by Erica and Stefan Armstrong (wife and husband accounting team) and David Mondrus
Open ledger accounting has the potential to make accounting more accurate and simpler than ever.
One of the problems with accounting as it currently stands is its inability to provide 100% accuracy. This might be surprising for those not actively managing books day to day, but the details of transactions, the speed with which they move and the complexity of their classification means that 100 accuracy is far from certain.
For example, a large bank has thousands of transactions a day that they have to balance to cash. They simply can’t balance to the penny every day. It takes too much time and would cost too much. Over time this adds up to the bank being out by millions of dollars. But, if transactions were automatically posted to an automated block ledger when the transaction took place the ledger would always be right. This would save companies time and be more accurate as you would not be able to actually conduct the transaction without the tracking.
How would this work? Well, essentially the company’s accounting department would “spin up” an internal company coin when they opened their books. This coin would be convertible to Bitcoin or whichever Crypto currency is prevalent, but would only be able to be used internally. They would then distribute this coin according to the annual budget. As departments interact with external suppliers, the payments are made through the accounts payable office, but in a fully automated fashion. That is the department’s purchase normally, but pay via an automated internal coin -> BTC converter. Internal departments payments are of coursed handled without the need to convert. Once the books were closed for the fiscal year, all coins would convert to Bitcoin to mark to market for the last time, and that coin would be closed. Then the cycle begins again.
This method guarantees internal transaction integrity, transparency and accountability
- Less transactions errors: Currently, all transactions for a company must be entered manually. This means that if a bank account balance is off at the end of the month, you have to figure it out, and there’s an incentive to “fudge” the reason. If transactions were automatically posted as soon as they were completed, this could no longer happen.
- Full transaction auditing: Currently an auditor can only test a percentage of transactions in the system as it’s cost prohibitive to verify each transaction. But with an open ledger accounting system, auditors could simply monitor the system.
- Real time financials: By tying the internal ledger to a reporting system that aggregates and rolls up the data, a company can track their financials in real time.
- Better risk management: Real time financials allow for better risk management through automated asset allocation, re-balancing and exposure monitoring.
- Better credit worthiness management: Currently we must rely on 3rd party credit rating agencies to advise us of the quality of a business customer. Access to a verified transaction chain means we no longer need to rely on people to make a decision on our behalf. We can now see and trust the data we see enough to make our own credit worthiness decisions.
- Cheaper and better public company accounting: The open ledger accounting methodology could be used to create real time financials for publicly traded companies allowing everyone to review the company’s transactions. This significantly reduces public disclosure compliance costs, and reduces the risk of “off balance sheet accounting”. Simply, it makes another Enron or Bernie Madoff become much less likely.
To be sure, there are both risks and complications with this method.
Most companiesaren’tgoing to have the technology to “spin up” their own coin. They also can’t do their own mining anyway, since this removes the chain credibility. They will have to reward the coin miners in some way, this will obviously cost $.Additionally, this method also leaks information that the company might not want to share. We think this concern can be reduced through appropriate level aggregations, but an aggregation too high removes the transparency.Also this does not address simple dishonesty, or the classification problem, although we expect that very quickly that will become a non-issue through an emergent implicit agreement on classification standards.
Finally there’s the sheer inertia and complexity of it all. Accountants are not exactly known for their breakneck charge of innovation adoption, GAAP standards took years to lock down and FASB and IASB will have a say in how this is monitored, measured, controlled and accounted for.
But we think that in the same way that the accounting profession adopted every other time and money saving technique to do their craft, aftert hey’ve understood the implications of this technology, and its veracity, utility and cost savings are demonstrated they will flock to it, well, like accountants to accounting.