New Approach to Creating a Closing Book or Audit Bundle

Most accountants have created what amounts to what I refer to as a "closing book". For a smaller financial statement, that closing book might be only one or maybe a handful of electronic spreadsheets. For a larger closing book, such as that of a Fortune 1000 company, as Gartner consultancy points out, it might be more than 800 electronic spreadsheets.

And those spreadsheets have mistakes.  Consider the fact that 94% of business operational spreadsheets are known to have critical errors. This includes the spreadsheets in that closing book.

Now, PWC says that they have been able to get artificial intelligence to accurately read electronic spreadsheets about 74% of the time with hopes that they can get accuracy up to about maybe 87%. And because an accuracy rate of 87% is not sufficient for a compliance report; humans are going to close the gap between the perhaps 87% accuracy rate and the theoretical goal of 100% accuracy.

While this is maybe a viable approach; is this the optimal approach for making use of this potentially very powerful tool of artificial intelligence?  Systems that evolved over the past 50 years with no over arching deliberate plan other than to meet immediate short-term needs, the data is a mess, the data is disconnected, use artificial intelligence that can only achieve 87% accuracy, and 94% of those disconnected spreadsheets have some sort of critical unknown mistake. Besides all that, the information systems don't even capture the core business event information because the information systems started at the end of the chain and therefore fundamentally are locked into using information about the past as contrast to being able to use the business event information to forecast the future.

I propose that their could be a better way.  This new way is based on the ideas of the Accounting & Audit by Design (A&AD) Framework. Now what I did was start one step "after" everything that A&AD provides; but it "connects" directly to A&AD.  What I did was look at a financial transaction and then assign a business event category to each transaction.  What that enables is the automatic generation of a complete set of primary financial statements: balance sheet, income statement, cash flow statement, and statement of changes in equity.  I absolutely acknowledge that a better approach, as A&AD suggests, which is to start at the source documentation and then "flow" from that source documentation, to the business event information, and then to the financial transaction (where I appended that business event code which can be reliably used to understand the standard business event financial report line item where that financial transaction must be reported).

What this gives you is two "paths" that will eventually merge into one path where the consciously connected deterministic proposed by A&AD can be evolved to over time.

I have created what can be called a proof of concept (e.g. I cannot call this a working proof of concept yet because I have not put all the pieces together and tested them; I have only tested individual "steps" as of this point) of a "digital closing book".

What I want to do is, when I have the right software, construct a complete working proof of concept which includes both a digital closing book and a digital audit bundle using off-the-shelf software. In addition, I want to create a complete set of meaning oriented metadata which follows the Seattle Method framework, a reporting framework, canonical disclosure templates, canonical working paper templates, canonical financial statement templates, canonical financial analysis templates, all based on business events and the proper flow of information from the source of a business event all the way through the financial statement and on to a financial analysis model.

All of this is reflected in my current proof of concept. But the proof of concept is (a) not complete and (b) does not actually work in its current instantiation. What this current version does do is help one think.

Imagine trying to query that set of 800 electronic spreadsheet in a traditional closing book or audit bundle. Now, imagine trying to query my digital closing book.  My digital closing book is targeting a quality target of 99.99966% (e.g. six sigma).  And that is actually achievable and verifiable.  Again, I admit that I am not there yet; but that is where I am going.

How this works:  In its current form, standard financial reporting framework "state" line items and "changes in state" line items have been manually provided for each financial transaction in the general journal. This enables a very useful accounting manifold to be created for the general journal financial transactions.

That accounting manifold can be projected into a general ledger trial balance.  That enables the general ledger transactions to be projected to a general ledger trial balance of company accounts and also a general ledger trial balance of standard reporting framework "state" line items and also standard reporting framework "changes in state" line items.

This also enables a projection of a roll forward (a.k.a. movements analysis) of each and every balance sheet line item. In my proof of concept note networks 9210 through 9340 labeled with the term "Movements".  Here is one example for the roll forward of cash and cash equivalents.

A report writer type algorithm, which knows about the financial reporting framework used (in this case the MINI financial reporting framework) is then used to organize the "state" and "changes in state" line items into the set of primary financial statements: balance sheet, income statement, cash flow statement, statement of changes in equity.

There is a lot more going on in that proof of concept. One specific item worth noting is the lead schedule. That is a digital lead schedule.  As I mentioned in another blog post; in 1982 I created a lead schedule using VisiCalc when I worked at Price Waterhouse.  That was back in the day when audit bundles were 100% paper based.  By 2002 100% electronic audit bundles were being created.  Perhaps by 2030 (maybe sooner) digital audit bundles will be possible for the average accountant to create.

Digital closing book and audit bundle: These are just my ideas.  I am sure others will have different ideas.  There are lots of possibilities. I created my garden, others will create theirs. Completely new types of work systems will be created using new platforms and ecosystems. Yes, the office of the CFO will be refactored.  Who is to say exactly how? That is the $64,000 question.

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