Blockchain Ledgers are not Accounting Ledgers

There is some confusion in accounting circles about the use of blockchain in financial systems and particularly for financial reporting. While there is a role for blockchain, it is destined to be a defined and somewhat limited role. The reason for this confusion is that all the literature about blockchain refers to its central mechanism for recording transactions as a distributed ledger, which accountants think means that blockchain can somehow substitute for accounting ledgers. It's true, there are applications emerging where blockchains serve a lot of the functions of specific ledgers, such as those used for recording certain contracts or sales ledgers and other specific transaction types,  and these are very useful but they serve a different purpose than accounting ledgers. One of the difficulties lies in the fact that a central purposes of accounting ledgers is to record the transactions using accepted accounting principles. In a blockchain, it's unlikely that all participants in the blockchain are going to agree on accounting principles all the time.

This point is made in a an FEI article recently published. Some further research into the use of blockchains in the accounting cycle is being carried out by "The Financial Executives Research Foundation (FERF) in collaboration with Deloitte to explore how blockchain is currently being adopted in the financial reporting community, the potential for industry disruption and the realistic next steps for the technology to be embraced."

As this and other research moves ahead, we are likely to find that there is a distinct role for blockchain, but that it is not a substitute for accounting ledgers.

Can Artificial Intelligence Address Fake News?

To live in the age of information is a challenging experience. We now have more information available than at any time in history. Also, new information is being created at growing rates. This is well documented. The bulk of this information has become available through the internet.

Our naive selves might have assumed at one time that with all this information, the populace would be much better informed. Now we know that to be wrong. A significant amount of the information available on the internet is not based on facts. Rather it is mis-information or "fake news". Or just opinion based, with strong biases. We know that the dispersal of information in the age of the internet is seriously flawed.

The Pew Institute survey recently conducted a large-scale survey of technologists, scholars and others to see where they think the information environment is headed. The overall result was that 51% felt it would not improve over the next ten years and the rest felt it would. The report goes on to provide a wealth of information about those results, leaving the reader to draw individual conclusions. The main considerations leading to the survey result divided into technological issues and human nature. Many of the pessimists felt that the environment would not improve because of human nature.

People, faced with this vast array of information need to choose.They can't and don't want to read it all. There is a tendency of people to seek out the news that confirms their own views or biases. With the new vehicles for conveying information on the internet, notably social media, there is much opportunity to find information that confirms a variety of views and often has no factual basis whatsoever.

So, does the answer lie in technology or in human nature? It's hard to to think that human nature is going to change anytime soon. True, people may become more adept at filtering the information and one hopes we will. But better screening ability may not be enough to overcome the basic impulses to seek out validation of personal views.

Another possibility lies in the advances being made in artificial intelligence. The new AI technologies could be a big help in enabling people to cope - in seeking out more fact based and truthful sources.

While some may rebel at the notion that their information is being managed by computer programs, nevertheless the nature of the new AI technologies is such that they may be the best possible solution.

We need all the help we can get.

Corporate Reporting as Inspired by Davos

Discussions at Davos this week include some clues as to the direction that should be taken in corporate reporting. Of course, the focus in Davos is on country reporting, but the parallels are clear.

In a discussion of the need for a six part balance sheet, reference was made to the work of "Nobel economist Amartya Sen’s concept of ‘capabilities’. The question he posed was: what do people need to allow them to lead the kind of life they want? This is most naturally measured in terms of access to several kinds of assets. Do they have financial capital? But also human capital (education and skills), physical capital (infrastructure such as roads, housing), intangible capital (examples include patents, goodwill, or data), natural capital (clean air, green space, a healthy ecosystem), and social capital (a well-functioning community or nation)".

A comparison of the six concepts of capital - financial, human, physical, intangible, natural and social - to corporate reporting can yield some useful insights. Here, we should talk about the full range of corporate reporting - the financial statements and all the related disclosures such as the MD&A, the annual report, the corporate website and the regulatory reports. Of course, traditional financial reporting has always centered on financial capital. It even does a pretty good job of that, although there are critics and unresolved issues. Physical capital, as well, is measured in traditional reporting, although the state of the infrastructure is not widely reported. Deferred maintenance, for example, is often not reported.

We have seen an increase in reporting on human capital in recent years, but such reporting lacks a framework and is, at best, incomplete. Intangible assets have long been reported in traditional financial statements, but again there is an incomplete aspect, since purchased intangibles have been reported, but not internally developed intangibles. Also, although there have been attempts to measure cost  and cost consumption, the nature and worth of those intangibles has not been addressed very well - and cost consumption measurements have historically been somewhat erratic.

Reporting on natural capital has improved in recent years with the growth of sustainability reporting. But the reporting on social capital has been sporadic and scattered at best, with much of it focused on random comments about corporate culture and the corporate "family", with little real objective attention given to the idea of what has the company done to actually contribute to the wider society, the community and the nation.  Again, there has been no framework nor structure for such reporting.

There is much to do to bring corporate reporting to a standard that meets the needs of the twenty-first century. Davos provides some good insight.

One article on the Davos discussion can be found here.

Digital Disruption and Changing Business Models

Digital disruption has been with us for  many years. The current trend really began with the emergence of Amazon and Dell, who revolutionized the book and computer businesses respectively. Of course, Amazon went on to wreak further disruption in a variety of industries. The emergence of Google has shaken the idea of digital disruption to its core, with its amazing evolution from a good search engine to a global megafirm with far reaching ventures such as self driving cars.

Netflix offers great insights into the nature of digital disruption, highlighting the ideas of new business models becoming possible with technology - models that enable a company to make more money while at the same time saving the customers money and offering them more convenience. We saw that when they began offering DVDs to customers without requiring fixed return dates and then starting the business of streaming video to compete with cable TV. The disruptions in all these industries have been massive. All the signs are there indicating even more massive changes are coming.

This story is effectively portrayed by PWC in a recent analysis published on their website. Worth a read.

Cloud Computing Destined to Grow Quickly

The new year is likely to see a rapid increase in the use of cloud computing. While cloud computing has been growing anyway, new technologies are making it possible to overcome some of the major objections to the cloud in the past. For example, one of the problems has been the interface between the resident operating system and the cloud, with the concomitant operability and security issues.

These challenges can be reduced or even eliminated through the use of container technologies, which are growing in usage. Containers package together sets of applications along with the related APIs and tools to make a self contained runtime environment. So containers tend to be platform independent, which is crucial. Also, they have can have built in accessibility to the cloud which is where they come in with regard to cloud computing. By far, the most popular container system is Docker, which is also useful for rapid development of cloud applications.

Cloud computing is not new. However, container cloud computing uses dedicated WAN accessibility rather than open internet access. Therefore the security issues become more contained, although there are pros and cons to this.

Overall, cloud computing using containers is the wave of the future. For more, check this article.

Improved Corporate Websites for Data Analysis

Filing requirements for Foreign Private Issuers to file using the IFRS XBRL Taxonomy are effective for fiscal year ends after December 15, 2017. The deadline for most of the filers is March 15, 2018.

Along with the information to be filed with the SEC, companies are required under the SEC rules to include the XBRL information on their websites. So we should see XBRL information appearing on the websites of some 300 Canadian companies by March.

This information will appear in the Investor Relations Section of the websites, thus raising the question - what are the users of these sites going to do with that information?

It depends on the user. XBRL data cannot be read by most human beings. It was never intended for that. It’s purpose is to automate the analytical process by being platform independent and easily transportable to various data analytical tools, thus reducing the need for human intervention. The hitch is that only the more sophisticated investors have access to such tools; the rest use Excel – if they do any serious analysis at all.

Many companies already have been disclosing Excel information on their websites for several years. This has taken two general forms. Some companies have been presenting their core financial statements in excel format, which can be downloaded into Excel spreadsheets. A lot of users are sufficiently proficient with Excel that they can do a lot of analysis with that information. Some companies have also been including in the IR sections of their websites a data tool. Usually these tools include a range of data from the financial disclosures along with common analytical ratios and benchmarks. This information can also be imported into spreadsheets and used for analysis. It has the advantage that it reduces the time required for the users to go through the statements and select the data elements they want to use in their analysis.

With the availability of Excel data, the XBRL data would seem to add little for investors who do not have access to the more sophisticated analytical tools. This, despite the fact that XBRL data include a lot of metadata that could be of use. Without the appropriate tools, this information is hard to get at.

The obvious solution is to use Inline XBRL which combines HTML and XBRL into a presentation that is both human readable and machine readable. The SEC and other regulators are moving towards inline XBRL and this is a good thing. Investors will be able to read the information and with a click or two gain access to the metadata for those items. This will give them context for those items – accounting principles used, relationship to other items, etc.

Inline XBRL could also be used as a tool for those website data tools on the websites, thus enhancing the usefulness of that information.

In time, as websites evolve, all the IR information on corporate websites could be available in iXBRL form. Now there’s a thought for another day.

Some Factors That May Impede AI Adoption in Business

A recent paper released by EY addresses the developing trends in use of AI in business, but points to a number of factors that will slow down progress in this area. First is a skill shortage, or in the current vernacular – a talent shortage. Part of the reason for this shortage is that although AI has attracted a lot of interest, it is still a small field relative to the expectations being placed upon it. Second, is the state of applications or products in place for AI. Most of them are still at the stage of data scientist and experimental use, and there are very few that have reached the level required of enterprise solutions. Also, EY says attention has focused heavily on the fears associated with AI rather than on the benefits. This means resources may be misapplied to address those fears as opposed to exploring the opportunities. For the paper, click this link.