Bringing Accounting into the ECommerce Age with REABased

Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored Commitments William E. Mc. Carthy – Michigan State University • • AIS Scope Business Processes and Value Chains Commitments and Types E-Commerce Collaboration Standards eb. XML electronic business XML REA’s Importance in a Wider Accounting Context Range of Accounting Systems

Bringing Accounting into the E-Commerce Age with REA-Based Collaboration Patterns and Monitored Commitments Keynote address given on 1 July 2002 to The Accounting Information Systems Educators Association Copper Mountain, Colorado William E. Mc. Carthy – Michigan State University • • Much of the content of these slides comes from co-authored papers and my own standards group work with the UN-CEFACT eb. XML group and the ISO Open-edi groups, so the ideas are due to many people besides myself. These include Guido Geerts, Julie David, Bob Haugen, John Yunker, Jim Clark, Brian Hayes, Paul Levine, Jamie Clark, Dave Welsh, Karsten Riemer, Nita Sharma, Nenad Ivezic, Colin Clark, Katsuhiro Morita, Jake Knoppers, and many others too numerous to mention. These slides may be reproduced, but please do not change the contents or attributions.

Extending the Scope of AIS MANAGEMENT INFORMATION SYSTEMS Distinguishing Feature = Transaction Processing for Accountability Purposes (original REA) Extend with Commitments and Types for Planning & Policy Purposes • Management Science • Behavioral & Organizational Science • Supply Chain • Computer Science ACCOUNTING INFORMATION SYSTEMS • Financial Reporting ACCOUNTING • Managerial Decision Making • Auditing & Control • Taxation Source: JIS editorial, 1989

EXAMPLE BUSINESS PARTNERS • Company C is “Cookie Monster” or an instance of Customer at the end of a supply chain in the e -marketplace for cookies • Company E is “Elmo” or an instance of an Entrepreneur who acquires the factors of production (cookie dough, chocolate chips) in the e-marketplace, converts them internally to a final product of cookies, and then sells them in the e-marketplace • Company K is “Kermit” or an instance of a Komponent Supplier who takes agricultural essentials like wheat or cocoa beans, converts them into the components of cookies like cookie dough or chocolate chips, and then supplies those components to cookie manufacturing entrepreneurs in the e-marketplace Source: Muppet site

BUSINESS PROCESS DEFINITION: A business process is a set of activities that takes one or more types of inputs and turns them into an output of greater value to the customer (Hammer) cookie Exchange or Transformation cash

$$ Cash payment $$ raw materials $$ payment purchase labor $$ $$ logistical operation labor acquire payment facilities, services & technology labor delivered raw manufactured materials goods labor material issue manufacture operation payment service acquire $$ Example Value Chain (source, make, _______ deliver) ______ shipment manufacture job sale labor service operation delivered manufactured goods service contract payment product services Source: eb. XML BP Catalog

$$ Cash receipt $$ Cash paymnt $$ raw materials $$ payment purchase labor $$ $$ logistical operation labor acquire payment facilities, services & technology labor delivered raw manufactured materials goods labor material issue manufacture operation payment service acquire $$ Example Value Chain (per Porter and SCOR) shipment manufacture job sale labor service operation delivered manufactured goods service contract cash rec product services Source: eb. XML BP Catalog

Economic Resource Economic Event Economic Agent duality Source: W. E. Mc. Carthy “The REA Accounting Model: A Generalized Framework for Accounting Systems in a Shared Data Environment, ” The Accounting Review, July 1982, pp 554 -78.

Economic Resource Economic Agent Economic Event Economic Agent INITIATING RESPONDING Economic Agent Economic Event Economic Resource Economic Agent Source: G Geerts and W. Mc. Carthy

Commitment & Type Extensions

Economic Contract commitment to ship executes cookie shipment commitment to pay executes cash payment Source: G Geerts and W. Mc. Carthy

cocoa beans cookies to chocolate chips Cash payment shipment chocolate chips Recipe step walnuts cookie dough labor Batch run cookies Cookie Supply Chain Source: R. Haugen and W. Mc. Carthy

Types Resource Event Agent Type Economic Resource Event Agent Source: G Geerts and W. Mc. Carthy

Examples of Type Images (typification) • Resources like cookies can be classified into different groups with varying shelf lives • Events like sales can be grouped into types like retail or wholesale with different price structures • Agents like customers can be typed into groups like intermediaries or end users with different certification requirements

Two Kinds of Business Modeling • Descriptive: This illustrates what is actually occurring (OLD ACCOUNTING) • Prescriptive: This illustrates what could be or should be occurring (NEW ACCOUNTING (some progress))

Some Proposed Collaboration Patterns • Negotiation • Order-Fulfillment-Settlement – E. G. 2/10 net 30, FOB source • Long Term Contract with Periodic Releases • Escalating Commitments • Supplier Cascade • Drop Shipment • International Payment and Shipment Source: eb. XML BCP&MC

Extended BP model Planning Identification REA components Types of Resources & Agents typification Negotiation Commitments for Types of Resources fulfillment Actualization Post-Actualization Economic Events with Resources & Agents Source: ISO Open-edi

E-Commerce Collaboration Standards • eb. XML (electronic business XML) – United Nations CEFACT and Oasis • e. BTWG – UN CEFACT • UBL – OASIS (nee x. CBL from Commerce. One) • ISO Open-edi • European Commission (ECIMF) • Others – BPML, Rosetta. Net etc. • Industry Specific (AIAG, Odette, etc. )

Electronic Collaboration – Old (bottom-up) and New (top-down) • OLD technology is EDI (electronic data interchange) • EDI has standard documents or transaction sets @ to X 12 (American) or EDIFACT (everywhere else) • NEW technology is XML – Bottom-up x. CBL or UBL (don’t throw away EDI legacy) – Top-down eb. XML BCP&MC (let’s innovate with full support for business process semantics)

XML standards groups • XML is always the foundation technology – Establishes the rules & syntax • XML standards are essentially agreements among groups of people in a domain that define an XML tag set and a Schema for a particular purpose (a. k. a. “vocabularies”) – XBRL (e. Xtensible Business Reporting Language) – eb. XML (electronic business XML) • Ontologies & Taxonomies are implemented as specific interpretations or classes of XML standards (e. g. , REA accounting ontology or the US commercial-industrial taxonomy for financial reporting) • Instance documents are actual documents using a particular ontology or taxonomy

Ontology • “A specification of a conceptualization” Gruber • A listing of the categories or classes in a certain domain and the ways they relate to each other

follows scenario consumes scenario Economic Resource Type Economic Resource typifies Business Event Type participates scenario Economic Agent Type typifies follows linkage characterization participates consumes association characterization Business Event association Economic Agent typifies stockflow consists of accountability Economic Event Claim initiator Agreement (contract or schedule) materializes settles forms involves terminator duality Agreement Type (contract or schedule) governs executes Commitment aggregate of initiator terminator reciprocity aggregate of Economic Contract Business Process (exchange or conversion) reserves aggregate of typifies Source: ISO Open-edi Business Process Type (exchange or conversion)

eb. XML -- 101

Between company interoperability BP Business Collaboration Business Transactions Business Documents Business Messages Source: eb. XML BPSS

C E X Y Customer Product. Supplier Logistics. Vendor Bank PO RA AA Freight. Order AA Advance. Ship. Notice RA Fund. Transfer. Advice AA Funds. Transfer. Notice RA Advance. Ship. Notice AA Shipping. Document Advance. Ship. Notice RA Receiving. Advice RA Fund. Transfer. Advice AA Funds. Transfer. Notice RA Business Process: Multi. Party Collaboration Source: eb. XML BPSS

eb. XML vision • A global electronic market place where enterprises of any size, anywhere can: – Find each other electronically – Conduct business through the exchange of XML based messages • • Using standard message structures According to standard business process sequences With clear business semantics According to standard or mutually agreed trading partner agreements • Using off the shelf purchased business applications • TEAMS: BP, CC, TP, security, messaging services, architecture, QC, etc. Source: eb. XML

Collaborative Process – Interactions 1 Collaboration Protocol Profiles, Business Process Models (BPSS) XML Collaboration Protocol Profiles 4 Collaboration Protocol Profiles, Business Process Models (BPSS) 5 Collaboration Protocol Agreement 1 COMPANY E Request Business Details 2 eb. XML Registry 3 Register Implementation Details Register COMPANY A Profile eile foilf rpor Ap Y N s PA ile M of O Pr t. C d an ou s ab rio ry na ue Q ce d. S oa nl ow D 3 Business Scenarios Business Profiles 4 COMPANY C eb. XMLcompliant system 5 Build Local System Implementation t en m ge ran r A ss e in us B n S eo e r ON I Ag T AC S AN 6 TR SS E N SI BU DO Source: eb. XML

Vision of eb. XML Collaboration Process Business Process, Core Components Process Definition Process Reengineering Process Evolution Process Management Business Process Management Registry/ Repository Partner Discovery Electronic Business Collaboration Process Execution Partner Sign-Up Electronic Plug-in Transport/Routing/ Packaging, Collaboration Protocol Agreement Business Service Interface Collaboration Protocol Profile Collaboration Protocol Agreement Business Service Interface Source: eb. XML

eb. XML Business Process & Information Meta-model (top-down controlled complexity) Business Area Business Operations Map (BOM) Process Area Partner Type Business Process Business Collaboration (binary or multiparty) Agreement Economic Event Economic Resources Business Requirements View (BRV) Authorizing Roles Business Documents Network Component Requesting Business Activity Business Transaction View (BTV) Business Messages Business Service View (BSV) Responding Business Activity Requesting Service Transaction Responding Service Transaction Source: eb. XML TMWG

Business Object realization produce consume Business Collaboration Use Case realization Monitored Commitment Economic Resource Business Collaboration Economic Event Agreement Economic Commitment Economic Contract e. g. Fowler BRV implements elaboration BTV <<pattern>> Business Collaboration Analysis Pattern implements Monitored Commitment is visibility of events associated with a commitment <<pattern>> Business Collaboration Design Pattern e. g. Gamma Source: eb. XML BCP&MC

Economic Contract commitment to ship reciprocal fulfills goods commitment to pay fulfills duality shipment cash payment • E & C agree to a contract where ship on Tuesday, pay on Wednesday • E ships on Tuesday (commitment to pay in force upon acceptable receipt, claim may be materialized). However, discount is taken, so commitment to pay is less than scheduled amount • C pays discounted amount on Wednesday Source: eb. XML BCP&MC

Economic Contract commitment to ship reciprocal fulfills goods commitment to pay fulfills duality shipment cash payment • E & C agree to a contract where pay on Tuesday, ship on Wednesday • C pays on Tuesday (claim may be materialized) • E ships on Thursday thus invoking $20 penalty • C notifies E that commitment to ship not fulfilled in full as unacceptable timing (materialized claim is reduced to $20) • E now pays $20 Source: eb. XML BCP&MC

Illustration of Perspective: Trading Partner vs. Independent Enterprise Independent view of Inter-enterprise events Business Process Enterprise Business Process Trading Partner view of Inter-enterprise events (upstream vendors and downstream customers) Business Process Blue arrows represent flow of goods, services, and cash between different companies; green arrows represent flows within companies Enterprise Business Process Source: ISO Open-edi

Business Objects and States (as embedded in COOL or the Commitment Oriented Orchestration Layer) • Business Objects are the “nouns” of business deals: • Examples: Products, Orders, Shipments, etc. (REAs) • Business States are named states of Business Objects – which affect both trading partners – to which both partners must agree – which mean the whole business deal has changed in an important way. • Examples: Order. accepted, Order. rejected, Order. fulfilled, Order. cancelled Source: eb. XML BCP&MC

BRV collaboration semantics of COOL are based on business concepts and practices: • Accounting “Events” per REA • Commercial law • Contract negotiation and execution • International Trade Source: eb. XML BCP&MC

Business State Alignment • Means both trading partners must agree on the state of each Business Object at the end of each Business Transaction. • For example, the Order is not accepted until both partners agree explicitly that it is accepted. • The Business Transaction protocol must insure that both partners transition to the new Business State or neither does. • Think “electronic handshake”. Source: eb. XML BCP&MC

eb. XML Business Process & Information Meta-model (top-down controlled complexity) Business Area Business Operations Map (BOM) Process Area Partner Type Business Process Business Collaboration (binary or multiparty) Agreement Economic Event Economic Resources Business Requirements View (BRV) Authorizing Roles Business Documents Network Component Requesting Business Activity Business Transaction View (BTV) Business Messages Business Service View (BSV) Responding Business Activity Requesting Service Transaction Responding Service Transaction Source: eb. XML TMWG

Business Process: Binary Collaboration Buyer Party Business Transaction Public Seller Party Catalog. Req Catalog. Rsp Quote. Req Business Transaction Quote. Rsp Business Transaction Order Business Collaboration Order. Rsp Business Transaction ASN Business Transaction Invoice Business Transaction Payment Source: eb. XML BPSS

Business Transaction Requesting Activity Unit of Work Responding Activity Request Document Receipt. Acknowledgment Signed. Receipt Signal Non. Repudi ation Acceptance. Acknowledgment Signal Response Document Non. Repudi ation Time-Outs Guards Success Failure Legally Binding Source: eb. XML BPSS

Overview: eb. XML Specification. Schema Multi Party Collaboration Authorized Role Binary Collaboration Choreography Transition Guard Request Document Business Transaction Execution Parameters Response Document Source: eb. XML BPSS

Runtime Design Time eb. XML Architecture Business Process Business Documents Registries/ Repositories Collaboration Protocol Profile Business Service Interface CP Agreement Transport Core/Industry Components Business Libraries, Trading Partner Directories, etc… Collaboration Protocol Profile Business Service Interface Message Business Services/App’s Source: eb. XML

Order pending Repository Business Process Catalog Business Entity Type Library Business Information Entities C O N T E X T Order Goods Order expecting. Delivery Deliver Goods Source: eb. XML BCP&MC

Why are leveled and semantically-precise value chain & supply chain models important ? (WHY are REA patterns important ? ) • They provide automatically the detailed economic semantics of the common order-deliver-settlement patterns of e-commerce to the collaboration management software (as explained above); • They provide the basis for integrating the descriptive components of old accounting (expanded to commitments and multiple nonmonetary dimensions) with the prescriptive components of new accounting; and • They provide the basis for representing the “economic events” of an enterprise with no double-entry (A= L + OE classification) spin to both upstream parties (capital, labor, and raw material suppliers) and downstream parties (customers) on a continuous reporting basis (see next slide for architecture).

Accounting Knowledge Traditional Accounting System Old Accounting { Accounts Receivabl e Order Entry Job Costing EDGAR FILES Inventory Payroll SEC Gener al Ledger FSA Filing Uses Present Use Path Real World { New Accounting Systems Analysis & Design Financial Decision Makers Value-Added Processing Object-Object Connection Knowledge-Based Decision Support System Uses Object Enterprise Model SOURCE: G. Geerts and W. E. Mc. Carthy “An Accounting Object Infrastructure for Knowledge-Based Enterprise Models” IEEE Intelligent Systems, July/August 1999, p. 92.

eb. XML & XBRL

eb. XML XBRL External Report COMPANY E Business Service Saies Interface (BSI) Reporting Taxonomy: • Acc. Rec – xx -- xx • COGS – zz Fin. Good– zz External Report COMPANY C Business Service Interface (BSI) External Reporting Taxonomy: • Purchases – xx Acc. Pay- xx Acc. Pay – xx Cash -- xx Cash – xx Acc. Rec -- xx Company-neutral (but strictly-typed with REA) view of a business collaboration. For example: -Order REA contract/commitment (no account) -Fulfillment REA initiator Economic Event -Settlement REA responding Economic Event Source: J. David, G. Geerts & W. Mc. Carthy

Evolutionary Tree – Enterprise Information Systems Source: J. David, W. Mc. Carthy & B. Sommer