Walk Through of Accounting & Audit by Design Framework from 50,000 Feet

This blog post provides a walk through of the Accounting & Audit by Design (A&AD) Framework from 50,000 feet. It shows the moving puzzle pieces.

Financial Reporting Framework

A&AD relates to financial reporting.  And for financial reporting, you need a financial reporting framework. This blog post, Theory of Financial Reporting Framework explains what a financial reporting framework is. For A&AD, the financial reporting framework is provided in digital form.

Here is a working proof of concept financial reporting framework that I have created and will be using for this walk through.  I am providing three versions of this framework which I call my MINI Financial Reporting Framework. Here is a simple, very basic HTML page that shows the financial reporting framework.

Here is a link to a commercial software application that can be used to have a look at the MINI Financial Reporting Framework.


And finally, here is a link to that MINI Financial Reporting Framework on GitHub.

Basically, the MINI Financial Reporting Framework is an example of the metadata used in the A&AD process to create a report.

Report Model

From the financial reporting framework the report model is created. The report model will be how the business state (balance sheet) and changes in state (income statement, cash flow statement, statement of changes in equity) are organized.  A reporting economic entity can pick and choose from the permitted alternatives provided by the published financial reporting framework. Other things are driven by industry specific reporting practices.  These permitted alternatives are combined into what is referred to as the reporting style of the economic entity.  What shows up in the report model is also determined by the business events which have impacted the reporting economic entity.

An accountant would configure the report model similar to how a chart of accounts is configured; but the configuration is far, far more extensive.  No programming is necessary.  That report model configuration and the financial reporting framework which is created consistent with the principles, practices, and techniques of the Seattle Method is then used by a specialized intelligence engine to generate the financial statement from the business events journal information.

Documentation

The next moving puzzle piece is documentation.  Documentation is explained by the Theory of Documentation.  In a nutshell, documentation is simply the information contained in and structured within a document. A document is best understood as a structured container of information that memorializes a business event.  An example of documentation is the common document known as a check which is shown below.


Documentation tends to come in the forms.  The first form is basically what amounts to a picture of a document in the form of a JPEG, PNG, or maybe PDF. This is the hardest form to extract information from.  The second form is that of a document structured for presentation in that document.  For example, a PDF or HTML file is structured for information and you can extract information from the document usually using a process known as "scrapping" information from the document.  The third form is a document structured for meaning.  That structure could be a nonstandard format or a standard such as the Universal Business Language (UBL).

Map Documentation to Business Events Journal

The next step is that the information from the documentation is mapped to the business events journal. So for example, the check above is mapped to the business events journal (here is a prototype of a business events journal with two entries).
I am not going to explain the business event journal in detail, metadata used to enter the business event information into the journal.  For more information on that, please see The Future of Accounting and the Data Centric Accounting (DCA) XBRL taxonomy.

Note this matrix which shows the list of business events in the MINI financial reporting scheme and provides a mapping from the DCA core facets to each business event.

Business Events Journal

The business events journal is where all information for all business events lives. Below you see a screen show of a prototype of a business events journal entry. (Click here to go to the actual prototype.)


NOTE: I have not yet completely figured out all the fields needed in the business event journal entry; this is still a work in progress.

NOTE: I am using only general journal entries currently to keep the example simple; but subsidiary journals will be implemented also.  See this: Agents that turn any document into a subledger.

General Journal Entry

The general journal entry is a projection generated from the business events journal entries. Click here to go to a working proof of concept of a general journal with the entries from the above business event.


Working General Ledger Trial Balance

The working general ledger and the working general ledger trial balance are projections of the general journal. Here is a working proof of concept.


NOTE: The working general ledger trial balance above also includes an adjustment that was posted to the working trial balance. Think audit adjustment.

Lead Schedules

Lead schedules provide a mapping from the internal chart of accounts used by a reporting economic entity and the financial statement line item used to report information. The lead schedules are a projection created from general ledger information and a model which provides the mapping from the chart of accounts to the financial statement line items. Click here to see the working proof of concept.

Working Papers

Rather than creating working papers in spreadsheets, working papers are either projections from the business events journal or models creating in what amounts to the same content management system. Below you see an example of a few simple working papers: a bank reconciliation, a reconciliation to the adjusted book balance, and a list of reconciling items.

General Ledger Summarized by Business Event

Business events cause changes in "state" of the real accounts which are reported on the balance sheet.  The general ledger information summarized by business event is a projection from the general ledger. Click here to see the working proof of concept.

NOTE: Each business event is a line item of a roll forward of a real account from the balance sheet. The typical accounting system cannot provide this output because the appropriate metadata is not attached to transactions. In this example, the business events journal does capture this metadata and therefore that metadata is available to the general ledger.  Thus these changes in state line items can be provided.

Real Account Roll Forwards

Balance sheet line items report "state".  The income statement, cash flow statement, and statement of changes in equity report "changes in state".  Below is an example of a roll forward of one balance sheet line item (e.g. real account).  In this case we are showing the roll forward of Cash and Cash Equivalents.  Each real account roll forward is a projection from the general ledger. Click here to view the working proof of concept.

Generate Financial Statement

The balance sheet, income statement, cash flow statement, and statement of changes in equity are projections of the general ledger, assisted by the lead schedules, and assisted by the report model configuration prepared from the financial reporting framework used for the report. Click here to view a working proof of concept balance sheet projection. From that link you can also get to the other parts of the financial statement.


NOTE: Similarly, the income statement, cash flow statement, and statement of changes in equity are likewise projections created in the same way the balance sheet projection shown above was created.

NOTE: The financial statement is dynamic, not static like in the past. To get an idea of the nature of the financial statement please see, Example of Financial Statement Holon.

Closing Book

The closing book is all the supporting facts (measurements, observations) and models used to structure or organize those facts.  All structures would be projections from the business events journal information.  Click here to view the working proof of concept closing book.
NOTE: Working proof of concepts have been successfully created using one transaction, 19 transactions of synthetic data, and 2,300 transactions of synthetic data.

NOTE: When information cannot be generated from the business events journal, then information would be created using a semantic spreadsheet. For example, accounting policies that do not flow through the business events journal and qualitative financial disclosures that do not flow through the business events journal would be modeled using a semantic spreadsheet.

Risk, Controls, and Control Activities

The risks, controls, and control activities are also provided in machine readable form. This will be forthcoming.  For the time being, see Essence of Audit and Assurance.

NOTE: Also see Auditology: The Science of Audit Improvement.

Audit Evidence Graph

The audit evidence is provided in the form of a machine readable graph. This will be forthcoming. For the  time being, see Audit evidence graph. Also see Numeric's Audit Evidence Export.

NOTE: The audit evidence graph is part of the digital audit bundle.


* * *

Acknowledgements

Accounting & Audit by Design Framework brings together and is built on the ideas of many people spanning many areas which have been created over many years. These include: Miklos Vasarhelyi and his team which developed ideas related to continuous reporting and continuous audit, Bill McCarthy and his colleagues who created and built out Resources, Events, Agents (REA) and made it an ISO/IEC standard, Willi Brammertz and his colleagues who created ACTUS which is now included in FIBO and on the path to becoming an ISO/IEC standard, Dave McComb and Cheryl Dunn who authored The Future of Accounting and explain Data Centric Accounting (DCA), XBRL International and it members who created XBRL, Object Management Group (OMG) and its members for creating a plethora of global open industry standards including SBVR and SBRM, OASIS and their members who have created standards such as UBL, the W3C and their members who have perfected the semantic web and are swiftly moving to make things more pragmatic, Richard Gasca and his team who pulled all this and more together including my Seattle Method. And of course we cannot forget Luca Pacioli and his Summa de arithmetica which provides the deterministic mathematical foundation.

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