Blockchain Revolution in Accounting and Auditing – Triple Entry Accounting

Portrait of Luca Pacioli, painted by Jacopo de’ Barbari, 1495, (Museo di Capodimonte).


Introduction

Accounting is often called the language of business. Modern accounting was invented by Brother Pacioli and it is now known as double-entry accounting in which each party had to enter both debits and credits in the respective accounting books, then both entries needed to be balanced eventually.  However, there are three fundamental problems with modern accounting.



1. Accounting fraud

The current system relies on managers ensuring that their books are in order, but not all managements always act with integrity leading to a higher cost of capital. 



2. Human error

Accounting errors often begin when someone in finance writes the wrong number in a spreadsheet. This small mistake becomes a big problem once it goes into the calculations of the company’s financial statements.



3. Traditional account methods

Traditional account methods cannot handle new business models, which relies on micro transactions. Most accounting and audit software only handle a maximum of two decimals, whereas micro transactions often require multiple decimal places.


The account itself is not problematic, but making our accounting systems relevant to the information age, we need a solution to the problems we have identified in double entry accounting.



Triple Entry Accounting – The World Wide Ledger

Triple entry accounting is an enhancement of double entry accounting where all accounting entries involving outside parties are cryptographically sealed by a third entry which is recorded on an external, independent and decentralized ledger – The World Wide Ledger.  This creates an interlocking system of enduring accounting records.


This ledger that shows the thorough history of assets and the relationships between transactions provides us with an immutable audit trail and the real-time status of all related transactions.  The financial reports of a company would become a live accounting book, capable of being audited, searched and verified at any time.  Real-time financial statements would become the norm.


Generating a live balance sheet would be a matter of a simple click, which is similar to checking your bank balance online today.  The implications of the ability to write transactions in a blockchain in real time and also between multiple parties are truly impactful.


Industry experts say this global ledger book has several implications for accounting.


1. Integrity integrates into the financial system

All fraud would become much harder as no one can go back and manipulate records.  It means that you will have the confidence in the statements as there is integrity in the statements or the transaction logs.  A transparent global accounting book of everything means that there could be no hidden data.


2. Balances and transactions reconciliation on a global ledger

Reconciling balances and transactions on a global ledger automatically could rationalize compliance and mitigate risk for banks when it comes to lending to businesses.  It would greatly improve the operation efficiency and reduce the cost of capital. 


3. Real-time access and streamline processes

Regulators and auditors would have real-time access and streamline their processes.  With a shared public ledger, auditors and bank managers could have automated many forms of examination.



Bibiography:

  • Tapscott, D and Tapscott, A. (2018) Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World Paperback
  • Deloitte (2016) Blockchain Technology A game-changer in accounting?

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