Blockchain Revolution

The World Wide Ledger
Today, companies record a debit and credit with each transaction—two entries, hence
double-entry accounting. They could easily add a third entry to the World Wide
Ledger, instantly accessible to those who need to see it—the company’s shareholders,
auditors, or regulators. Imagine that when a massive company like Apple sells
products, buys raw materials, pays its employees, or accounts for assets and liabilities
on its balance sheet, the World Wide Ledger recorded the transaction and published a
time-stamped receipt to a blockchain. The financial reports for a company would
become a living ledger—auditable, searchable, and verifiable. Generating any up-to-
the-minute financial statement should be as simple as a spreadsheet function, where
the click of a button gives you an immutable, complete, and searchable financial
statement, free of error. Companies might not want everyone seeing these numbers,
and so executives might give only regulators, managers, and other key stakeholders
permissioned access.
Many in the industry see the inherent implications of this World Wide Ledger for
accounting. According to Simon Taylor of Barclays, such a ledger could streamline
bank compliance with regulators and reduce risk. “We do a lot of regulatory reporting
where we’re basically saying, here’s everything we’ve done, because what we’ve
done sits inside a system that nobody else can see.”
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A World Wide Ledger and a
transparent record of everything “means that a regulator would have access to the

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same base layer of data. That would mean less work, less cost, and we could be held
to account in near real time. That’s really powerful.”
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For Jeremy Allaire of Circle,
regulators benefit the most. “Bank examiners have had to rely upon opaque, privately
controlled, proprietary ledgers and financial accounting systems to do their work—the
‘books and records,’” said Allaire. “With a shared public ledger, auditors and bank
examiners could have automated forms of examination to look at the underlying
health of a balance sheet and the strength of a corporation—a powerful innovation
that could automate meaningful parts of regulation as well as audit and accounting.”
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It bakes integrity into the system. “All fraud would be much harder. You have to
do fraud on an ongoing basis and at no point can you go back and change your
records,” said Christian Lundkvist, of Balanc3, an Ethereum-based triple-entry
accounting start-up.
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Austin Hill argued, “A public ledger that is constantly audited
and verified means you don’t have to trust the books of your partner; there is integrity
in the statements or the transaction logs, because the network itself is verifying it. It’s
like a continuous a priori audit that is done cryptographically. You’re not relying on
PricewaterhouseCoopers or Deloitte. There is no counterparty risk. If the ledger says
this is true, then it’s true.”
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Deloitte, one of the world’s Big Four accounting firms, has been trying to
understand the impact of blockchain. Eric Piscini, who heads up the Deloitte
cryptocurrency center, tells clients that the blockchain is “a big risk for your own
business model because now the business of banking is to manage risk. If tomorrow
that risk disappears, what are you going to do?”
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Overripe for disruption is the audit
business, and audit is a third of Deloitte’s revenue.
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Piscini said, “That’s a disruption
to our own business model, right? Today we spend a lot of time auditing companies,
and we charge fees accordingly. Tomorrow, if that process is completely streamlined
because there is a time stamp in the blockchain, that changes the way we audit
companies.”
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Or perhaps eliminates the audit firm altogether?
Deloitte has developed a solution called PermaRec (for Permanent Record)
whereby “Deloitte would record those transactions into the blockchain and would
then be able to audit one of the two partners, or both of them, very quickly, because
that transaction is recorded.”
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But if the third entry on the blockchain—time-stamped
and ready for all to see—happens automatically, anyone, anywhere, could determine
whether the books balanced. Conversely, the fastest area of growth for Deloitte and
the other big three audit firms is consulting services. Many clients are already
scratching their heads over the blockchain. This bewilderment provides opportunities
for migration up the advisory value chain.
Mornini, a plucky entrepreneur and self-described “eternal optimist,” likened
periodic accounting to “watching a person stand up and dance in front of a strobe

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light. You know they’re dancing, but you can’t quite figure out what’s going on. And
it looks interesting, but it’s hard to figure out all the steps in between.”
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Periodic
accounting gives a snapshot. Audit is, by definition, a backward-looking process.
Creating a complete picture of a company’s financial health by looking at periodic
financial statements is like turning a hamburger into a cow.
According to Mornini, most large corporations would never want a completely
transparent accounting record in the public domain or even readily accessible by
people with special privileges, such as auditors or regulators. A company’s financials
are one of its most guarded secrets. Furthermore, many companies want to ensure that
management has a certain degree of flexibility in how it accounts for certain items,
such as how to recognize revenue, depreciate an asset, or account for a goodwill
charge.
But Mornini believes that companies would benefit from greater transparency—
not only in terms of streamlining their finance department or lowering the cost of
audit, but in how the market values their company. He said, “The first public company
with this system in place will see a significant price per share advantage, or price to
earnings ratio advantage, over other companies where investors have to anxiously
await the dribble of financial information that they are provided quarterly.” After all,
he argues, “Who is going to invest in a company that shows you what’s going on
quarterly, compared to one that shows you what’s going on all the time?”
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Will investors demand triple-entry accounting to meet corporate governance
standards? It’s not a far-fetched question. Many institutional investors, such as the
California Public Employees’ Retirement System, have developed strict corporate
governance standards, and will not invest in a company unless those standards are
met.
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Triple-entry accounting could be next.