Digital Financial Reporting

A BBC News article, Why you have (probably) already bought your last car, reports that RethinkX reckons that within 10 years of self-driving cars getting regulatory approval 95% of passenger miles will be in self-driving electric robo-taxis.  The article goes on to say that these regulatory approvals could be in place by 2021 in the United Kingdom.  Some say this could happen by 2030.

How does disruption work?  The Innovators Dilemma explains the difference between sustaining (or incremental innovation) and disruptive innovation.  Sustaining innovation meets a customer's current needs.  Disruptive innovation meets a customer's future needs.

The Seba Technology Disruption Framework, which was created by Tony Seba, explains how disruption works:

 (Click image to go to presentation which explains Seba Technology Disruption Framework)

Here is the definition of disruption Tony Seba uses:

A disruption is when new products and services create a new market and significantly weaken, transform or destroy existing product categories, markets or industries.

This 50 minute video explainshow AT&T missed the mobile phone market because of a 10x error in estimating the market provided by "an expert". Here is a list of the seven worst technology predictions of all times.

What does this mean for the modern finance platform? What does this mean when accounting, reporting, auditing, and analysis moves to a truly digital environment? Let me know what you think.

Between 5,000 and 10,000 years ago farmers in Mesopotamia, where agriculture was born, used physical object to count crops and animals . The distinction between types of crops or animals was made by using different types and shapes of objects.

Then, in about 3200 BC, around 5,000 years ago, the first spreadsheet was invented.  These farmers began documenting information using clay tablets in the earliest form of human writing ever discovered called Cuneiform.  They partitioned their clay tablet into rows, columns, and cells.  These farmers used single-entry accounting.

Source: Metropolitan Museum

In 1211 AD a bank in Florence, Italy was the first documented use of double-entry accounting.  Between 1299 AD and 1300 AD double-entry accounting came of age.  In 1494 AD during the Renaissance, Venetian mathematician and Franciscan friar Luca Pacioli  published a book, Summa de arithmetica, geometria. Proportioni et proportionalita (Sum of Arithmetic, Geometry, Proportion and Proportionality).  That book documented the double-entry approach bookkeeping and recommended that others use this approach.  The double-entry approach allowed for better error detection and the ability to differentiate unintended errors from fraud.  Accountants adopted that new approach. 

Most recently there are discussions about immutable mutual digital distributed ledgers using cryptographic technologies.  One technology that can be used to implement a digital distributed ledger is blockchain. People are calling this "triple-entry accounting".  Some say that triple-entry is the most important invention in 500 years.  Basically what triple-entry does is create a link between the two double-entry systems documenting that the transactions in the two systems go together.

There is a little bit of a dispute around the true meaning of "triple-entry". Yuji Ijiri was first credited with using the term but the blockchain folks seem to have perhaps redefined the terma bit. I am using the term "triple-entry" as the blockchain people and Ian Grigg tend to use the term.

Here is the bottom line: 

• A single-entry is not much more than a glorified list.
• Double-entry is in essence posting a transaction to two different single-entry ledgers with different parties responsible for each ledger. When you use a double-entry ledger what the transaction represents has to be explained by reasoning, the two transactions logically go together. Removing or changing part of the transaction will make the transaction illogical.  Double-entry allows for the detection of errors and the differentiation of an unintentional error from fraud. 
• Triple-entry further builds on double-entry in that triple-entry links a transaction in two double-entry ledgers and the link is publicly available for all to see the transaction.  You are still able to explain the reasoning behind the entry but additionally the transaction is visable for all to see which makes it very tough to lie since others are watching.  It would be illogical for the transaction to not be reflected the same in both ledgers.

With the volume of transactions growing and complexity increasing; triple-entry accounting intuitively seems like a potentially valuable tool. Perhaps those experimenting with triple-entry accounting might come up with something useful.

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Toward Blockchain-Based Accounting and Assurance

Triple-entry accounting podcast

Before writing was invented, between about 5,000 and 10,000 years ago farmers in Mesopotamia used physical object to count crops and animals.  In about 3200 BC the first spreadsheet was invented when these farmers began documenting information using clay tablets in Cuneiform; partitioned their clay tablet into rows, columns, and cells.  This was single-entry accounting.

In 1211 AD a bank in Florence, Italy was the first documented use of double-entry accounting.  Between 1299 AD and 1300 AD double-entry accounting came of age and in 1494 AD during the Renaissance, Venetian mathematician and Franciscan friar Luca Pacioli published a book, Summa de arithmetica, geometria. Proportioni et proportionalita documenting this approach.

Accountants have a special name for the spreadsheets, or tables, that these farmers invented and Italian bankers perfected. Accountants call these ledgers. 

A ledger is simply a place where you record information such as transactions.

A fact ledger is a new type of ledger that offers utility and leverage when accounting, reporting, auditing, and analysis is done in a digital environment.  Another accountant and I came up with this idea when trying to figure out how to actually implement accounting process automation.  The document Introducing the Fact Ledger summarizes our ideas related to this tool.

Fact ledgers can work with single-entry accounting, double-entry accounting, or even triple-entry accounting.

Do you have any ideas that might improve on our vision of the fact ledger?  If so, give us a shout.