ABSTRACT
The research proffers
an assessment of the impact of triple entry accounting system on financial
reporting, a study of bitcoins. It analyses triple entry accounting system and
financial accounting, its functions and significance. The research projects
triple entry accounting system and financial accounting as a unifying factor to
enhance accounting firms and bitcoin users towards the accomplishment of easy
transaction, proper recording and reporting.
The
relevant research questions were analyzed using the chi- square statistical
tool.
Result
from the study indicated that triple entry accounting has had positive impact
on financial reporting which is significant. Adequately bitcoin network is
secured against hacking and fraud which
is seen has the ultimately resulted to the confidence in bitcoin. Lastly, the
bitcoin network is been regulated by external bodies against use in fraudulent
businesses.
Base
on this, the study advised the accounting firms to evaluate more on triple
entry accounting on financial reporting, look towards advance way bitcoin
network can be more secured against hacking and fraud, proper regulation on
bitcoins users against use in fraudulent businesses, Bitcoin users should be
encouraged, motivated by exchange rate and commition, regardless of their
status should make the bitcoin activity a priority which should surely have
effect on the triple entry transaction, Accounting firms should monitor the
progress of their entries closely.
CHAPTER
ONE
INTRODUCTION
1.1
INTRODUCTION
Modern
financial accounting is based on a double entry system. Described simply,
double entry bookkeeping allows firms to maintain records that reflect what the
firm owns and owes and also what the firm has earned and spent over any given
period of time. Double entry bookkeeping revolutionized the field of financial
accounting during the Renaissance period. Whereas simple ledgers had long been
the standard for record keeping for merchants, the church and state treasuries,
the growth of long distance trade and creation of the first joint stock
companies resulted in firms whose records were too voluminous and complicated
to provide any assurance of accuracy to their users.
The double
entry system solved the problem of managers knowing whether they could trust
their own books. However, these same companies were now expected to share their
records with outside stakeholders, such as investors, lenders and the state.
This created the problem of how outsiders could trust the company’s books. Thus
came the independent public auditor, whose role was (and is) to serve as an
independent guarantor of financial information. Stakeholders placed their trust
not in a firm’s management, who had a vested interest in presenting the rosiest
of pictures to all who cared to ask, but in the auditors retained by management
to vouch for them. It doesn’t take an attorney to see how a problem of agency
is created by this arrangement. Do auditors work for the managers who hire and
pay them or for the public that relies on their integrity in order to make
decisions?
Financial
statements are inherently representative of certain assertions by a firm’s
management to the users of those financial statements. Among these are:
1. Existence.
That the assets and liabilities reflected on the balance sheet are true and
accurate as of the balance sheet date.
2. Completeness.
That the financial statements represent all of the firm’s activities during the
time period in question.
3. Valuation.
That the amounts on which the financial statements are based are correct or
reasonable under the circumstances.
4. Rights
and Obligations. That what is owned and owed as reflected by the balance sheet
is true and correct.
5. Presentation
and Disclosure. That the items in the financial statements are valued and
described in the proper way.
Each of the
preceding assertions is basically a problem of trust, which audits are designed
to resolve. As an accountant, I am disappointed to admit that, all too often of
late, my colleagues have failed in this respect. Not only have auditors failed
to manage public expectations by honestly and openly communicating the
limitations of assurance work, but in many cases they have also, through
collusion, corruption, incompetence, or simple laziness, failed to properly do
their jobs. This problem is even worse outside the US and EU member states,
where lax enforcement of existing regulations creates opportunities for easy
manipulation of financial statements. If a firm’s management is willing to
issue inaccurate financial statements and capable of organizing a conspiracy to
support them, then it is very likely that auditors will fail to detect the
associated misstatements (assuming that the firm’s auditors were not colluding
with the firm outright).
Production
of bogus financial statements is a delicate affair. Merely falsifying revenue
or recording it early doesn’t work on its own, because it throws the books out
of balance. For example, a credit to the sales revenue account must be matched
with a debit to an asset account (usually cash or accounts receivable). For
fraudulent accounting records to stand up to any kind of scrutiny, they usually
must be backed by a “legend” consisting of altered or falsified documentation.
Bearing this in mind, Generally Accepted Auditing Standards require testing of
all aspects of the financial statements and also that auditors obtain
“sufficient, appropriate” evidence to support them. As one can imagine, the
cost of completing the work ranges from obscene to astronomical. It is not
uncommon for the cost an annual audit of a moderately sized company to run into
the tens of thousands of dollars. However, the cost to the public of relying on
faulty financials can be many times more.
1.2
BACKGROUND OF THE STUDY
Triple
entry accounting is an enhancement to the traditional double entry system in
which all accounting entries involving outside parties are cryptographically
sealed by a third entry. These include purchases of inventory and supplies,
sales, tax and utility payments and other expenses. Placed side by side, the
bookkeeping entries of both parties to a given transaction are congruent. A
seller books a debit to account for cash received, while a buyer books a credit
for cash spent in the same transaction, but in separate sets of accounting
records. This is where the blockchain comes in: rather than these entries
occurring separately in independent sets of books, they occur in the form of a
transfer between wallet addresses in the same distributed, public ledger,
creating an interlocking system of enduring accounting records. Since the
entries are distributed and cryptographically sealed, falsifying them in a
credible way or destroying them to conceal activity is practically impossible.
The
companies using triple entry bookkeeping would derive two immediate benefits
from adoption: First, since auditors could quickly and easily verify a large
portion of the most important data behind the financial statements, the cost
and time necessary to conduct an audit would decline considerably. Audits would
still be necessary, but auditors could spend more time on higher risk areas
such as internal control. Second, the integrity of a company’s financial
statements would be essentially unassailable. Revenue and expense transactions
could not be falsified if they required the encrypted signature of the
counterparty in order to be accepted as valid. In the case of Bitcoin,
transactions only occur when wealth is transferred, so there is no incentive
and considerable cost associated with spurious activity. Taken together, both
of these effects would have a strong positive effect on stock prices, borrowing
rates, and a variety of other fundamentals.
It isn’t
difficult think of ways to manipulate even a highly reliable system like the
one described. Schemes like off balance sheet arrangements, improper
valuations, disguised self-dealing, etc. would still be possible under a triple
entry model, so new regulations would be necessary to mitigate some of the new
sources of risk. These could be totally voluntary or only required for publicly
listed companies, though companies of all sizes stand to benefit from better
financials. For example, US Generally Accepted Accounting Principles could adopt
the stance that, if it isn’t on the blockchain then it does not exist / didn’t
happen and cannot be included in the financial statements. Rather than being
created at random, financial wallet addresses could be assigned by a trusted
third party such as the SEC or some yet to be created private organization in
order to guard against abuse. It is true that new regulations would require
firms to share some amount of proprietary information, but probably not more
than they are currently required to disclose, just in a different form. The
standard of privacy enjoyed by public firms in the United States is already
quite low.
Triple
entry is possible using existing Bitcoin infrastructure (with minor
modifications) and highly desirable for both companies and outsiders. Its
adoption would enhance the credibility of the financial statements of
participants. Further, triple entry would empower smaller enterprises and
create opportunities for growth by offering a very low cost way to prove
economic activity to outside stakeholders, such as banks or angel investors.
Triple entry accounting doesn’t address every financial statement assertion or
totally take risk off the table, but its adoption would contribute greatly to
the safety and stability of securities markets
1.3
STATEMENT OF THE PROBLEM
A transaction of what one would
regard as “simple” has now grown to be complex due to the introduction of
digital currencies. Instead of paying with cash, cheque, or with plastic (i.e.
debit or credit card), the customer can now initiate a payment to the vendor
while the vendor hands them their purchase, be it a virtual item in a game,
tokens to be used to purchase tunes, or an exchange to digital coinage.
The cryptocurrency bitcoin is now
in the spotlight due to its decentralized nature, relieving users of
transaction fees. However, its ability to provide anonymous transactions has
made it an ideal currency for illicit transfers due to its ease in
convertibility between bitcoin and real currency.
As discussions about regulating digital
currencies become more prominent, some users have already started to counter
their attempts, with software and applications like the Dark Wallet, where its
main function is to launder bitcoins. Governments are cautious in quickly
providing a response; while it is important to ensure that the risks relating
to the usage of digital coinage are reduced, they also need to consider what
users value from the currency: privacy. The concern on privacy raises issues on
whether governments should regulate a currency that is intangible and not
belonging to any jurisdictions, yet may have an effect on the economy.