In 1497 two real Renaissance men lived together in Milan: the painter and inventor Leonardo da Vinci and the mathematician and monk Luca Pacioli. Although only Leonardo remains in our collective memory, it is actually Pacioli’s work on which our society rests today.
Shortly before sharing a flat in Milan, Pacioli published the bestseller “Everything About Arithmetic, Geometry and Proportions”. It contains 36 chapters on double entry bookkeeping, a practice that was quite new to Italian merchants and enabled them to manage their increasingly complex businesses.
Accounting is wrongly accused of being boring. Without it there would be no industrial revolution, no science and no economic globalisation. "What advantages does he derive from the system of bookkeeping by double entry! It is among the finest inventions of the human mind", said Johann Wolfgang Goethe. The old romantic knew what he was talking about.
Pacioli did not invent double entry bookkeeping, but he was the first to codify and publish it. It is no wonder that for almost 200 years his work was the only textbook in this field. It is amazing, however, that even today, five hundred years later, the exact same Pacioli method is used, whether by a family business or a multinational corporation.
But now this system is starting to show its age badly. Take a company like Enron. They did all kinds of things to cook the books. They managed to hide billions in debt. They have become the benchmark by which all fraud can be measured (followed closely by Bernie Madoff). It shows that the system is only as trustworthy as the accountant behind it.
The problem is that while accounting is done more or less in real time, auditing is done after the fact. This gives ample time to manipulate. Although accounting records should be immutable, in fact they are not. That accounting is done completely in secret keeps the power of knowledge at the company or its defrauding employees and handicaps the auditors. Any improved accounting system must solve that inequality.
Enter TRIPLE entry accounting and Ian Grigg's now almost mythical phrase, "It’s tough to lie when everybody is watching." His logical solution to the crisis of confidence in accounting is simple: accounting should no longer be completely private. He developed the idea of a self-auditing public ledger - click here, which is best explained in this simple graphic:
Bob writes Alice an invoice for rendered services. In conventional double entry accounting, the bill exists in both books — Bob’s credit, Alice’s debit. Griggs idea introduces a third, public ledger. Bob writes his invoice and puts it in the public ledger. Alice accepts the invoice. Although Bob could still try to conceal it, at the latest when filing the tax return a comparison with the public ledger would bring the "error" to light.
How do you implement such a public database that is encrypted, trustless (as no trusted third party is required), decentralised and immutable, and outside the control of any state or single entity? The answer is Blockchain.
But such a self-auditing ledger would only develop its full potential if used by many, indeed all companies. We face the same problem as with the first telephone: it only makes sense if there are enough users.
Let's hope we won't have to wait for it for another five hundred years.
