Trusting the numbers
Because enhanced trustworthiness is a primary attribute of any blockchain system, this capability is well aligned with the finance function’s priorities.
Each block’s hash result is a unique identifier and is incorporated into the next block for integrity verification. Blockchains further protect data integrity by distributing a full copy of the database to each participant. All changes or edits to previous transactions must be approved by all participants, so it is incredibly challenging for individuals to tamper with records or commit fraud. Additionally, unlike a centralized system with one authority, there is no single point of failure.
Blockchain technology possesses a number of characteristics that can determine whether financial data is accurate, secure and simple to analyze. The technology allows for the creation of “smart contracts” that facilitate or verify the performance of a contract. These smart contracts often have logic built into code that is stored, verified and executed on a blockchain, providing a platform for self-enforcing, self-executing agreements.
Blockchain technology also enables automated tracking of these contracts and transactions, making it possible to investigate balances at the source transaction. The accuracy of all transactions and subsequent accounting entries is maintained through cryptography mathematics. With a shared ledger, data is validated at the source, making it difficult to corrupt and helping to prevent fraud in certain applications, maintaining accurate and complete data.
The data accessibility of blockchain could have far-reaching implications for a company’s audit process. In a decentralized shared ledger, each transaction is automatically verified by all involved parties, potentially reducing the role for an auditor to test transactions.
Because of this feature, some audit activities could be automated. The inherent property of the system to maintain data integrity means that auditors will focus on confirming the validity of the digital representation of physical assets and codification of contracts in conjunction with accounting standards rather than auditing transactions. This enables greater focus on more complex transactions and internal controls, fundamentally changing the scope and approach of an audit opinion.
Financial analyses provide insight and allow the finance function to make sound business decisions. Blockchain technology allows for a distributed ledger that could improve reporting speed, validity and access.
In a distributed ledger, all copies of the ledger are updated nearly simultaneously, creating identical copies with no out-of-sync versions. Shared ledgers can be applied within institutions across their businesses, legal entities and divisions. CFOs could see the movement of every transaction through their system and generate real-time reporting. There could also be increased visibility into payment cycle data and the movement of money down the supply chain, allowing for better predictive analysis and budgeting, and the enactment of any strategic restrictions such as departmental spending limits.
Blockchain could also serve as a valuable source of data for a company’s analytics department, enabling key strategic and operational functions to make near real-time decisions. In a recent collaboration with Harvard Business Review, EY found that fewer than 50% of analytics programs met their initial return-on-investment goals. However, having a distributed ledger with chronological records for all transactions is an accessible, verifiable source of data. This could reduce the required investment and increase the actionable insights returned by analytics and big data initiatives.
Slow and inaccurate reporting data can lead to poor decision-making, additional delivery costs and potentially unnecessary capital funding. With blockchain technology, the ledger could provide near real-time insight from verified, chronological data, thus eliminating the need for the standard reporting cycles across statutory, regulatory and management reporting.
Companies are experiencing exponential data growth that is overwhelming them and leading to false correlations, “dark data” and important strategic insights hidden among the complexity. Blockchain technology may help companies simplify and standardize complex data to allow faster detection of market trends and meaningful information. Insights derived from more efficient analysis may then help businesses evolve their supply chains, business models and processes.