In recent years, traditional business bookkeeping methods have come into question because of their deficiencies. The advent of a concept of shared or distributed ledger systems offers a potentially better solution. However, shared ledger systems and their potential remain underresearched. Thankfully, and with Pacio’s input, this is changing.
Accounting and management researchers Ibañez, Bayer, Tasca, and Xu who are associated with the Centre for Blockchain Technologies at the University College of London, have created a landmark study on Triple Entry Accounting and Blockchain technology. Pacio’s CEO, David Hartley, contributed to the study regarding the company’s work on building the first scalable Triple Entry Accounting (TEA) solution.
The study recounts the invention of double-entry accounting in the 15th century and points out that accounting has continued this way since then. Says the study: “However, a second revolution took place between 1982 and 2008, and it has been rather overlooked. Shared ledger systems emerged as a fruit of this revolution. One prime example of these systems is triple-entry accounting, or TEA.“
“This is the first comprehensive study of its kind,“ says Pacio’s Hartley. “It puts the spotlight on the issue that accounting has not yet caught up with the needs of a rapidly changing economy.”
Double-entry, or legacy, accounting has three main problems:
- It is easy to commit fraud since transactions can be altered or obfuscated. In 2018, there was an estimated $4 trillion in corporate fraud alone.
- A complex and expensive system of ‘trusted’ regulators and auditors is required to try to keep things honest. Yet these systems often fail due to chance (sampling methods) and the lack of complete, verifiable detail.
- The financial reporting systems built on double-entry accounting often offer little insight on how to make better business decisions, usually only delivering results long after the event.
Triple Entry Accounting solves these problems:
- The financial transactions recorded in a distributed ledger, accessible on an as-needed basis to both parties involved and their auditors or regulator as required, are immutable. Once made, the transaction records cannot be altered. That makes fraud by alteration afterwards impossible. (Fraud by obfuscation where both parties are involved in the crime is not prevented, but that is made easier to find and expose.)
- The availability of immutable records accessible to all interested parties dramatically reduces the need for trusted third parties. Auditing does not need to be a statistical process based on samples – it can be automated and involve 100% of transactions, providing far better confidence in the data.
- The availability of all data, verified in real-time, allows active, intuitive reporting and systems to provide management help when it is needed – as things are happening.
There is one major hurdle to overcome for a global TEA solution. Until now, no technology could guarantee decentralized security for a distributed immutable transaction ledger system at the scale required to handle world needs of hundreds of thousands of transactions per second. That has made TEA a challenging undertaking for the global market.
“However, Pacio is developing a transactional system to overcome that limit of scale.” says Hartley. “We will ship that and supporting systems over the coming years and hope to make a good case for the global ascendancy of Triple Entry Accounting, to finally replace the five-century old double-entry accounting system.”
Link to the first paper of four papers comprising the study: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3602207