Structuring Systems into Discrete Stable Units

This article pulls the ideas of the Atomic Design Methodology which was created by Brad Frost, the ideas of Kurt Cagle related to the holon, the practice of strong typing, the notion of a state machine, the mathematical notion of the manifold from the branch of mathematics called topology, the child's toy called the Lego brick, the notion of best practices based canonical templates, and use all those ideas with XBRL. To all that, add the quality control techniques of Lean Six Sigma and Agile.  Now, apply all that to the deterministic system that is called double entry bookkeeping, accounting, auditing, and analysis.

Let me explain.

Atomic Design is a methodology for structuring systems by breaking those systems into discrete, stable, typed units at different levels of complexity: atoms, molecules, organisms, and species. Each level represents a progressively richer functional structure. This creates an explicit hierarchy of structures which can be leveraged.  Atoms are the basic building block.  Molecules are bonded functional units created from assembling atoms.  Organisms are assembled from molecules and form working functional systems with describable and understandable characteristics.  Species are simply different categories of organisms that perform slightly different functions.

A logical theory (a.k.a. conceptualization) describes the molecules. There are four molecules: elements, connections, conditions, facts. Those molecules are used to construct structures. Structures are organisms that fit into a model.

A holon is something that is simultaneously a whole in and of itself, as well as a part of a larger whole. Holons are things that exist as both wholes and parts of larger systems at the same time.  Holons have a dual nature in that they function independently by one set of rules while at the same time they contribute to the functioning of the larger system in which they exist. This describes perfectly the relationship between atoms, molecules, organisms, and species of organisms. As exemplified by a financial statement, a holon is a state machine which has:

  • An interior state and that interior state can be described using a knowledge graph
  • A boundary (a.k.a. boundary layer, fenced boundary, control plane) that can also be described using a knowledge graph
  • Events which cause changes in state and contribute to current state also describable using a knowledge graph
  • The knowledge graphs of the interior state, the boundary, and events  can be used to create a projection or various projections of that holon
  • One of those projections could be a manifold as described by topology which is a branch of mathematics
This is provenance by construction. Not provenance as metadata bolted on after the fact, but provenance as an inherent property of the generative process. Truth is inherent for the same reason.  Truth is not assembled. Traceability and trackability are inherent. This is simply the nature of the holon.

A manifold is a mathematical structure related to topology which is a branch of mathematics. To understand what a manifold is and how it works requires working knowledge of calculus and topology; I am not going to explain those ideas here.  Just understand that double entry bookkeeping is a computational substrate which can be leveraged to create useful tools such as a manifold.

Lego bricks, or the Lego analogy, give you intuition for composability, composition, and decomposition. These discrete, stable, typed units are:
  • Modular: Instead of one giant, messy project, you break everything down into small, manageable pieces.
  • Standardized: Similar to how every Lego brick has the same little bumps (studs) on top and holes on the bottom; because these "interfaces" are always the same, any two pieces can snap together; if you make the "connectors" standard, you can swap parts in and out without breaking the whole system.
  • Portable: Because, like standardized Legos, they are portable. For example, you can take your Legos to a friend's house and her Lego set will fit into your Lego set.
  • Reusable: Similar to Legos, if you need a tower for your castle, you don't have to invent a "tower-making" process. You just use the same bricks you used to build the wall. Pieces are proven, tested, and based on best practice.
  • Scalable: Like with Legos, you can start with a tiny house and, brick by brick, turn it into a city. You don't need a new "system" to get bigger; you just add more blocks.
  • Versatile: Like Legos, the discrete, stable, typed units are versatile.  There is not only one type of Lego brick, there are many different types. And you can build pretty much anything with Legos.
  • Precision components: Like certain Lego pieces, like wheels, which provide specific critical functionality and these precision components can be created and provided within the Lego system.
Typing is across two facets.  The first facet is the pattern of the information. Information is one of the following types: set, roll up, roll forward, restatement (a.k.a. adjustment), difference (a.k.a. variance), member aggregation, arithmetic, prose (a.k.a. text block), roll forward info, header-detail. The second facet is the use of the artifact. Artifacts types are either: primary financial statement, disclosure, accounting working paper, audit working paper, analysis model. These high level artifact types can have subtypes.

The digital information organism is a discrete stable unit.  With these discrete stable typed units, industrial processes can be created. Lean Six Sigma is a set of techniques, principles, and philosophies related to process improvement. For example poka yoke mistake proofing is a technique and the 1-10-100 rule which points out that the relative cost to fix a process is $1, to remediate an error is $10, and to deal with the consequences of a failure is $100. The Agile Manifesto is used by software developers can likewise be used by accountants, auditors, and analysts.  One Agile technique of extreme programming is to use test suites, a similar approach can be used to create these discrete stable units and make sure they were created correctly and according to best practices.

Why all this effort?  Because the payback is huge.  As Gartner points out, the average Fortune 1000 company uses about 800 electronic spreadsheets to create its compliance report.  Those 800 electronic spreadsheets are fragmented islands of information, individual silos.  Those silos of information are linked together using human effort.  These discrete stable units of information, if they work well, can replace those 800 silos with one knowledge graph that is interpretable by both machine-based processes and human-based processes.

To industrialize something means to turn it into a routinized, repeatable, scalable, reliable process that can be done the same way every time. That includes:
  • Standardization: You define the steps clearly so the work is done the same way each time.
  • Repeatability: Anyone (or any machine) can follow the steps and get the same result.
  • Scale: You can do it not just once, but hundreds or thousands of times.
  • Efficiency: You remove unnecessary variation, waste, or improvisation.
  • Transfer from “craft” to “system”: Before industrialization work depends on individual skill, judgment, or memory. After industrialization work depends on a documented, controlled process.
A simple metaphor. If you cook a meal from memory, that’s craft. If you write a recipe that anyone can follow, that’s standardization. If you build a kitchen that can produce 500 identical meals a day, that’s industrialization.

Now think of all those accounting working papers, audit working papers, and financial analysis models.  Imagine them not as documents like the electronic spreadsheet. Yes, an electronic spreadsheet is a document; an error prone, physically fragmented, semantically fragmented, arbitrary created document that artificial intelligence has a hard time sorting out. Heck, unless you created the spreadsheet even humans have a hard time sorting electronic spreadsheets.  What if we tried something different; what if we separated the information from the document "costume" the information wears. What if we created canonical best practices based templates, little databases that machines can reliably understand. Think Lego bricks of information; discrete typed stable units of information represented using an open global industry standard.

These discrete typed stable units of information are held in a new type of database, I refer that database as a quantum field database.

Discrete stable typed units of global open industry standards based information make industrialization possible. These AI-ready digital discrete stable units of information can serve accountants, auditors, and analysts for the next 500 to 1000 years. This is not a database feature.  This is a property of the knowledge itself and possible when that knowledge is represented correctly in the knowledge model. This property is achieve by eliminating accidental complexity, leveraging good ideas, clever tactics, paying attention to detail, a community of practice agreeing on meaning, testing, and other such hard work. Now, new platforms and ecosystems can be created.

Sure, some of these templates will be commodities.  But think about the possibility of a market for quality templates and models. Think knowledge as a product. Stored in a semantic knowledge management system.  Standards make markets.

The question is not whether there are better alternatives; there are.  The question is why the accounting and audit profession has tolerated this current situation for so long, and what it will take to transition to something fundamentally more sound.

This example helps you see what a discrete stable unit looks like.


Here is my summary of use cased for these discrete stable units of information, exemplified by progressively larger and more complex reference reporting frameworks. Here are my test cases. Here is my conformance suite.

* * *

The same stable unit of information may legitimately have different human readable representations for different disciplines, different activities and different purposes. Trying to impose one universal visual representation on humans is not always desirable; or even possible. This is why software which can dynamically generate multiple representations and and models is useful; even being able to travel between different human readable representations while preserving semantics. Think dynamically adjustable pivot table. (see here)


* * *

Everything is relative. A spreadsheet feels simpler than a graph; and that is true. But that simplicity comes from limited expressive power of the spreadsheet. A graph can represent far more than a spreadsheet ever could.

“Simple” and “simplistic” are not the same. Simple means making something easy to use. Simplistic means stripping away essential complexity and pretending it is not there.

But you cannot make complexity disappear simply by ignoring it. That complexity just moves.

A graph is richer than a spreadsheet in all but the most trivial use cases. But a graph is also more complex; and that complexity exists for a reason. A graph carries additional information, structure, and metadata. A graph makes explicit the assumptions that spreadsheets leave unstated.

Simplicity tends to favor accountants who want to finish their task quickly, without considering how their work affects the next person in the chain of work. Richness favors accountants who want accuracy, transparency, and accountability across the entire chain of work.

A “shortcut” is a matter of perspective. When viewed holistically, the graph; though slightly more complex at the start; makes the full workflow dramatically easier for the system as a whole.

Today accountants have new work partners in their chain of work, artificial intelligence.  Be conscious of those shortcuts.  They might not really be a shortcut all things considered.

Additional Information:

Comments

Post a Comment

Popular posts from this blog

Reference Reporting Frameworks

Image
A financial reporting framework is a purposeful arrangement of financial line items, totals, subtotals, aggregations, disaggregations, structures, metadata, categorization, classification, assertions, restrictions, constraints, other conditions, etc. A financial reporting framework represented in a digital format should not be semantically impoverished. Leaving information out, consciously or unconsciously, is not desirable. These reference reporting frameworks provide the minimum of what is necessary. They are modest yet not impoverished. A financial reporting framework provides the elements necessary for reporting organized by basic line item element, superordinate elements, and subordinate elements organized by type per the process of classification .  Financial reporting frameworks tend to start with the high level concepts of the basic accounting equation: assets, liabilities, equity; and then build out from that basic accounting equation. The following are a set of reference ...
Read more

Accounting & Audit by Design (A&AD) Framework

Image
The Accounting & Audit by Design (A&AD) Framework is about freedom from drudgery for accountants, auditors, and analysts. It is about streamlining processes. A&AD is about eliminating the waste of time and energy that goes into transaction chasing . It is about eliminating the need to resort to things like " the plug ".  A&AD is about fixing processes that allow mistakes rather than spending time fixing mistakes a process allowed or dealing with the consequences of a mistake escaping from the system undetected. The following sections will help you understand what the Accounting & Audit by Design (A&AD) Framework is and what it enables. Environment What is A&AD? Why A&AD Now? How does A&AD Work? Business Outcome Fifty to seventy five year ago it would have been impossible to contemplate something like A&AD; it just was not feasible. We did the best we could to implement accounting information systems using computers and software that we...
Read more

Overview

Image
( Executive summary ) Innovation doesn’t arrive. Innovation evolves. Imagine it.  Freedom from drudgery. Freedom from the toil of tedious, repetitive, mundane, monotonous tasks. Far less time needs to be spent fulfilling the role of "data janitor".  Time spent "transaction chasing" is significantly reduced. Accounting is a well understood system which has evolved over many thousands of years. Accounting, reporting, auditing, and analysis is being digitized. This digitization will enable processes to be industrialized  and productivity boosts to be realized. If you are an accountant, auditor, or analyst it is time to update your tradecraft. This overview is an attempt to take the work that I have done to understand XBRL-based reports and back into a framework for explaining those reports, accounting and audit working papers, analysis models to accountants and software engineers building software for accountants.  I am now referring to this as model-driven reporting ...
Read more