Accounting is the language of business – even though it was invented by Father Luca Pacioli, a 15th-century scholar and monk.
It’s all based on double-entry accounting, of course – in which both debits and credits are entered in the ledger and then both sides balanced.
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 accounting methods
Traditional accounting methods cannot handle new business models that rely 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 that is recorded on an external, independent and decentralised 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.
- 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.
- 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.
- 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.
ProsperChain will be at Accountex Summit North on September 10 – Manchester Central, stand 26.
