processor, the internet, or the computer. People accessed paper-based reports in SEC reading rooms, libraries, or copies of reports where mailed to them.  Eventually microfiche became available.  Ah, the good ole days!)

Beginning in 1993, financial reports of public companies looked something like this 10-K of Microsoft. (Here are all of Microsoft's reports on Edgar)  Computers have a tough time figuring out "big blobs of text" like that.

Beginning in about 2009, the SEC began requiring public companies to submit their financial reports using the Extensible Business Reporting Language (XBRL).

Here is the first XBRL-based report submitted by Microsoft. Here is the filing page on EDGAR. (You can use the two Excel VBA applications in this ZIP archive to validate the fundamental accounting concepts and relations provided in that first filing and/or every Microsoft XBRL-based report. Note that Microsoft reports are generally very high quality in terms of the fundamental accounting concepts and relations; they had two issues which I confirmed were, in fact, errors on the part of Microsoft.)

Traditionally (circa 1980 or 1990), financial reports have been created using tools like spreadsheets and word processors. But these spreadsheets and word processors understand nothing about financial reports that are represented using those tools.  Those tools are presentation oriented.

While traditional reports were presentation oriented,  XBRL is effectively an extra fancy knowledge graph.  Traditional reports, being presentation oriented,  are made up of paragraphs, tables, columns, rows, cells and such.


But XBRL-based reports are structured for meaning and are made up of facts, associations, rules,  terms,  blocks of information, and disclosures.  In fact, the Microsoft report shown above is made up of:

I could go on giving you more of those sorts of details, but I think you might see my point.  Effectively, those informational artifacts are the "molecules" and "organisms" that make up the financial "stuff" that is represented in something like the Microsoft 10-K financial report.  That financial "stuff" is actually reliably interpretable to software that is built to interpret that "stuff". (If you don't understand what I am saying or if you want to understand more, read Financial Report Knowledge Graphs.)

Here is another rendering of that same Microsoft 10-K report for 2017. And another. And another. And another. And another. And another. And another.  And here is one more. This one is a bit special because this software application can in fact interpret that financial "stuff".  (Read this to properly differentiate understand and interpret)


So think about something.  Don't think about what you see.  Think about what you see means.  Model based XBRL-based financial reports are not totally perfected yet. But they will be perfected.  They will be made industrial strength and enterprise quality.  You can take that to the bank.

Here is one example of the significant benefits of model-based financial reports.  You probably have heard of Git.  Imagine Git for financial reporting.  Imagine something like Git except rather than working at the "file" level; it worked at the "molecule" or maybe the "organism" level of a financial report.  Imagine how useful something like Git for financial reporting would be to the teams of accountants creating a financial report for a company like Microsoft.

Imagine humans and machines collaborating with the machines amplifying and increasing the combined capabilities of those teams.  Imagine not spreadsheets that are not interpretable by machines, but spreadsheets that are interpretable by machines.  Excel is NOT a knowledge graph. But what if you had a tool that is as easy to use as Microsoft Excel or Google Spreadsheets; but it was also interpretable by machines and it  could help you do your work.

Again, not everything is working effectively yet. But this Showcase of XBRL-based Digital Report Capabilities can help you see that things are getting close.

The drudgery of accounting, reporting, auditing, and analysis is going to be significantly reduced. The tedious,  monotonous, repetitive, even grueling work will be taken over by machines.  These machines are not going to make unskilled people experts.  The machines are going to make good accountants even better accountants and make their lives better. Human + machine teams will perform work.

Accountants are not going to lose their job because of artificial intelligence; accountants that don't properly understand artificial intelligence are going to lose their job to accountants that do understand artificial intelligence properly.  This is what I see happening and this prediction is conservative:

  • Traditional role heavily enhanced by AI: Approximately 25% of all accountants/auditors/analysts will get a 10x increase in productivity.
  • Traditional role somewhat enhanced by AI: Approximately 30% of all accountants/auditors/analysts will get a 5x increase in productivity.
  • Traditional role replaced by AI: Approximately 5% of all accountants/auditors/analysts will be completely replaced by artificial intelligence.
  • Traditional role remains unchanged: Approximately 40% of all accountants/auditors/analysts continue doing things as they are done today or will be marginally impacted by artificial intelligence.

Because financial statements have been deconstructed into their fundamental logical oriented components; those components can be (a) interpreted by machine based processes and (b) reliably recomposed in new ways and useful ways using machine based processes.

Future-proof and amplify your unique capabilities.  Apply human + AI collaboration and work frameworks to your tasks.  Dramatically amplify and accelerate your accounting, auditing, analysis careers. Keep in mind that reliable artificial intelligence requires reliable artificial knowledge representations prior to the artificial intelligence becoming useful.  Forget the "toys" and cheap "parlor tricks".  Do the hard work; it will pay dividends.

Additional Information:

Comments

Post a Comment

Popular posts from this blog

Microsoft CEO: "AI Agents will Replace All Software"

Image
We have entered the "agentic era"; the era of the agent or intelligent software agent . Others refer to this as the "algorithmic economy".  Maybe think many very intelligent  microservices  exchanging information with each other and can work globally. In an interview with BG2, Microsoft CEO Satya Nadella predicts that (paraphrasing) SaaS (software as a service) is dead and that AI agents will replace all software. The entire interview is the first link in "Additional Information" below.  These three videos provide a focused look at this statement: LinkedIn post including short video AI Insights Explorer video  (Microsoft CEO Predicts: "AI Agents Will Replace ALL Software") Microsoft CEO's Shocking Prediction: "Agents will replace ALL software" Here is my personal interpretation of what Satya Nadella is saying and what it means.  First, Nadella says that we are "on the brink of a monumental shift".  I agree with that statem...
Read more

New Tool for Accountants, Auditors, Analysts

Image
A new type of tool will be available (is becoming available) to support professional accountants.  This tool is somewhat similar to the traditional electronic spreadsheet but it works differently and provides different capabilities to professional accountants. This new tool will supplement the arsenal of tools available to accountants, auditors, and analysts. This new tool is semantic oriented, model-based, and a global standard technical format.  To describe this tool in the past I have used the terms " modern spreadsheet " and " professional knowledge graph " and " deductive apparatus " and " semantic oriented accounting and audit working papers " and " knowledge product " and " logical spreadsheet " and " logic programming " and " logical digital twin of financial reports ". This new type of tool will help usher in modern accountancy . In this new era, machines will support accountants, auditors, and ana...
Read more

Named Graphs

Image
A named graph is a concept in the Semantic Web architecture where a set of Resource Description Framework ( RDF ) statements (a graph) are identified using an internationalized resource identifier ( IRI ). This allows for descriptions to be made about that set of statements, such as context, provenance information, or other metadata. In an RDF database, a named graph is essentially a subset of data that has been given a unique label (referred to as a name). A graph database can contain multiple named graphs alongside its default graph, and each fact can be present in or absent from any graph. Named graphs form a patrician of information that can be used. Named graphs are useful for managing sets of RDF data within an RDF store, enabling fine-grained access control, and managing chains of provenance for pieces of data. Additional Information : Named Graphs (ScienceDirect) Graph Search Algorithms: Developer's Guide Named Graphs, Chapter 5. Data Management Patterns Wolfram, Nonahed...
Read more