I've been thinking about the practical use cases of blockchain, and I've realized the implications that it can have on accounting after I finished my internship with Ernst and Young a year ago.
Let's start with an auditing example:
When I interned at EY, I was an auditor.
I looked through a private or public company's financial records, reconciled balances, looked through excel sheets, and requested any additional evidence that I needed from the client. Throughout my internship, I quickly came to realize that accounting is much more than numbers, and that there's a qualitative aspect towards the strategy and methodology of accounting.
A simple qualitative example can be positioning an expense as an investment or an asset. Another example can be arguing that a certain purchase is tax deductible.
Other qualitative approaches come from the auditor side, such as determining the formula to calculate a certain values, removing a value due to a certain condition within a calculation, or hundreds of other scenarios.
At the end of the day, accountants and auditors make qualitative and quantitative mistakes. Accountants will go into Quickbooks and register an expense incorrectly. Or, they might forget to balance their accounts - and accounting errors are the reason why auditors have a job in the first place.
In that sense - the auditing industry and landscape will shift dramatically, from less of a repetitive, menial, and quantitive role to qualitative in the future.
Enter triple ledger accounting.
Triple ledger accounting works like this.
Typically, a company's balance sheet has debits and credits, where you're basically saying that when you sell a product, your cash increases (debit) and your sales are credited.
Credits to Zoho for this image: https://www.zoho.com/books/accounting-terms/double-entry-system.html
This system hypothetically works, because at the end of the day, you should have a reconciled balance where both sides equal each other.
But this isn't the case in the real world, and it's outdated. Double entry accounting has been around since 1494, and it's suprising that there hasn't been a fundamental change in accounting methodologies, even with the development of business technology and new business structures.
Accountants make mistakes. Auditors make mistakes. Software (if programmed correctly for a specific use case), and blockchain, rarely make mistakes.
So, let's imagine this scenario in the year of 2030:
Not the greatest storyteller here, but you can imagine how powerful this can be for public accounting as cryptographic API's can serve as a reference of truth and immutability.
Instead of collapsing and owing credits over 3 billion as a fraudulent company, what if it were able to get real time, blockchain verified reports on Wirecard's cash balances?
With blockchain, there would be a significant decrease in companies being able to fraudulently report fake values. Retail investors can stop getting hurt from fraudulent public companies that they've invested in. Financially sound, public companies can get more investors because of the inherent decreased risk with the triple entry accounting system. It's a win-win situation.
Ending notes and questions:
What if I had to refund a purchase that I made that was registered?
This can be solved. Let's assume I purchased a software with a 30-day free trial. We can register a smart contract that either expires in 30 days, or use it as an off-chain transaction until it's actually registered, and then it would be registered on the Ethereum blockchain. To an extent, there can be a degree of mutability associated with a block that is registered.
How would we stop fraudulent companies from falsifying their data on the blockchain?
Cryptographic API's should focus on connecting directly to banking data, instead of third party accounting software. This would lower the inherent risk of having blockchain data synchronized to data that can be changed or manipulated on financial/accounting software.
Do you think that auditing will one day be run autonomously by the blockchain?
How do I get a shorter version of this blog post?