Know Your Blockchain to Re-Imagine Business, Finance and Accounting

Stathis Gould | July 26, 2018 |

Professional accountants in various roles are seeking to contribute to the blockchain discussions and innovation in their organizations particularly as they relate to finance, accounting and reporting. To help, at its last meeting, the IFAC Professional Accountants in Business Committee discussed blockchain and how it is being considered and deployed. EY presented on the fundamentals and provided insights on use cases which are captured in A Vision for the Finance Professional and Finance Function. The fundamental concepts of blockchain and the impact on business, finance and accounting are also set out in a presentation.

At a conceptual level, blockchain is fairly straightforward but how it can deliver return on investment, particularly in relation to existing processes and systems, is more complex. As with all nascent technologies, the variety of people that need to be involved in its development and deployment means that there will be cost and complexity, and the need for external technical expertise is high.

But it is important that its potential is not overlooked, and ignored by finance and accounting professionals, especially in how it can be used to transform business processes.

Blockchain can cause confusion as it is often referred to as software, a database and a network. Fundamentally it is all these things which enables a distributed and digital ledger database with no single participant ownership and control of each transaction or asset that occurs across a network.

The potential of blockchain is significant and emerging beyond how it enables cryptocurrencies like bitcoin. When the jump from proof-of-concepts to actual operating blockchain deployments will take place remains unclear. There is plenty of hype and information available on how it works and its applications. Conversations and experimentation are taking place in financial services, consumer goods, mining and other settings around deploying blockchain to gain process efficiencies, as well as fundamentally changing business models and the value proposition to customers. In fact, the potential of blockchain is vast with applications in many contexts and industry (see Banking Is Only The Beginning: 42 Big Industries Blockchain Could Transform and Blockchain beyond the hype: What is the strategic business value?).

Efficiency gains come mainly from reducing duplication, for example in settlement and reconciliation, and from automation of execution of business processes and protocols through smart contracts.  Trust and transparency are derived without central authority controlling a database given all participants are able to view the original transaction or transfer of ownership of an asset. Blockchain can be applied to financial data, hard assets (physical property and land registry), and intangible assets (votes, health data, etc.). A distributed ledger approach can respond to a range of situations where multiple parties record transactions to their own systems, which leads to lack of visibility across a network, and disintermediation makes sense.

There are several key areas to think about in determining how a distributed ledger approach can potentially cut cost and transform business models and core business processes.

The strategic and operational value proposition has to be properly understood and blockchain applied in the right contexts.

Use cases and proof of concepts are currently mainly testing out benefits in financial related processes, supply chain and logistics, and health and property records management. The most promising applications are so far:

  • Where there is data fragmentation and siloed systems, particularly between organizations and separate legal entities. Consolidating reporting entities and managing intercompany or inter-group transactions is complex and costly. In financial services, trading, order management and settlement processes are typically housed in separate systems, and the opportunities on the efficiency side therefore significant
  • A  tamper-proof (in theory) permanent record of transactions which in some contexts makes the system more efficient such as by allowing wide scale consensus between trading parties such as in settlements and managing order books and trading assets. The peer-to-peer network becomes the trusted intermediary, offering increased trust at scale while cutting the cost associated with oversight and intermediaries
  • Circumstances where authenticity and provenance are important such as with tracking diamonds or wine to source. Securing the ownership or management of a finite or scarce resource helps to prevent fraud given complete visibility in the chain of ownership
  • Tracking objects through the supply chain such as fruit and other perishable goods being sourced and transported around the world in global chains enabling efficiencies in shipping and logistics and enables visibility on where a product has come from, where it has been processed and stored.

Blockchain and business processes

The opportunity of blockchain in driving changed business and value-stream processes is significant but needs further exploration. Finance and accounting processes can be time consuming, error prone and susceptible to fraud.

The potential re-imagination and transformation of procure-to-pay (PTP), customer to cash, and account to report processes presents a significant opportunity for greater efficiency and effectiveness in delivering value to customers and minimizing unnecessary processing. The combination of these streams into one overall value stream, or at least into a more interconnected set of streams, allows the delivery of products and services, and the associated experience, to be more seamless for customers and more efficient for producers and suppliers.

Improving value streams requires functions to look beyond their traditional boundaries and learn how their actions affect the overall support service to their organization, and ultimately helps improve customer experience (see Value stream management: how firms can use an architectural approach to improve the way key back-office functions, including finance, perform).

The re-imagination of core value stream processes could be enabled by blockchain. Transactions relevant to all parties in the chain (e.g., organization, customer, supplier, and bank) are visible and seamless on a distributed ledger so no human validation is needed.

On the PTP side, purchase order and goods receipt data can flow through the blockchain reducing their processing.

On the billing side, there is potential to bring together goods and services with their respective payment. Shared access between accounts receivable and accounts payable removes the need for manual invoicing. Smart contracts can automate the generation of invoices and enable the automatic reconciliation of payments to corresponding invoices, and provide connectivity to bank payment network.

Payment settlement enquiries and reconciliations should also be largely removed.

Developing end-to-end process solutions has its technical challenges. It will require integration with other systems and technologies. For example, blockchain network transactions need to feed into accounting and enterprise resource planning (ERP) systems, which will require Application Programming Interfaces between the blockchain and database that feeds into the ERP.

It is also important to note that blockchain verifies all transactions and data native to the blockchain; all data and assets that are represented in the blockchain that are derived off-chain are not subjected to the same benefits. For corporate reporting, blockchain will need to fit into the overall framework of demands of preparers (see Blockchain and the Future of Corporate Reporting, How Does it Measure Up?)

Despite the challenges, a value stream architecture that is interconnected by a common database of transactions across organizations and their customers, banks and suppliers is perhaps in reach. It might be an opportunity too good to miss.

Stathis Gould

Deputy Director, Professional Accountants in Business, IFAC

Stathis Gould heads up the development of international services for professional accountants working in business and industry at IFAC. A key element of his work is developing thought leadership and guidance in support of finance professionals and their roles facilitating sustainable organizational performance. Before moving to IFAC, he was at the Chartered Institute of Management Accountants (CIMA) responsible for planning and overseeing a program of policy and research. Prior to serving the accountancy profession, Mr. Gould worked in various roles in the private and public sectors in the UK. See more by Stathis Gould

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