Blockchain-based technology Sweetbridge is an economic framework that is transforming supply chain and logistics collaboration. Founder and CEO of Sweetbridge, Scott Nelson, caught up with Accountancy Age to explain how his innovative technology will help the accounting world navigate some of its current issues.
When explaining the overall aim of this project, Nelson said: “We’re trying to create a platform that will allow for the complete automisation of corporate audit, and not just of the financial audit but of basically anything that would need to be verified. It would be achieved through something called synchronised accounting, which is an extension of triple entry accounting, the idea that you can automate some of the accounting controls and audit controls that are required for corporate audit by using hashes which would be signed by both parties that would verify that the opposing accounting treatments in each parties books were proper.”
Nelson explained that, though he can’t reveal too much, there are exciting times ahead for Sweetbridge as a big accounting firm in the UK has just signed off on the fact this technology is bringing to the table such innovative ideas. He believes the system could replace up to 8,000 employees in the City of London alone, but that overall the number of audit employees will actually increase, they will just play a different role.
This is because of its “ability to do real-time audit has so many effects, particularly in capital markets, banking, and other similar industries,” Nelson explained.
“If you’re going to have a whole bunch of one-off transactions that’s actually going to require other verifications but it should lead to a much sounder, more trustworthy set of financial information because you wouldn’t have just one auditor company, we would potentially have hundreds because different auditors would audit the systems that audit to the certain classes of transaction, and all counterparties that were involved would be audited by that auditors audit of the system.
“The transactions they processed would then be audited, and so this technology would completely change the nature and ability to audit and what it would actually look like and it would create a massive barrier to the levels of fraud we see today. It would make it very, very, difficult for some of the scandals we’ve seen recently, like Patisserie Valerie, to even have occurred.”
Fraud in the accounting world
As well as ensuring the accounting industry keeps up with technological development and removes the need for humans to conduct a lot of the tasks they would have done traditionally, Sweetbridge will help to fight fraud.
Nelson explained that his last business, Trax Technologies, “tracked technology-audited supply chain transactions for fraud and we found that it was consistent around the world, just being slightly better in industrialised nations like Europe and the United States, and slightly worse in places like India and Latin America, but there wasn’t much in it.”
He added: “The other shocking thing is that we used to order an auditing treatment, remember these are very well-run, highly audited organisations, and we found 13% of the transactions incorrectly reported on the financial statement.
Senior corporate executives fear this and “the more we try to put them on the hook the more frightened they actually get, and yet they have very little power to correct the situation because latency and cost have to be balanced against the demands of accuracy and truthfulness. It costs too much to get perfect information and latency of information may make it impossible to get that perfect information at that time of recording the transaction.
“You’re never going to get rid of fraud or people doing bad things but you can make it more and more difficult for people to do that and you can create networks of trading partners that have super high levels of trust.”
Forward-looking audit
One of the possibilities that could come out of the Sweetbridge technology is the ability to do forward-looking audits, which is when you don’t audit the transaction, you audit whatever creates the transaction then you can use it later to determine whether information on how it was done and the transaction has been changed at all.
Nelson highlighted: “As long as you can prove the logic that did things automatically was at one time validated then you can prove all the transactions were also correct.
“This means that you shift where the focus of the audit is to auditing the systems and the controls and the way information gets encoded. It needs to go all the way up to when the legal agreements are created or laws are changed; it’s at that point you need to do the validation, it’s at that point you would actually inject, so instead of accounting being the backend of the function it would switch to being at the very beginning of the process, really at the same seat of the table as the lawyers are.
“Defining the transaction properly, auditing, and verifying it at that point would mean all of the transactions that flow out of that agreement are law and so would all be able to be validated for their accounting treatment, so you can know the accounting treatment is accurate. Then by having counterparties signing everything that you do it’s the same concept as not being able to put a receivable on the book without a payable or you can’t have a sale without having an expense or transfer of asset and that then means you can’t create transactions. And you also know the counterparty agrees with the transaction. So that means you don’t have to do audit letters to validate balance sheet items, you don’t need to do a whole lot of things, this is kind of how it happens, it’s very pragmatic actually. It’s not magic, it’s just changing the nature of the problem.”
The power of automation
Nelson explained that automation has and will continue to change the accounting industry in colossal ways.
He said: “Within audit, because you can get one of the controls to determine what is the control of an asset or good and traditionally you have had to do physical inspection to figure that out, if that can be done through these automated systems through third parties which you can trust then you create all sorts of opportunities for new financial instruments, all sorts of new streams for lower cost lending, all sorts of opportunities for lots of things, so I really think that accounting in the future is going to expand.
“It has been expanding over the years, but it will happen even more and there will be much more assurance around lots of things, including data assurance, where audit firms are already doing a lot of that
“I think they may be the most trusted institutions we still have. Even more trusted than banks and governments.”