CIO accountability for accuracy of financial statements

Archive Notice: This page preserves the original work of Todd Boyle on general ledger architecture and distributed accounting (1997-2010), restored 2026 by The Ledgerism Brief. We are not affiliated with any accounting standards body. Original work © Todd Boyle. Visit The Ledgerism Brief for current editorial coverage of CPA practice, audit, M&A quality of earnings, and digital asset accounting.

Companies keep three sets of books. A terabyte, multidimensional, drilldown data warehouse with near-realtime information for themselves, plus a couple of cheap little reports with a few dozen useless, older numbers, for stockholders and the SEC, and one for tax.

Owners have a right to see more of the real information now provided only to management.

The CIO/CTO (: Chief Information Officer, Chief Technology Officer) manages the information systems of a company. These executives maintain internal reporting systems of the company that provide very timely and accurate reports by geographic area, across product lines and products, across customer segments, comparable across periods. The entire computer industry of course services these CIO's and CTO's requirements.

You may be aware of articles in many computer magazines, admitting IT knew plenty about recent reporting failures. All data warehouses are reconciled with reported numbers in the general ledger and financial statements, by both CFOs and CIO/CTO's. Who are they kidding? The Chief Information Officer CIO/CTO sees everything sooner, more completely and deeply than the bean counters.

CIO's could provide powerful and direct improvements to transparency and accuracy of reporting: provide drilldown into aggregates of the native transactions. The elements agreed between the company and its trading partners is held in balance by the adverse nature of *arms-length exchanges*. Parties in contracts agree on amounts, identities of the parties, dates and places of performance, and the character of what is bought and sold-- usually with great precision!

The technical complexity of defining common vocabularies (definitions of terms, "data dictionary" or metadata registry) has already been undertaken and completed by these CIOs/CTOs as an inherent part of developing data warehouses. This challenge must not be permitted as an excuse for the IT profession to avoid responsibility in perpetrating fraud and misstatement in financial statements.

There are private, custom semantics in most companies' data warehouses. However there are also standard, global semantics in EDI and in emerging ebXML and other transaction side vocabularies, and in XBRL taxonomies and proprietary enterprise software on reporting side.

Realize, there is no objective system of classification of any given transaction as to what line of the income statement or balance sheet it belongs. Accountants set up the transactions to flow into "reporting buckets" with charts of accounts and so forth. In doing so, they actually reduce the information content in the information, recharacterizing all the worlds' diversity into their ideological GAAP classification system. Meanwhile, FASB and other top level professional organizations make a living from manual, "professional" classification, insist it must remain a matter of "judgment"! This stinks, guys.

As long as insiders have terabytes of information, and navigate along every conceivable dimension, the information gap between insiders and outsiders will only grow worse.

I feel the accounting profession, as well as the investment houses and the SEC, are subconsciously using the decline in markets as a weapon to strengthen today's monopoly on reporting practices by "semantic police." GAAP which once served the public's interest, now servers only as a safe harbor for how little disclosure is required. It serves as a sort of dam between all of the abundant information behind the Corporate Veil, and stockholders and the public at large.

The accounting profession expresses to the public a basic fundamental position that reporting is more reliable, useful, when there is an intermediary role for "accountant" and "auditor" between management and owners. The fundamental position of accountants is "Trust Me". Trust the CFO, trust the Controller, trust the Auditor. The public has moved on. They do not trust CPAs, and CPAs make lousy information intermediaries.

"Trust me" weakens the profession. It places accountants in a position of moral hazard, aligned against the interests of Management while being subject to management for salary or fee. This furthermore, is disempowering. Dominance/submission is always demeaning for both the CPA and the investor, especially when the IT alternatives are so obviously available today.

One element in a solution is *ending the free ride* of the software industry and IT professionals, and imposing regulations on their behavior.

Government protection of the accounting profession's monopoly should end, and free competition allowed in information reporting and semantics. This would NOT be the end of GAAP. Investors will still clamor for GAAP, and the present semantics will only grow stronger from competition. But better alternatives exist, that are deeper and more industry focused within the analysts communities, data warehouse industry, and indeed within reporting entities. If the protected monopoly of audit firms is removed, these information products will have a chance to compete in the market.

What accountant would sign this petition, and give away the profession's monopoly on attest services, seignorage profits on minting of semantics, and unearned access to information? http://www.ledgerism.net/FinancialDeregulation.htm

I wrote this essay in 1997, which is a bit dated, saying almost the same thing: CIOs and CFOs need to be working together to reconcile the data warehouse and the GL (or trial balance) http://www.ledgerism.net/datamart.htm

The point I am trying most to get across is that financial reports can be objectively true only to the extent they present the dealings that were executed in arms' length transactions with external parties. Of course, everybody can agree to that! but Accountants go much further. They take upon themselves a benevolent, fatherly role of making journal entries, reclassifying things into sums other than the groupings they were put by the author of the transaction. They recharacterize them with words other than the terminology of the agreement between buyer and seller. The overall result of this is destruction of the native information and a carefully modulated veiling and obscuring of what happened. It encodes what happened into an arcana that is convenient for bankers and investment analysts, which acts to the detriment of the rest of society: employees, buyers and sellers in the marketplaces, small stockholders, regulators, tax authorities, or anybody else.

There is fairly broad agreement in public accounting, that GAAP really represents a consensus view of the minimum legally required disclosure, rather than a straight-up effort for transparency in financial reporting. In effect it is a safe harbor for an entire edifice of secrecy and confidentiality in business. Everybody knows, at this point in history corporations have immensely detailed and rich business reporting systems, internally.

IT profession has a great opportunity today to produce a revolution in transparency of public corporaitons. But the software industry has more than its share of pragmatic, self-centered and socially oblivious people. For example, most CIOs will say "Heck no we're not responsible for those lies in the financial statements. " Like the CEO or line managers the CIO benefits from high stock prices and regard stockholders, customers, the society and even their own employees, as *exactly the same thing*: outsiders, to be manipulated by information.

Some Conclusions

The IT professions should throw down the gauntlet, revolt against the artificial reporting classifications of the last century, and provide SOAP interfaces and drilldown GUIs into the objective transaction attributes as they were declared in arms length transactions between buyers and sellers. In an age of electronic execution and ubiquitous networks, those native transaction attributes are far more valuable than the published financial aggregates of GAAP and SEC vocabularies,