Calibration
Precision machines need to be calibrated. Accuracy and precision are not the same thing. Per Wikipedia,
- Accuracy is how close a given set of measurements (observations or readings) are to their true value.
- Precision is how close the measurements (observations or readings) are to each other.
Accuracy is measured using a series of specific tests under controlled conditions to determine if a specific machine is operating within expected tolerances. Tolerance is an allowed amount of variation from a specified quantity. Tolerances are set and serve as a standard between which results must fall. There are many tests that can help determine the accuracy of a machine; remember that accuracy is not a standalone value, but rather the summation of these specifications.
A financial report tells a story. That story must be "true and fair". Precision is the measure of how true and fair that story is to the real economic entity that the story is about.
A financial report is a precision machine.
A financial report can be said to be valid if it possesses certain traits which can be defined in general terms and for clarity are listed below to bring them into the reader’s mind:
- Completeness: Having all necessary or normal parts, components, elements, or steps; entire.
- Correctness: Free from error; in accordance with fact or truth; right, proper, accurate, just, true, exact, precise.
- Consistency: Compatible or in agreement with itself or with some group; coherent, uniform, steady. Holding true in a group, compatible, not contradictory. Not inconsistent.
- Accuracy: Correctness in all details; conformity or correspondence to fact or given quality, condition; precise, exact; deviating only slightly or within acceptable limits from a standard.
While these four notions which relate to the "trueness" and "fairness" must exist for every fact reported by a financial report, they also need to exist when considering the financial report in its entirety.
Two other notions help bring the notion of trueness and fairness of information at the fact and at the report level into focus:
- Fidelity: Fidelity relates to the loyal adherence to fact or detail; exactness. The faithful representation of the facts, business events, and circumstances represented within a financial report properly reflect, without distortion, reality. High fidelity is when the reproduction (a financial report) with little distortion, provides a result very similar to the original (reality of company and environment in which company operates).
- Integrity: Integrity is holistic fidelity. Integrity relates to the fidelity of the report in its entirety, of all parts of a financial report, from all points of view. Integrity is holistic accuracy, accurate as a whole. Integrity is the quality or condition of being whole or undivided; completeness, entireness, unbroken state, uncorrupt. Integrity means that not only is each component of a financial report is correct but all the pieces of the financial report fit together correctly, all things considered.
To an accountant the notions of verification and validity and that a financial report must be complete, correct, consistent, and accurate as defined above are a statement of the obvious. We know this.
Accountants have performed these tasks for hundreds, even thousands, of years and have a reputation for performing this task well. This is not new to accountants. This is why accountants built the precision tool, double-entry bookkeeping. Further, these traits which a financial report must possess are the obligations of those creating these reports; they are not options. Accountants don’t pick and choose whether a financial report is to be true and fair; those traits must be true by definition.
The article, Information Integrity: Forging a pathway to Truth, Resilience and Trust, points out that, "Access to reliable information is a necessary condition for well-governed and peaceful societies." It is also the case that reliable information is a necessary condition for well-functioning capital markets. And, as shown in Exhibit 1.1 of the Accountants Handbook, Volume 1: Financial Accounting and General Topics, there is a link between well functioning capital markets and a well functioning society. That path is through financial information.
That article defines the notion of an information ecosystem. Per that article, an "Information ecosystems are “complex adaptive systems that include information infrastructure, tools, media, producers, consumers, curators, and sharers. They are complex organizations of dynamic social relationships through which information moves and transforms in flows.”
The article borrows the notion of information integrity from corporate systems. Per the article, "The concept of information integrity is borrowed from corporate systems, where it refers to information security and data protection within enterprises. Applied more broadly, information integrity is determined by “the accuracy, consistency, and reliability of the information content, processes and systems to maintain a healthy information ecosystem.”
In her book An Introduction to Ontology Engineering, C. Maria Keet, PhD, provides discussion about what constitutes a good and perhaps a not-so-good ontology. There are three categories of errors she discusses:
- Syntax errors: She discusses the notion that a syntax error in an ontology is similar to computer code not being able to compile. For example, when an XBRL processor tells you that your XBRL taxonomy is not valid per the XBRL technical specification.
- Logic errors: She discusses the notion of logical errors within information which cause the information to not work as expected. For example, if you represented something in your XBRL taxonomy as a credit when it should have been a debit.
- Precision and coverage errors: Finally, Keet discusses the notions of precision and coverage when it comes to judging whether information is good or bad.
These ideas related to ontologies are also appropriate for knowledge graphs and more specifically financial report knowledge graphs.
Keet uses those terms, others use different terms including sound, complete, and effective to describe a well-functioning logical system. There are other descriptions as well.
A logical theory can be used to describe a logical system. A logical system is said to be consistent with a logical theory if there are no contradictions with respect to the logical statements made by the logical theory that describes the logical system.
A logical theory can have high to low precision and high to low coverage with respect to describing a logical system.
Precision is a measure of how precisely the information within a logical theory has been represented as contrast to reality of the logical system for the area of knowledge.
Coverage is a measure of how completely information in a logical theory has been represented relative to the reality of the logical system for the area of knowledge.
When a logical system is consistent and it has high precision and high coverage the logical system can be considered a properly functioning logical system. When a logical system is properly functioning, it creates a virtuous cycle.
Calibration is the comparison of measurements (observations or readings) delivered by a device under test with those of a calibration standard of known accuracy. The Seattle Method provides what amounts to a conformance suite of financial semantics and financial integrity. You can find those resources here, PLATINUM Business Use Cases, Test Cases, and Conformance Suite.
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