Blockchain for Accounting & Assurance

11
BLOCKCHAIN FOR ACCOUNTING &
ASSURANCE
Eryk Budi Pratama
Cyber Security & IT Advisory Consultant
February 2020

Agenda
01 Blockchain at a Glance
02 Blockchain Technology
03 Managing Risks in Blockchain
04 Blockchain for Accounting &
Assurance
05 CASE STUDY :
▪ OTC in Retail
▪ PTP in Oil & Gas

Blockchain market is still nascent
01. Blockchain at a Glance
Source: https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/blockchain-beyond-the-hype-what-is-the-strategic-business-value
Despite the hype,
blockchain is still an
immature technology,
with a market that is still
nascent and a clear
recipe for success that
has not yet emerged.
Unstructured
experimentation of
blockchain solutions
without strategic
evaluation of the value at
stake or the feasibility of
capturing it means that
many companies will not
see a return on their
investments.

Blockchain in Indonesia

History of Cryptocurrency
Sep
‘12
Bitcoin foundation established to shepherd the currency
Jul
‘10
First major exchange Mt Gox established
Oct
‘08
Satoshi Nakamoto publishes whitepaper on Bitcoin
Jan
‘09
Bitcoin 0.1 released and first transaction recorded
Jun
‘11
Silkroad coverage thrusts Bitcoin into the mainstream spotlight
Mar
‘13
First US Regulatory body, FinCEN, declares bitcoins only subject to regulation at point of exchange
Jan
‘15
Overstock.com becomes first major retailer to accept bitcoins as payment

Cryptocurrency could introduce major changes across multiple areas
OpportunitiesThreats
Government
Financial
Service Retail
Less control
on financial
markets
Decreased
revenue from
transfer services
Decreased revenue
from credit card
transactions
Block chain for
other transactions
Reduced costs from
credit card
transactions
Easier
purchases
Cheaper bank to
bank money
transfer

What is Blockchain
A Blockchain is a decentralized ledger of all transactions in a network. Using blockchain technology,
participants in the network can confirm transactions WITHOUT the need for a trusted third party
intermediary. Powerful applications include fund transfers, voting, and many other uses.
IT IS A LEDGER THAT IS SHARED ADDITIONS ARE AGREED
A Blockhain is a way of
storing and sharing data
between participants
Everyone participating has an
up-to-date copy of this ledger
Additions need to be agreed
upon by the majority

The Blockchain is a global distributed database which allows secure
transactions with no need of a central authority in control
A continuously growing list of data records is kept in a global distributed database of
independent computers called Blockchain
The Blockchain operates decentral in a peer-to-peer network and allows very secure transactions
nearly instantaneous with no central authority in control
Bitcoin is the first fully functioning digital asset and most known public Blockchain. It started in
2009 by an anonymous person or group called Satoshi Nakamoto.
Distributed
Database
The Blockchain nodes achieve consensus about the transactions and propagate it to the whole
network. Consensus protocols are used to make one reliable computer out of many unreliable or
untrusted computers
Miners invest computational power to secure the network and receive an incentive
No Central
Authority
Public Ledger
Consensus
Mining

Blockchain is an Architecture concept
Traditional Record Authenticity
• High Cost
• Long delays and inefficient
• Difficult to customize the network
• Vulnerable and difficult to monitor
Blockchain Record Authenticity
• Low Cost
• Quick turnaround and efficient
• Simple Customization using “smart contracts”
• Participants have multiple shared ledgers
Third party
Bank Records
Auditor Records
Party A
Party B
Ledger
Ledger
Ledger
Ledger
Ledger
Blockchain Solution
Third party
Ledger
Bank Records
Ledger
Auditor Records
Ledger
Party A
Ledger
Party B
Ledger
Traditional Decentralized Business Network
A Blockhain is a LOG of ALL transactions, in a DISTRIBUTED LEDGER, that were ever VERIFIED on a business network
allowing any participant to see the SYSTEM OF RECORD (LEDGER) with a CRYPTOGRAPHIC AUDIT TRAIL

Blockchain is a permanent record of transaction
Counterparty 1
(Public Key)
Hash
Counterparty 0
(Signature)
Block 1
Counterparty 1
(Private Key)
Counterparty 2
(Public Key)
Hash
Counterparty 1
(Signature)
Block 2
Counterparty 2
(Private Key)
Counterparty 3
(Public Key)
Hash
Counterparty 2
(Signature)
Block 3
Counterparty 3
(Private Key)
BLOCKCHAIN
Block 0
Block 4
The system is protected by using a reference to the previous block (“HASH”), which is encrypted. Breaking into the system,
would be so evident than any illegitimate changes to the system can be detected and cancelled.

How a Blockchain Works
A wants to send money to B. The transactions
are represented online as a BLOCK
The block is broadcast to every party in the
network
Those in the network approve the transaction
is valid
The block then can be added to the chain,
which provides an everlasting and transparent
record of transactions
The money moves from A to B

Currently, there are 3 types of Blockchains defined with different
attributes and advantages
• No central point of control by
individuals, corporations or
governments
• Permission-less to participate
(Network neutrality)
• Everyone can read the
blockchain
• Change of rules difficult
• Controlled by more than two
individuals, corporations or
governments
• Permission on participation
from consortium necessary
• Readability of the blockchain
can be public or restricted to
the consortium
• Change of rules medium
• Controlled by one individual,
corporation or government
• Permission on participation
from owner necessary
• Readability of the blockchain
can be public or restricted to
one
• Change of rules easy
Public
Blockchain
Consortium
Blockchain
Full private
Blockchain

Blockchain needs the right conditions to be successful
If you can answer yes to at least 4 out of 6, Blockchain could be an effective solution
Multiple parties
share data
• Multiple
participants
need views of
common
information
Multiple parties
update data
• Multiple
participants
take actions
that need to
be recorded
and change
the data
Requirement
for verification
• Participants
need to trust
that the
system that
are recorded
are valid
Intermediaries
add complexity
• Removal of
intermediaries
can reduce
cost and
complexity
Transactions are
time sensitive
• Reducing delay
has business
benefit
Transaction
interact
• Transactions
created by
different
participants
depend on
each other

Digital Ledger Technology as potential game-changer
02. Blockchain Technology
Blockchains are an upgrade on traditional ledgers due to the quality and integrity of data stored due to the use of
cryptographic security and identity verification. They also enable a number of different efficiencies through the
elimination and reduction of redundant processes.
Traditional Ledger
Present
• Ledgers record business activities such
as transactions and contracts, today each
party owns individual ledgers
• This solution is well established and
working, but inefficient, expensive and
fraud vulnerable
Distributed Ledger
Future
• Decentralized system building one
encrypted ledger, shared across many
parties
• Records are immutable
The benefits of Distributed
Ledgers
▪ Quality and Integrity of
stored data (single source of
truth)
▪ Increase Efficiency through:
- Automation
- Reduced reconciliation
- Reduced duplication
▪ Trust between all parties

Functional process of digital ledgers
Source: https://assets.kpmg/content/dam/kpmg/pdf/2016/06/kpmg-blockchain-consensus-mechanism.pdf
Initiate the
transaction
Multiple parties
transact
Add the transaction
to the network
The transaction is
added to the network‘s
block and cannot be
deleted
Broadcast
The block is broadcasted to
every party in the network
Validate via consensus
and confirm
The network verifies,
validates, and approves
Consensus is recorded
(agreed mathematical
mechanism)
Transaction
completed
Parties have
access to a
shared, single
source of truth
Immutable,
encrypted block
The confirmed block is
added to the chain
Provides a transparent
record of transactions,
audit trail
Consensus mechanism applied

What are smart contracts?
▪ Eliminates the risk of delays and reliance on middlemen to follow through on their commitments
▪ Information sharing is transparent, time-stamped, and irreversible
Replicated, Shared Ledger
Value State
Transaction Sending value to contract Transaction Sending value from contract
Events Sending information to the contract Events Sending information from contract
Smart Contract
A Smart Contract in a blockchain context is a piece of written code that auto-executes subject to the satisfaction of pre-
agreed conditions thus adding additional functionality to an operation by automating certain processes.
Benefit:
Business Logic

Blockchain solution platform layers – Digital Ledger Technology (DLT)
The common functionality of DLT technology is distributed in five layers that interface with each other
Layer Notes Components
Application
Layer
End user applications for
businesses and clients
Middleware
Layer
Stores business logic
written in smart contracts
and orchestrates
information relay
DLT Layer Distributed ledger with
notes provided to qualified
members
Database
Layer
Database to store static
and mapping data
Infrastructure
Layer
On-demand computing and
storage (for KYC-related
documents)
Client Web Portal
Business Access
Portal
Sales Portal
Risk management
Portal
Business Logic &
Governance
standards
Signing &
Network Engines
Listening & Alert
Engines
API Engine
Blockchain Node 1
(Smart Contract)
Blockchain Node 2
(Smart Contract)
Blockchain Node 3
(Smart Contract)
Database 1
(SQL)
Database 2
(SQL)
Database 3
(SQL)
Compute
(Virtual Machine)
Storage
(SAN)
Sanitized

Sample of DLT Platform - https://www.hyperledger.org/

Managing Risks in
Blockchain03

Risks to blockchain participants
03. Managing Risks in Blockchain
Dimension Risk
Interoperability Integrating blockchain with legacy IT platforms is a potentially costly operational
challenge. Participants will need to convert data models and business processes and
incorporate new authentication and communication protocols.
Auditability For transactions stored on a blockchain, companies may lack the ability to provide
information necessary for legal discovery, forensic investigations, and audit purposes.
Control and collusion A single participant, or collusion among a group of participants, could obtain control of the
blockchain by achieving consensus without other participants. This could effectively block,
delay, or modify transactions.
Data management
and governance
Although blockchain uses a persistent, distributed ledger that grows with every
transaction, large volumes of transactions and the presence of corporate data outside of
the network presents risks similar to cloud computing environments. Further, transactions
may have additional metadata that is not part of the blockchain transaction, which will
have to be secured and transferred outside of the process while maintaining the ability to
reconcile with the blockchain.

Unclear regulations, and concerns around security, scale and speed
may hinder widespread Blockchain adoption
Fluid Regulatory
Landscape
• Lack of a global regulatory body to set standards on global transactions
• There is no regulation for managing blockchain ecosystem in Indonesia
• Reduction of settlement risk and easy access to transaction data may provide incentives for
regulators to react positively towards this technology
Potential
Scalability Issues
• This technology is currently in an emerging stage, it may not operate at scale without
compromising on security, speed or cost – e.g., Visa has the capability to process 56K
transaction messages per second
High System
Latency
• Traditional payment systems (credit cards) provide a “real-time” feel of settlement at the
POS, while blockchain payment systems can take from 3-5 seconds (e.g. Ripple) to 10
minutes (e.g. Bitcoin)
Security Concerns
• Dependency on users’ private keys could result in hard to retrieve lost keys
• Ledgers are public but the users are anonymous and might be difficult to track
• Technology is still not fully tested and might run into future issues – e.g., MtGox, a bitcoin
exchange, was hacked, and Stellar reported issues with the Ripple protocol

Blockchain consortium poses other hurdles
Setting up and running a consortium requires ongoing efforts to confirm to certain standards, best practices and
governance frameworks.
▪ Providing secure access to and storage of data
▪ Ensuring data privacy and rights management
▪ Securing the agreement on standards for compiling a single source
▪ Agreeing on ownership rights and structure for the developed technology
▪ Decision on services offered and expansion into advanced data analytics
▪ Determination of voting rights between members
▪ Defining member’s role while each participant may have different interests
▪ Setting up data liability and reliance standards acceptance to all members
Data – Privacy & Security
Data – Standards
Intellectual Property
Technology
Consortium Groups
Data - Liability

Blockchain for Accounting &
Assurance04

Complex algorithms run across network of users to authorize and
complete transactions
04. Blockchain for Accounting & Assurance
Transaction
Requested
Transaction
Authorized
Transaction
Recorded
• Network users request a transaction with each other which includes the transfer of a
cryptocurrency
• Network users review past transactions on the blockchain to conduct authorization based on
the algorithm or methodology employed by the system. Some examples of algorithms:
- Proof of work verification – a hash algorithm that generates random numbers
- Consensus verification – an agreement among the majority of network players
• Upon authorization, value and assets change ownership on the network
• The entire transaction including asset ownership is cryptographically recorded in the ledger
• Blockchain provides users with immutable and permanent audit trail to prove occurrence
and timing of transactions

Problem that Blockchain are trying to solve
The Audit Problem:
Traditional audit approaches will not work for the blockchain based systems predominantly due to their always on
nature and likely scale. However Assurance will still be a necessary component of any use case.
A fundamental shift in audit philosophy will be required
Providing transparency requires a shift in how we think about
the audit and control. We must go from retrospective point in
time efforts to real-time auditing.
SOLUTION
▪ Create an audit node for
transparency purpose to meet the
needs of all applicable stakeholders
and improve the efficiency of our
audit.
▪ By relying on the core tenants
of a blockchain based system,
irrefutable transaction record and
transaction integrity will be
established the necessary
transaction level of assurance
regardless of use cases or industry.
Current State
Point in time
Forensic
Retrospective
Sample based analysis
Speculative
Subject to population results
Future State
Real time
Inherency
Immediate / predicted
Full population
Macro level trending
Objective population results

The Blockchain audit challenge
Rapidly evolving technologies are creating a critical need for an enterprise to be prepared and adaptive to emerging
challenges.
Traditional audit approach
Methodologies must shift from
manual to an automated and
continuous approach
Expertise challenges
Risk and Audit staff do not have
the technical expertise to
obtain transparency without
significant technical complexities
and inefficiencies
Technological challenges
Current methodologies cannot
provide the necessary transaction
level assurance in areas blockchain
is used

Providing assurance for blockchain
Audit challenges with blockchain
Corporate risk and audit staff are unfamiliar
with blockchain and emerging technology.
The traditional audit approaches won’t work,
and pilots will get ‘stuck’ if assurance
challenges are not addressed up front.
Current regulatory guidance does not provide
a standard risk framework.
Digital trust of blockchain and confidence is
needed in order to move blockchain pilots
forward to production.
Existing systems have immature reporting and
analysis around blockchain.
Typical Solution
▪ Creates and integrates an
assurance layer for a Blockchain
use case
▪ Implements Continuous
Auditing and Compliance
Solution
▪ Performs gap analysis with
Blockchain Risk Framework
▪ Provides live views of
transactions
▪ Creates transparency and
optics necessary to meet
internal audit requirements
Expected Result
Decreased audit costs from
required hours necessary to
perform an audit when
product is implemented
Higher economic viability of
any blockchain use case
Faster time to deployment

Blockchain revolutionizes each cycle within the Finance function
Case Studies
Procure-to-Pay Order-to-Cash Acquire-to-Retire Record-to-Report
Huge reductions in cost
and process duration
through elimination of
several third party
approval roles
Automation of invoice
and quotation
generation, enhanced
accuracy in all
transactions, a reduced
number of disputes and
significantly improved
data management
Streamlining of fixed
asset use and recording
from beginning to end
by tracking ownership
and use of individual
assets on a public, yet
central database
Optimized processes
leveraging a platform
to achieving timely,
accurate, and
transparent reporting
through use of
decentralized ledger
Case study sample for public consumption purpose. Other case studies are not disclosed. Contact me for further discussion ☺

Blockchain Retail Industry Use Case: Franchise Billing
Case Studies - Consumer Markets Use Cases – Order to Cash
The franchise billing accounting process can be manual and time-consuming because the franchisor has to track upfront and ongoing
franchise fees as well as advertising and other costs. An immutable distributed ledger in the Blockchain would increase auditability,
traceability, automation, and assist with audit and dispute management.
Restaurants in the Quick Service industry have moved toward a franchise model. Adopting the Blockchain would grant them
increased traceability and visibility into franchisee transactions, which would allow them to streamline and
automate the reporting and audit process involved in franchise billing.
Franchisor
A
Franchisee
B
Franchisee
C
Billing Billing
Sales
Reporting, Fees
and Payments

Franchise accounting improvement with POS, ERP and blockchain
Integration
Franchisor A sends from ERP lease/rent data, advertising costs to its node which writes/broadcasts to all nodes in network
Franchisee B and C’s POS systems send sales data to their respective nodes which write/broadcast to all nodes in network
The Smart Contracts on the network contain the details of the respective franchise agreements between A & B as well as
between A & C. Logic is embedded in the Smart Contracts which will incorporate the external data to calculate and execute the
franchise accounting and billing transactions. The resulting transactions are written/broadcast to all nodes in the network.
The Smart Contract will trigger the flow of funds from B & C to A
Integration between Node A and the ERP will ensure that the accounting is captured appropriately in A’s ERP
Transactions are recorded to all of the partner nodes in the blockchain network, creating an immutable record of transactions
(this is contemporaneous to steps detailed above)
Inputs Are Sent From ERP and POS Into The Blockchain Nodes Posting To Blockchain
A
B
C
6
Franchisor A
A
ERP/Enterprise
Applications
Franchisee B
B
Franchisee C
C
1
3
3
3
3
2
2
4
4
5
1
2
3
4
5
6

Pain Points and Benefits of Blockchain for Franchise Billing
Some Pain Points across Franchise Billing include:
• Manual reporting by franchisees
• Inaccurate franchisee fees and sales data
• Burdensome audit and dispute management process
How does blockchain address these Pain Points?
• Reduces manual efforts
required to enter and submit
franchisee sales
required to reconcile franchisee
sales
required to track and monitor
franchisee data
Manual Reporting
• Reduces risk of incorrect
franchisee sales and costs data
• Reduces risk of incorrect
franchisee royalties and fees
calculation
Inaccurate Data
• Increases auditability
• Increases visibility into
franchisee transactions
• Streamlines franchisee audit
process
• Simplifies dispute management
process
Burdensome Audit Process

Key Takeaways
Summary
Blockchain is a LEDGER that is SHARED to establish a CONSENSUS amongst
AUTHORIZED and VALIDATED participants
We have to be aware on how Blockchain could be an effective solution for
our problems (4 from 6 criteria)
Both Blockchain participants and provider must be responsible to manage
blockchain risks
Continuous (automated) auditing is the only way to audit the Blockchain system

Bitcoin = Cryptocurrency
Cryptocurrency uses Blockchain Technology

Blockchain for Accounting & Assurance

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