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Feature Interview: Subledger’s Quest to “Unlock the Flow of Value” in Accounting

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The explosive trajectory of blockchain innovation has been nothing short of remarkable. The technological applications ensuing from these efforts are poised to disrupt a wide swath of professional fields and industries. This is particularly true for the accounting profession and its ledger-centric model for managing large amounts of financial data.

The blockchain in its fullest iteration virtually eliminates the need for bookkeepers, auditors and other intermediaries in the accounting process, signaling a major transformation for how enterprises both small and large will conduct their business. For these and myriad other reasons, some are predicting that the technology behind the digital currency bitcoin could transform the accounting profession entirely

The ultimate value of the blockchain to the accounting world is its ability to provide real-time financial information with virtually no transaction costs — a simple, efficient means of facilitating transactions in a fully automated, verifiable and secure manner. In the same way that Bitcoin uses this model for the movement of monetary value, this blockchain application creates a fluid record-keeping system for the accounting world. Fully developed, it will have profound implications for fraud reductions, fiscal accuracy and data transparency, among many other benefits.

These impacts are predicted to be particularly significant in the sub-specialization of accounting known as auditing. Professionals in this realm who act as independent third-parties charged with verifying the accuracy of business financial statements are confronted with the inherent conflict of simultaneously collecting fees from clients that they’re conducting audits on. As a result, an inherent temptation exists on the part of auditors to present client financials in a favorable light at the public’s expense. Moreover, this due diligence can be fraught with error as auditors attempt to reconcile highly disparate and complex elements of information from multiple sources.

The auditing profession is therefore predicated on the concept of trust: in this case, the protection of shareholders and investors. But as we saw with the Enron scandal back in 2007, manipulation and bias can become a major albatross adversely affecting the integrity of a company. Without emerging applications like those being advanced through the blockchain, ledger entries are reliable only to the extent that the human-dependent processes are fully trustworthy.

Resolving the Trust and Reconciliation Issue

Tom Mornini, founder of San Francisco-based Subledger is on an ambitious quest to bring the successful integration of blockchain technology into the accounting world. A self-avowed serial entrepreneur, Mornini views Subledger’s value proposition as akin to Google Analytics for money. His company’s innovative software offering provides businesses with a stealth and scalable double-entry accounting ledger solution, delivering real-time data on financial standing and performance.

In an exclusive interview with BTCMANAGER, Mornini talked about the intriguing path and evolution of his accounting solution.

“We started about four years ago — some would argue much too early for acceptance. Our fundamental belief is that if we can unlock the flow of value in the business realm, much like the Internet unlocks the flow of information in general. Subledger is going to be truly transformational.”

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The genesis of this current endeavor, says Mornini, ensued from what he observed at his previous business, Engine Yard.

“Over the years, I was blown away by how much information we generated in our accounting department. I started looking into this and how we were paying our auditing firm high five-figures to come in annually and tell us whether our books were accurate or not. While this investment of money was probably a wise move at the time — our board and others all thought this was pretty normal — it seemed a little surprising to me.”

From this experience, what Mornini discovered was an extreme lack of information science involved in the accounting process. Digging further, he now describes the entire accounting information chain for businesses in general as a “big mess.”

“At one time, enterprises accounted for every transaction. Today, we have instead this gigantic monthly process that looks much more like that produced by a Rube Goldberg machine,” says Mornini with a chuckle.

Therein lies the biggest advantage to Subledger customers — the ability to automate their accounting processes through the use of the highly efficient blockchain infrastructure.

Our clients tell us that the biggest problem they universally face is in reconciling their bank statements. The current information-flow through existing legacy financial systems is absolutely pathetic.

Here, Mornini describes a disjointed process — one that involves the capture and reconciliation of disparate pieces of information that often lead to a confusing mismatch of information. This, he says, is one of the reasons he got really excited about bitcoin and its supportive blockchain technology — the fact that it represented a clear end to this problem.

What’s nice about blockchain technology is that you get a transaction ID when you make a transaction which you can track that all the way to confirmation. It’s just that simple.

Mornini says the magic of this process is that it makes it very easy to link one’s internal accounting operations with external payment information systems and record flow.

“Subledger provides businesses with a completely autonomous financial system that can automatically reconcile itself. We believe this will be a very key feature for our business clients and users in the future.”

He is quick to point out that Subledger has its own chain, not a distributed chain like the universal blockchain. “It’s ‘sidechain-like.’ Or an even more accurate definition would be a ‘sidechain.’ Sure, we could be doing this on the global blockchain. But because of scalability, cost and privacy concerns, we don’t view this as a very likely future.”

Mornini notes that the vast majority of what accountants and bookkeepers do today can be done with software. “We’ve shown this repeatedly with our customers. With Subledger, you get real-time information vs batched monthly information. It also allows for a complete audit trail, lower costs and faster software integration without having to figure the software integration process out in some random, ad hoc fashion.”

Accounting professionals who have been introduced to Subledger have generally given it favorable reviews. They point to the software’s ability to capture and share accounting information in real time as its most redeeming quality.

However, counterbalancing this enthusiasm, says Mornini, is the fact that the accounting profession is the most conservative he’s ever run into. “They certainly have a different mindset about all of this, that’s for sure.”

The end game in the accounting profession, according to Mornini, is the ability to gather clean, accurate financial information that’s accessible in real-time for both strategic business decisions as well as stakeholder and investor review.

It’s really going to be profound and interesting to watch how all of this plays out over time.