Double entry booking has been around for centuries, and most people believe it was designed by a Franciscan monk in Milan in 1494 (Luca Pacioli). But it was in fact described earlier than that, in 1458 by Benedikt Kotruljević, a diplomat, trader and humanist, and who was born in Ragusa (or what is now known as Dubrovnik) in his work: Book on the Art of Trade.
Accountants and their armies of assistants enter transactions that effect a debit and a credit, and at the end of the day these should balance. Nowadays transactions are not manual, they are computerised, but the principles remain the same. Transactions are logged in general ledgers, in accounts payable ledgers, in accounts receivable ledgers, in treasury systems, ordering systems, asset ledgers, stock ledgers. These same transactions are recorded in suppliers’ ledgers, bank accounts, buyers’ ledgers and should reflect the same transactions from the counterparty’s viewpoint.
Supporting these transactions are invoices, contracts, delivery notes, bank statements, receipts, stock control forms etc. etc. These documents may well be in different formats and almost definitely on different systems.
Errors are made, cash goes missing, accounts don’t reconcile, disputes arise. Huge resources are allocated to recording, balancing, analysing, auditing. Time and money is spent in long transaction cycles as money moves through banks, traders, counterparties and other “trusted” intermediaries. And then there is KYC, regulation, money laundering and taxation to worry about!! And lastly there is cyber fraud risk.
It’s a complex world.
Double entry for sure has helped the finance functions to get things as right as they can, given time and resource. It’s a form of self-checking that has stood the test of time BUT it is going to be severely tested in the new world of Artificial Intelligence, cognitive systems, machine learning, Internet of Things, Blockchain, Big data and the demands from other parts of the organisation for real-time actual and predictive numbers to support decision-making.
There is so much data available now, both internally, within an organisation, and externally from third parties on the internet, in the cloud, in proprietary databases, that it is a humungous task to be able to access, integrate, interpret and produce something meaningful AND produce information that will differentiate one business from another to win competitive edge.
Enter our modern day “monk”, Satoshi Nakamoto who conceived of what we now call Blockchain. This technology has the power to turn our CFO into the Master of his Universe!
The Blockchain can solve so many of today’s big problems with applications being developed for a huge variety of different purposes but each one having some core features in common.
Blockchain technology records transactions (and more) in real time, that are almost impossible to falsify or hack, that cut out the middlemen. They can be accessed, analysed, audited, checked, at any time and most importantly that retain a permanent record, date stamped and verified, that all parties can trust.
Blockchain technology can be private (closed to invited parties) or public. Each participant in the system has a public key that others can access to initiate a transaction and a private key that triggers the authority to transact (eg make a payment). Cryptography keeps the whole system secure. The long chains of information tied together in “blocks” and distributed across many computers with each computer having the same record makes fraudulent abuse of data and hacking almost impossible. There is no central “trusted” party but transactions are person to person, peer to peer, each date stamped and verified.
Imagine a world where accounting was not double entry but maintained in ledgers simultaneously recording the same item in multiple locations on multiple computers, all self-balancing and checking every few minutes. No middlemen, no reconciliation, no corrupt date, no need for month-end cycles, no need to bring together all the different books and records of departments and counter-parties.
Transactions to order stock, control deliveries, record payments and receipts, trade securities, store important contracts, trace the source of assets or money, trigger transactions automatically (smart contracts) and report to management and authorities all supported by blockchain applications. These applications can manage vast quantities of trusted, immutable, data in real time. This is the world we will be living in.
There is a long way to go and a lot of hurdles to jump before this technology becomes as ubiquitous as today’s internet; technical, legal, regulatory, taxation, cross-border restrictions etc. BUT there seems little doubt that the Blockchain concepts will be as revolutionary as the internet and will be adopted by business, institutions, governments and individuals across society. It could power a new economy of inclusiveness never before seen.
For the CFO it should see the end to armies of people reconciling entries and tracing historical transactions. The end to delays and high costs for money transfer and the use of financial intermediaries. The start of real-time data analysis, the end to the onerous nature of the reporting cycle and more dynamic, less intrusive, audit, taxation and money-laundering processes.
The role of the CFO is about to change like never before. The CFO can be the instrument for change and an irrepressible source of predictive analysis to the management of a business. From back office to front office; from support and retrospective reporting of transactions past to forward-looking quantitative information drawn from numerous sources of data; from balance sheets, budgets and variance analysis to real-time modelling for a range of potential business decisions.
And it is not just Blockchain. There are many other more developed technologies already available to transform the life of the CFO. These include robots, Artificial Intelligence, Big data, IOT, smart contracts, machine learning.
These topics to be covered in future articles.