Blockchain + Accounting
Mention the word ledger 10 years ago and you would yawn and think of accountants. Hardly a mechanism of financial control you would get excited about.
Dating back to the early-medieval Middle East, the use of debits and credits (double entry accounting) was developed to record and validate transactions. Since then accountancy systems have evolved and quietly tick along in the background for industries. However, a buzzword that everyone is getting excited about is Blockchain.
At its core Blockchain technologies are a bunch of shared ledgers. Irrespective of the form of network - open or closed transactions are recorded on a form of ledger.
I am going to try and avoid too many technical terms and will not go into the mechanics of Blockchain as there are plenty of articles out there.
The Issue with traditional ledger
An issue that we have always had in accountancy is the delay between parties being able to reconcile transactions. The sales rep may agree one price with the customer, but when the details get to the finance department, the price is missing.
Junior finance staff assume it is the standard price and will raise an invoice based on the official list price. For months both parties will argue over the right amount.
Because one party has a different version of the truth to the other, many in the finance department are excited about improvements in the supply chain.
The other issue with current accounting systems is that while parties exchange contracts and trade with each other we do not have a 100% clarity as to their financial stability. Traditional financial reporting is based on historical data. How many invoices have you had unpaid? The lack of real-time information makes it hard for accurate due diligence.
Take a step further to internal audit. Often internal auditors are accountants acting as watchdogs for the organisation. They monitor far more than the finance function.
They assess the risk within the supply chain, the impact of false advertising, technical fault risks, quality control, IT issues etc. They have a duty to care to create the checks and balances for the organisation.
A big one I see within the fashion sector is ethical manufacturing. More consumers want to know where their clothes are coming from. Imagine if internal audit had a mechanism to validate a manufacturer and aim for a 100% ethical supply chain?
Shared ledgers to the rescue?
Whether you call them Blockchain or Distributed Ledgers Technologies, what these technologies promise is real-time verification of transactions. I like to think of it as triple entry accounting. A 3-dimensional ledger if you would say made up of debits, credits and valits (validation of the transaction in the ledger).
At the point of purchase the sales rep and customer can complete their transaction on the spot and within seconds have confirmation that both their systems have accepted the transaction. Real-time the seller will have confirmation that the other party is financially stable and they can more than likely settle their invoices there and then.
(For any accountants reading this, the shared ledger would sit outside the organisation and feed into the internal accounting system through control accounts).
Within the supply chain, the shared network can real-time communicate on manufacturers and share details of unethical or poor quality practices. The network would trace component as well. You could in effect know where the buttons, zips, materials and labour come from.
I would push for factory workers to have access to the shared ledger so that they can confirm their hours worked and pay. Now, wouldn't that be truly transparent?
Shared ledgers, of course, require all parties taking part to be part of the same network. This will be the biggest blocker for Blockchain acceptance. With all our zeal for the tech, it is going to be costly for organisations to overhaul their front and back offices systems to adopt such technologies.
Small businesses may struggle and let's be honest, it is a huge leap for organisations to re-think working capital cycles (apologies, a technical term for money management within a company). Will organisations have to join several shared ledgers networks to trade or will we all see these merge into one great giant shared ledger governing every transaction on the planet?
We may in the immediate future see very specific uses, such as in the diamond trade. However, the long-term mechanics of how we make sure these technologies will co-exist with government regulations, accounting standards and the secretive nature of some industries, needs to thought through.
Will companies be willing to be that transparent with tax authorities? I can't imagine any government not wanting to avail of real-time VAT collection at the point of sale.
But will big tech giants have a vested interest in blocking aspects of the technologies which could remove income tax havens? I.E. validate transaction that happen in Australia and therefore must be paid there and not through a vehicle in Luxembourg? Or if transactions are validated globally, do we move to a global income tax system?
In a way, the developers of shared networks today are no different to the medieval pioneers of ledgers. Both blue sky thinkers, trying to find better ways to validate transactions. It may have taken the early accountants centuries to spread their message, but they didn't have electricity.
Research has shown that finance professionals expect shared ledgers to be fully utilised by 2030. Plenty of accountants want better systems to do their jobs. We are tired of late payments, incorrect details on transactions, risks in the supply chain and the lack of real-time data for decision making.
However, there is a risk that adoption will be slow if Blockchain innovators do not talk to us, accountants. We are probably better placed than most professions to understand the pitfalls as well as spot new applications.
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