Blockchain for Accounting & Assurance
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The document provides an overview of blockchain technology and its implications for accounting and assurance, emphasizing its decentralized nature and potential to improve transaction processes across various industries. It highlights the risks associated with integration, regulatory uncertainties, and the need for adaptation in auditing methods to leverage blockchain's benefits. Case studies illustrate how blockchain can streamline franchise billing and other financial operations, improving efficiency while posing challenges in traditional audit procedures.
Blockchain for Accounting & Assurance
- 1. 11 BLOCKCHAIN FOR ACCOUNTING & ASSURANCE Eryk Budi Pratama Cyber Security & IT Advisory Consultant February 2020
- 2. Agenda 01 Blockchain at a Glance 02 Blockchain Technology 03 Managing Risks in Blockchain 04 Blockchain for Accounting & Assurance 05 CASE STUDY : βͺ OTC in Retail βͺ PTP in Oil & Gas
- 3. Blockchain at a Glance 01
- 4. Blockchain market is still nascent 01. Blockchain at a Glance Source: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value Despite the hype, blockchain is still an immature technology, with a market that is still nascent and a clear recipe for success that has not yet emerged. Unstructured experimentation of blockchain solutions without strategic evaluation of the value at stake or the feasibility of capturing it means that many companies will not see a return on their investments.
- 5. Blockchain in Indonesia 01. Blockchain at a Glance
- 6. History of Cryptocurrency 01. Blockchain at a Glance Sep β12 Bitcoin foundation established to shepherd the currency Jul β10 First major exchange Mt Gox established Oct β08 Satoshi Nakamoto publishes whitepaper on Bitcoin Jan β09 Bitcoin 0.1 released and first transaction recorded Jun β11 Silkroad coverage thrusts Bitcoin into the mainstream spotlight Mar β13 First US Regulatory body, FinCEN, declares bitcoins only subject to regulation at point of exchange Jan β15 Overstock.com becomes first major retailer to accept bitcoins as payment
- 7. Cryptocurrency could introduce major changes across multiple areas 01. Blockchain at a Glance OpportunitiesThreats Government Financial Service Retail Less control on financial markets Decreased revenue from transfer services Decreased revenue from credit card transactions Block chain for other transactions Reduced costs from credit card transactions Easier purchases Cheaper bank to bank money transfer
- 9. What is Blockchain 01. Blockchain at a Glance A Blockchain is a decentralized ledger of all transactions in a network. Using blockchain technology, participants in the network can confirm transactions WITHOUT the need for a trusted third party intermediary. Powerful applications include fund transfers, voting, and many other uses. IT IS A LEDGER THAT IS SHARED ADDITIONS ARE AGREED A Blockhain is a way of storing and sharing data between participants Everyone participating has an up-to-date copy of this ledger Additions need to be agreed upon by the majority
- 10. The Blockchain is a global distributed database which allows secure transactions with no need of a central authority in control 01. Blockchain at a Glance A continuously growing list of data records is kept in a global distributed database of independent computers called Blockchain The Blockchain operates decentral in a peer-to-peer network and allows very secure transactions nearly instantaneous with no central authority in control Bitcoin is the first fully functioning digital asset and most known public Blockchain. It started in 2009 by an anonymous person or group called Satoshi Nakamoto. Distributed Database The Blockchain nodes achieve consensus about the transactions and propagate it to the whole network. Consensus protocols are used to make one reliable computer out of many unreliable or untrusted computers Miners invest computational power to secure the network and receive an incentive No Central Authority Public Ledger Consensus Mining
- 11. Blockchain is an Architecture concept 01. Blockchain at a Glance Traditional Record Authenticity β’ High Cost β’ Long delays and inefficient β’ Difficult to customize the network β’ Vulnerable and difficult to monitor Blockchain Record Authenticity β’ Low Cost β’ Quick turnaround and efficient β’ Simple Customization using βsmart contractsβ β’ Participants have multiple shared ledgers Third party Bank Records Auditor Records Party A Party B Ledger Ledger Ledger Ledger Ledger Blockchain Solution Third party Ledger Bank Records Ledger Auditor Records Ledger Party A Ledger Party B Ledger Traditional Decentralized Business Network A Blockhain is a LOG of ALL transactions, in a DISTRIBUTED LEDGER, that were ever VERIFIED on a business network allowing any participant to see the SYSTEM OF RECORD (LEDGER) with a CRYPTOGRAPHIC AUDIT TRAIL
- 12. Blockchain is a permanent record of transaction 01. Blockchain at a Glance Counterparty 1 (Public Key) Hash Counterparty 0 (Signature) Block 1 Counterparty 1 (Private Key) Counterparty 2 (Public Key) Hash Counterparty 1 (Signature) Block 2 Counterparty 2 (Private Key) Counterparty 3 (Public Key) Hash Counterparty 2 (Signature) Block 3 Counterparty 3 (Private Key) BLOCKCHAIN Block 0 Block 4 The system is protected by using a reference to the previous block (βHASHβ), which is encrypted. Breaking into the system, would be so evident than any illegitimate changes to the system can be detected and cancelled.
- 13. How a Blockchain Works 01. Blockchain at a Glance A wants to send money to B. The transactions are represented online as a BLOCK The block is broadcast to every party in the network Those in the network approve the transaction is valid The block then can be added to the chain, which provides an everlasting and transparent record of transactions The money moves from A to B
- 14. Currently, there are 3 types of Blockchains defined with different attributes and advantages 01. Blockchain at a Glance β’ No central point of control by individuals, corporations or governments β’ Permission-less to participate (Network neutrality) β’ Everyone can read the blockchain β’ Change of rules difficult β’ Controlled by more than two individuals, corporations or governments β’ Permission on participation from consortium necessary β’ Readability of the blockchain can be public or restricted to the consortium β’ Change of rules medium β’ Controlled by one individual, corporation or government β’ Permission on participation from owner necessary β’ Readability of the blockchain can be public or restricted to one β’ Change of rules easy Public Blockchain Consortium Blockchain Full private Blockchain
- 15. When we need Blockchain?
- 16. Blockchain needs the right conditions to be successful 01. Blockchain at a Glance If you can answer yes to at least 4 out of 6, Blockchain could be an effective solution Multiple parties share data β’ Multiple participants need views of common information Multiple parties update data β’ Multiple participants take actions that need to be recorded and change the data Requirement for verification β’ Participants need to trust that the system that are recorded are valid Intermediaries add complexity β’ Removal of intermediaries can reduce cost and complexity Transactions are time sensitive β’ Reducing delay has business benefit Transaction interact β’ Transactions created by different participants depend on each other
- 18. Digital Ledger Technology as potential game-changer 02. Blockchain Technology Blockchains are an upgrade on traditional ledgers due to the quality and integrity of data stored due to the use of cryptographic security and identity verification. They also enable a number of different efficiencies through the elimination and reduction of redundant processes. Traditional Ledger Present β’ Ledgers record business activities such as transactions and contracts, today each party owns individual ledgers β’ This solution is well established and working, but inefficient, expensive and fraud vulnerable Distributed Ledger Future β’ Decentralized system building one encrypted ledger, shared across many parties β’ Records are immutable The benefits of Distributed Ledgers βͺ Quality and Integrity of stored data (single source of truth) βͺ Increase Efficiency through: - Automation - Reduced reconciliation - Reduced duplication βͺ Trust between all parties
- 19. Functional process of digital ledgers 02. Blockchain Technology Source: https://assets.kpmg/content/dam/kpmg/pdf/2016/06/kpmg-blockchain-consensus-mechanism.pdf Initiate the transaction Multiple parties transact Add the transaction to the network The transaction is added to the networkβs block and cannot be deleted Broadcast The block is broadcasted to every party in the network Validate via consensus and confirm The network verifies, validates, and approves Consensus is recorded (agreed mathematical mechanism) Transaction completed Parties have access to a shared, single source of truth Immutable, encrypted block The confirmed block is added to the chain Provides a transparent record of transactions, audit trail Consensus mechanism applied
- 20. What are smart contracts? 02. Blockchain Technology βͺ Eliminates the risk of delays and reliance on middlemen to follow through on their commitments βͺ Information sharing is transparent, time-stamped, and irreversible Replicated, Shared Ledger Value State Transaction Sending value to contract Transaction Sending value from contract Events Sending information to the contract Events Sending information from contract Smart Contract A Smart Contract in a blockchain context is a piece of written code that auto-executes subject to the satisfaction of pre- agreed conditions thus adding additional functionality to an operation by automating certain processes. Benefit: Business Logic
- 21. Blockchain solution platform layers β Digital Ledger Technology (DLT) 02. Blockchain Technology The common functionality of DLT technology is distributed in five layers that interface with each other Layer Notes Components Application Layer End user applications for businesses and clients Middleware Layer Stores business logic written in smart contracts and orchestrates information relay DLT Layer Distributed ledger with notes provided to qualified members Database Layer Database to store static and mapping data Infrastructure Layer On-demand computing and storage (for KYC-related documents) Client Web Portal Business Access Portal Sales Portal Risk management Portal Business Logic & Governance standards Signing & Network Engines Listening & Alert Engines API Engine Blockchain Node 1 (Smart Contract) Blockchain Node 2 (Smart Contract) Blockchain Node 3 (Smart Contract) Database 1 (SQL) Database 2 (SQL) Database 3 (SQL) Compute (Virtual Machine) Storage (SAN) Sanitized
- 22. Sample of DLT Platform - https://www.hyperledger.org/ 02. Blockchain Technology
- 24. Risks to blockchain participants 03. Managing Risks in Blockchain Dimension Risk Interoperability Integrating blockchain with legacy IT platforms is a potentially costly operational challenge. Participants will need to convert data models and business processes and incorporate new authentication and communication protocols. Auditability For transactions stored on a blockchain, companies may lack the ability to provide information necessary for legal discovery, forensic investigations, and audit purposes. Control and collusion A single participant, or collusion among a group of participants, could obtain control of the blockchain by achieving consensus without other participants. This could effectively block, delay, or modify transactions. Data management and governance Although blockchain uses a persistent, distributed ledger that grows with every transaction, large volumes of transactions and the presence of corporate data outside of the network presents risks similar to cloud computing environments. Further, transactions may have additional metadata that is not part of the blockchain transaction, which will have to be secured and transferred outside of the process while maintaining the ability to reconcile with the blockchain.
- 25. Unclear regulations, and concerns around security, scale and speed may hinder widespread Blockchain adoption 03. Managing Risks in Blockchain Fluid Regulatory Landscape β’ Lack of a global regulatory body to set standards on global transactions β’ There is no regulation for managing blockchain ecosystem in Indonesia β’ Reduction of settlement risk and easy access to transaction data may provide incentives for regulators to react positively towards this technology Potential Scalability Issues β’ This technology is currently in an emerging stage, it may not operate at scale without compromising on security, speed or cost β e.g., Visa has the capability to process 56K transaction messages per second High System Latency β’ Traditional payment systems (credit cards) provide a βreal-timeβ feel of settlement at the POS, while blockchain payment systems can take from 3-5 seconds (e.g. Ripple) to 10 minutes (e.g. Bitcoin) Security Concerns β’ Dependency on usersβ private keys could result in hard to retrieve lost keys β’ Ledgers are public but the users are anonymous and might be difficult to track β’ Technology is still not fully tested and might run into future issues β e.g., MtGox, a bitcoin exchange, was hacked, and Stellar reported issues with the Ripple protocol
- 26. Blockchain consortium poses other hurdles 03. Managing Risks in Blockchain Setting up and running a consortium requires ongoing efforts to confirm to certain standards, best practices and governance frameworks. βͺ Providing secure access to and storage of data βͺ Ensuring data privacy and rights management βͺ Securing the agreement on standards for compiling a single source βͺ Agreeing on ownership rights and structure for the developed technology βͺ Decision on services offered and expansion into advanced data analytics βͺ Determination of voting rights between members βͺ Defining memberβs role while each participant may have different interests βͺ Setting up data liability and reliance standards acceptance to all members Data β Privacy & Security Data β Standards Intellectual Property Technology Consortium Groups Data - Liability
- 27. Blockchain for Accounting & Assurance04
- 28. Complex algorithms run across network of users to authorize and complete transactions 04. Blockchain for Accounting & Assurance Transaction Requested Transaction Authorized Transaction Recorded β’ Network users request a transaction with each other which includes the transfer of a cryptocurrency β’ Network users review past transactions on the blockchain to conduct authorization based on the algorithm or methodology employed by the system. Some examples of algorithms: - Proof of work verification β a hash algorithm that generates random numbers - Consensus verification β an agreement among the majority of network players β’ Upon authorization, value and assets change ownership on the network β’ The entire transaction including asset ownership is cryptographically recorded in the ledger β’ Blockchain provides users with immutable and permanent audit trail to prove occurrence and timing of transactions
- 29. Problem that Blockchain are trying to solve 04. Blockchain for Accounting & Assurance The Audit Problem: Traditional audit approaches will not work for the blockchain based systems predominantly due to their always on nature and likely scale. However Assurance will still be a necessary component of any use case. A fundamental shift in audit philosophy will be required Providing transparency requires a shift in how we think about the audit and control. We must go from retrospective point in time efforts to real-time auditing. SOLUTION βͺ Create an audit node for transparency purpose to meet the needs of all applicable stakeholders and improve the efficiency of our audit. βͺ By relying on the core tenants of a blockchain based system, irrefutable transaction record and transaction integrity will be established the necessary transaction level of assurance regardless of use cases or industry. Current State Point in time Forensic Retrospective Sample based analysis Speculative Subject to population results Future State Real time Inherency Immediate / predicted Full population Macro level trending Objective population results
- 30. The Blockchain audit challenge 04. Blockchain for Accounting & Assurance Rapidly evolving technologies are creating a critical need for an enterprise to be prepared and adaptive to emerging challenges. Traditional audit approach Methodologies must shift from manual to an automated and continuous approach Expertise challenges Risk and Audit staff do not have the technical expertise to obtain transparency without significant technical complexities and inefficiencies Technological challenges Current methodologies cannot provide the necessary transaction level assurance in areas blockchain is used
- 31. Providing assurance for blockchain 04. Blockchain for Accounting & Assurance Audit challenges with blockchain Corporate risk and audit staff are unfamiliar with blockchain and emerging technology. The traditional audit approaches wonβt work, and pilots will get βstuckβ if assurance challenges are not addressed up front. Current regulatory guidance does not provide a standard risk framework. Digital trust of blockchain and confidence is needed in order to move blockchain pilots forward to production. Existing systems have immature reporting and analysis around blockchain. Typical Solution βͺ Creates and integrates an assurance layer for a Blockchain use case βͺ Implements Continuous Auditing and Compliance Solution βͺ Performs gap analysis with Blockchain Risk Framework βͺ Provides live views of transactions βͺ Creates transparency and optics necessary to meet internal audit requirements Expected Result Decreased audit costs from required hours necessary to perform an audit when product is implemented Higher economic viability of any blockchain use case Faster time to deployment
- 32. Case Studies
- 33. Blockchain revolutionizes each cycle within the Finance function Case Studies Procure-to-Pay Order-to-Cash Acquire-to-Retire Record-to-Report Huge reductions in cost and process duration through elimination of several third party approval roles Automation of invoice and quotation generation, enhanced accuracy in all transactions, a reduced number of disputes and significantly improved data management Streamlining of fixed asset use and recording from beginning to end by tracking ownership and use of individual assets on a public, yet central database Optimized processes leveraging a platform to achieving timely, accurate, and transparent reporting through use of decentralized ledger Case study sample for public consumption purpose. Other case studies are not disclosed. Contact me for further discussion βΊ
- 34. Blockchain Retail Industry Use Case: Franchise Billing Case Studies - Consumer Markets Use Cases β Order to Cash The franchise billing accounting process can be manual and time-consuming because the franchisor has to track upfront and ongoing franchise fees as well as advertising and other costs. An immutable distributed ledger in the Blockchain would increase auditability, traceability, automation, and assist with audit and dispute management. Restaurants in the Quick Service industry have moved toward a franchise model. Adopting the Blockchain would grant them increased traceability and visibility into franchisee transactions, which would allow them to streamline and automate the reporting and audit process involved in franchise billing. Franchisor A Franchisee B Franchisee C Billing Billing Sales Reporting, Fees and Payments
- 35. Franchise accounting improvement with POS, ERP and blockchain Integration Case Studies - Consumer Markets Use Cases β Order to Cash Franchisor A sends from ERP lease/rent data, advertising costs to its node which writes/broadcasts to all nodes in network Franchisee B and Cβs POS systems send sales data to their respective nodes which write/broadcast to all nodes in network The Smart Contracts on the network contain the details of the respective franchise agreements between A & B as well as between A & C. Logic is embedded in the Smart Contracts which will incorporate the external data to calculate and execute the franchise accounting and billing transactions. The resulting transactions are written/broadcast to all nodes in the network. The Smart Contract will trigger the flow of funds from B & C to A Integration between Node A and the ERP will ensure that the accounting is captured appropriately in Aβs ERP Transactions are recorded to all of the partner nodes in the blockchain network, creating an immutable record of transactions (this is contemporaneous to steps detailed above) Inputs Are Sent From ERP and POS Into The Blockchain Nodes Posting To Blockchain A B C 6 Franchisor A A ERP/Enterprise Applications Franchisee B B Franchisee C C 1 3 3 3 3 2 2 4 4 5 1 2 3 4 5 6
- 36. Pain Points and Benefits of Blockchain for Franchise Billing Case Studies - Consumer Markets Use Cases β Order to Cash Some Pain Points across Franchise Billing include: β’ Manual reporting by franchisees β’ Inaccurate franchisee fees and sales data β’ Burdensome audit and dispute management process How does blockchain address these Pain Points? β’ Reduces manual efforts required to enter and submit franchisee sales β’ Reduces manual efforts required to reconcile franchisee sales β’ Reduces manual efforts required to track and monitor franchisee data Manual Reporting β’ Reduces risk of incorrect franchisee sales and costs data β’ Reduces risk of incorrect franchisee royalties and fees calculation Inaccurate Data β’ Increases auditability β’ Increases visibility into franchisee transactions β’ Streamlines franchisee audit process β’ Simplifies dispute management process Burdensome Audit Process
- 37. Summary
- 38. Key Takeaways Summary Blockchain is a LEDGER that is SHARED to establish a CONSENSUS amongst AUTHORIZED and VALIDATED participants We have to be aware on how Blockchain could be an effective solution for our problems (4 from 6 criteria) Both Blockchain participants and provider must be responsible to manage blockchain risks Continuous (automated) auditing is the only way to audit the Blockchain system
- 39. Bitcoin = Cryptocurrency Cryptocurrency uses Blockchain Technology
- 40. Thank You βΊ