[MUSIC] Welcome back, in this video, we'll look at what we call the World Wide Ledger. It's a solution to the problems we've identified with double-entry accounting. Today, companies record a debit and a credit for every transaction. That's why it's called double-entry accounting. And this model has been around for hundreds of years. It was the foundation of the corporation and of the capitalist system. So what is triple-entry accounting? Back in 2005, financial cryptographer Ian Grigg, he argued the cryptographically sealed record of transactions, essentially a shared receipt, was the same as a third entry, extending double-entry accounting systems. Now Ben Taylor, the CEO of a cloud accounting software company, said Grigg's use of the phrase is confusing. The presence of a digitally signed receipt is not a fundamental departure from double-entry accounting, he said. He pointed out a common misconception. Some believe, quote, the writing of each piece of information to the blockchain is actually a third entry, and it's not, unquote. This misconception is unfortunate, but it shouldn't lessen the value of blockchain in accounting applications. The ability to write transactions to a blockchain in real time, and between multiple parties, is very powerful and maybe revolutionary. A ledger showing the whole history of assets and the relationships among transactions gives us more than a credible audit trail. It gives us the real time status of all transactions relevant to us. A company's financial reports would become a living ledger, capable of being audited, searched, and verified at any time. Generating any up to the minute financial statement would be simple, like a spreadsheet function. We'd simply click on the balance sheet view, or the income view, or the cash flow view of a company's financial data. Companies might not want everyone seeing these numbers, of course. So executives could grant access only to regulators, managers, or other appropriate or key stakeholders. Industry insiders say that this shared World Wide Ledger has several implications for accounting. First, it could streamline compliance and reduce risk for banks. It would mean less accounting work and lower costs for the bank. Simon Taylor of Barclays said, quote, we're basically saying, here's everything we've done. Because what we've done sits inside a system, nobody else can see. A transparent World Wide Ledger of everything means there could be no hidden data. Second, regulators would have real-time access. And it would sure make a regulator's job easier in holding, say, a bank accountable. Jeremy Allaire of the digital currency startup Circle thinks regulators benefit the most. Since they won't have to rely on what he calls opaque, privately controlled ledgers and financial accounting systems to do their work. With a shared public ledger, auditors and bank examiners could have automated forms of examination, to look at the underlying health of a balance sheet, unquote. And he called it a powerful innovation. We think he's right. Third, it bakes integrity into the financial system. Christian Lundkvist of ConsenSys is working on an Ethereum-based distributed app for triple-entry accounting. And he said quote, all fraud would be much harder, because at no point can you go back and change your records, unquote. Austin Hill, co-founder of Blockstream, said a public ledger, quote, means you don't have to trust the books of your partner. There is integrity in the statements or the transaction logs, because the network itself is verifying it, unquote. He compared it to a continuous audit, requiring no further evidence. Hill said, quote, you're not relying on PricewaterhouseCoopers or Deloitte. There's no counterparty risk. If the ledger says this is true, then it's true, unquote. That leads us to four, the audit business itself is overdue for a shake-up. Deloitte, one of the world's big four accounting firms makes a third of its revenue from auditing. Deloitte's Eric Piscini said to us, quote, today we spend a lot of time auditing companies, and we charge fees accordingly. Tomorrow, if that process is completely streamlined because there's a timestamp in the blockchain, it changes the way that we audit companies, unquote. We think it could eliminate the need for audits altogether, or audits in the traditional sense, where a company comes in and takes a sample of what's occurred. There is no sample, because you're looking at the population of all data. And you don't need to do it at the end of the year, because it can be real time. Audit is by definition a backward-looking process, creating a complete picture of a company's financial state by piecing together its financial statements. It's like turning a hamburger into a cow. On the other hand, the fastest area of growth for Deloitte is consulting services. So auditing firms may need to redeploy their expertise in new services. And most of the smart ones understand that that's going to be a good thing. Many clients are scratching their heads over blockchain. This confusion creates opportunities for advising them on how to manage the technology. Transparency on the World Wide Ledger can help companies to increase value. There's a startup called Subledger, and it's targeting the accounting industry for that reason. Tom Morini, its chief executive officer, compared modern accounting to watching someone dancing under a strobe light. When was the last time you were in a disco? Well, he says, you know they're dancing, but you can't quite figure out what's going on. And it looks interesting, but it's hard to figure out all the steps, unquote. Morini believes companies will benefit from greater transparency. You get the whole picture. It goes beyond streamlining finance departments and lowering audit costs. It changes how the market values companies too. Morini says quote, the first public company with this system in place will see a significant price advantage, over other companies, where investors have to anxiously await the dribble of financial information. Morini believes investors will choose a company showing the public, quote, what's going on all the time, quote, over one where they can see only what's going on quarterly. The question is, will investors demand blockchain-based accounting to meet corporate governance standards? It's hard not to imagine. Many institutional investors, like the giant California Public Employees' Retirement System, already have strict corporate governance standards. And they won't invest in a company unless those standards are met. Accounting on the World Wide Ledger could be next.
