Rethinking Financial Reporting: the Model-driven Financial Statement

It is time to rethink the design of financial statements. Clay tablets worked well and they had a good run which ended many years ago when the clay tablets were replaced by papyrus and then ultimately paper.  Paper had a good run also but paper financial statements were ultimately replaced by what amounted to an electronic version of that paper; PDF, HTML, and such. We can do better.  Today's demands call for more modern accounting tools.

Idealized design (a.k.a. greenfield project) is the notion of designing a system without imposing constraints of prior work.  This technique may, or may not, work for rethinking the financial statement.

Here are a number of ideas that I would throw at the wall if I were in charge of rethinking the financial statement to make such tools modern:

  • Digital first: The first thing that I would do is abandon the legacy notion of paper and the document and embrace what a financial statement really is; a database or knowledge graph. A financial statement is a knowledge graph.  If there is any hope to effectively automate existing manual processes, if a "digital first" approach is not used, the results will be unsatisfying.  If you don't understand this, you very likely need to increase your digital proficiency.
  • Model-driven: If digital first is embraced, then model-driven can likewise can be embraced. I include serval sub ideas under model driven, including:
    • Model-driven as contrast to the current traditional approach of typing information into a document or spreadsheet
    • Global standards-based which provides massive leverage as contrast to proprietary which does not provide that leverage
    • Semantic-oriented meaning in the model you work with "things" rather than "strings"; this is necessary for making such systems actually work effectively
    • Artificial intelligence powered meaning specialized software for working with model-driven financial reports which is usable by accountants and other business professionals
    • Controlled customization (a.k.a. elasticity) meaning that financial statements are not fixed forms, rather they are customizable models that need to be effectively controlled in order to keep accountants within permitted boundaries or guardrails
  • Dynamic pivot tables: A modern financial statement needs to be dynamic like a pivot table as contrast to static like a piece of paper.
  • Semantic spreadsheet: A modern financial statement needs to be more like a semantic spreadsheet or knowledge graph. Excel is not a knowledge graph.
  • Git for information: Git is a standard technique for managing software code, think GitHub. Imagine having Git for information or Git specific to financial reporting. Imagine Git like operations for creating a financial statement: push, pull, rollback, branch, merge, squash, time travel.
  • Agile: Agile is a philosophy. Modern financial reporting should follow the Agile philosophy, to understand more then read the Agile Manifesto. Agile philosophy includes Extreme Programming (XP). Think Extreme Accountancy (XA).
  • Lean: Lean is a philosophy.  Modern financial reporting should embrace Lean philosophy, techniques, and principles of avoiding waste.  The creation of a financial statement is a manufacturing process.
  • Six Sigma: Six Sigma is a set of techniques and tools for process improvement which was pioneered by Motorola.  Lean Six Sigma is a discipline that combines the problem solving methodologies and quality enhancement techniques of Six Sigma with the process improvement tools and efficiency concepts of Lean Manufacturing. For example, Poka Yoke mistake proofing is a Lean Six Sigma technique.
  • Collaborative: Modern model driven financial statement creation will be collaborative in terms of managing a reporting project and in terms of the system for actually performing the report creation work; collaborating with internal reporting team members or independent third party auditors is part of the system.
  • Transparent: The entire record to report process will be free from as much friction as is possible enabling the origin of any financial statement line item to be understood and to be able to trace any business event which causes an accounting transaction to be traced to where that transaction ended up with a financial statement.
  • Human in the loop automation: Humans are in the artificial intelligence loop and in control. The aggregate work capabilities of human/machine teaming will exceed what a human or a machine could do alone.  Humans perform tasks which they do best; machines perform tasks which they excel at.
  • Global perspective: The perspective or orientation of a modern financial statement tool is global as contrast to being focused on any one single country or individual company.
A fundamental reorientation of the current state of affairs is underway. Technology offers new approaches to solving problems of accountancy.  There is a difference between a line cook and a chef. A line cook can follow a recipe and use kitchen equipment to cook you a meal; but a chef takes cooking to an entirely new level and provides you with an experience.

Sensemaking is the process of determining the deeper meaning or significance or essence of the collective experience for those within an area of knowledge. My Seattle Method does a pretty good job of summarizing my sensemaking.

Industrial engineering, informatics, cybernetics, information technology, computer science, knowledge engineering, and other "stuff" will be synthesized into a new, modern approach to financial reporting and the idea of what a financial statement is.

Below are three separate examples of what might be considered modern digital financial reports.  These are provided to help accountants understand the possibilities.

Here is one example of some of the new aspects of a new financial statement design exemplified by Auditchain Labs AG Luca Suite basic report viewer used to show prototype financial statements that I have created: 

Comments

Post a Comment

Popular posts from this blog

Big Idea for 2025: Semantic Accounting and Audit Working Papers

Image
I began my career in accounting in 1982 as an auditor with Price Waterhouse when accounting and audit working papers and schedules were 100% paper.  But within three months, I was creating many of those same working papers and schedules first in VisiCalc and then Lotus 1-2-3.  I would create those schedules and working papers electronically, then print them out, and tape them into the bundle of paper that supported our audits. The Compaq luggable computer was invented and electronic spreadsheets where even more compelling. Today, accounting and audit working papers tend to be 100% electronic proxies for those paper documents created in Excel or some other electronic spreadsheet, Word or some other word processing document, PDF generated from some word processing document, and maybe HTML.  All of these are presentation oriented proxies for documents and none of them is truly understandable by a computer based process. The next step in the evolution of accounting and audi...
Read more

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

Professional Study Group for Digital Financial Reporting

Image
Digital financial reporting is a thing.  The IFRS Foundation explains digital financial reporting  in an article, Digital Financial Reporting - Facilitating digital comparability and analysis of financial reports . OFFICIAL VERSION : The IFRS Foundation publishes an XBRL taxonomy for IFRS for SMEs (2024).  You can find official information about that XBRL taxonomy here on this web page, IFRS for SMEs as Published by IFRS Foundation (2024) . (Also see this PDF, IFRS Taxonomy Illustrated .) Since that official XBRL taxonomy is effectively a "pick list" created from the perspective of standards setters (i.e. not very practical, easy to use, and intended for ease of use by reporting economic entities);  ENHANCED VERSION : I have created an enhanced version of that same XBRL taxonomy, see  IFRS for SMEs 2024) - ENHANCED (Work in Progress) . The enhancements make the IFRS for SMEs XBRL taxonomy more useful in many different ways.  The enhancements are driven...
Read more