In the
Transparent Society
David Brin talked about having a society where everything
is observed and everyone can observe not only each other
but more importantly government functions such as
the police.
Here I talk about that for the accountancy function,
that all contracts and transactions are publically
available.
XML, deontic Logic, contracts and the Transparent Society
are
a solution for preventing Financial fraud and eliminating or
reducing the cost
of accountants.
Our student group developed several techniques for marking up contracts
in XML. XML represents information so it is easy for people to read
and easy for computers to read. Deontic logic represents obligations;
contracts are simply sets of obligations: if A does X for B, then B should
do Y for A.
I propose:
-
- All contracts must be expressed in deontic logic in XML.
-
- All contracts are public
For example, the English Language Contract:
- Acme Pizza Company will deliver ten boxes of Pizza
-
Joan Smith will pay $80.00 to Acme Pizaa
might be encoded in XML as follows:
<Offer ID="I003">
<PartyList>
<Party ID="P001" type="Offeror">
<Actor ID="ACT001"><Name ID="NAME001">
<Entity Type="Company">
<FullName>Acme Pizza
</FullName></Entity>
</Name></Actor>
</Party>
<Party ID="P002" type="Offeree">
<Actor ID="ACT002"><Name ID="NAME002">
<Entity Type="Person"><FullName>
Joan Smith</FullName></Entity>
</Name></Actor>
</Party>
</PartyList>
<Clause ID="C001">
<Implication><Condition>not raining April 10th</Condition><Then>
<Clause ID="C002">
deliver ten boxes Pizza</Clause></Then></Implication></Clause>
<Clause ID="C003">Pay $80.00</Clause>
<LawsuitTo><CourtInformation><Location><LocationId>
Court 1</LocationId><LocationFunction>N.A.
</LocationFunction></Location>
</CourtInformation></LawsuitTo>
<ApplyLawOf>NY</ApplyLawOf>
<EffectiveDate><Date>20000413</Date></EffectiveDate>
<ResponseDate><Date>20000415</Date></ResponseDate>
</Offer>
Notice how this contract makes clear
that the payment will happen whether it is not raining. That is not clear
in the English.
More detail provides for one activity to be conditional upon another and
for one activity to be required after the other party does something. For
example, the supplier of an industrial heating and cooling system must
deliver within thirty days of receiving the order, must invoice within
a specific amount of time and then the buyer must pay that invoice.
And if there are problems.
Our standard extends the Java Exception mechanism. For example, if
a clause says that the buyer must notify Kathy Smith of problems, then
one must provide an exception mechanism if she were ill or the like.
If one specified a particular means of sending freight, it would recognize
that one should provide for a disruption, e. g., after September 11th or
a flood.
Now, what does that have to do with making our financial system more
secure. All contracts are public and easily read. Thus, investors and
potential creditors can
find out exactly what a firm is obligated to do. They do not have to rely
on a summary prepared by an accountant who might be relevant.
They can evaluate the risks rather than rely on the assumptions of a rating
agent.
Steven M. H. Wallman who was
then a Commissioner in the United
States Securities and Exchange
Commission said that firms should simply
disclose their databases of informations
and let the investors (and other users)
draw their own conclusions and
analyze them.
He argues that auditors would have to
check the procedures to create the
databases. By simply making all contracts
public, one would not even need that.
In 1991, Craig Pilks and myself gave an article at the TIMS-ORSA
joint meeting on the Cashless Society, arguing that we should
replace cash by an incluse electronic system. We looked at
the cost of the current system with ACH debits, cash, checks
and credit cards and looked at the cost of databases and
telecommunications of the day and found that it would be
cheaper for society to replace cash. Certainly with the
reduced costs of computer technology, that is more true.
There are many other advantages of this system, including
increasing tax compliance.
The Internal REvenue Services
estimates the tax gap at $345 billion dollars per year
and sixty-eight billionof this is
small business (individual proprietors) that don't report
all their income.