Accounting of Asset and Accountability through Blockchain Technology

 Accounting of Asset and Accountability through Blockchain Technology[1]

Introduction

Blockchain Technology has the potential to change the future of how monetary / value-based transactions as carried out and records are kept. It is the New Age Record Book. It is our new technology Bahi-Khaata, that no one can tamper with. It has the potential to safeguard our money, properties and the services that we avail. It’s use in public sector may bring in a lot of change in the way books are maintained, accountability is ascertained and data is retrieved. In this article use of blockchain will be dealt with in the critical area of asset management. Blockchain may be a game changer in asset register maintenance and accounting. Before venturing into the application of blockchain in asset accounting, a quick introduction of blockchain would be apt. 

The simplest definition of Blockchain is “a system for creating and maintaining records in a way that prevents anyone single entity to have full edit rights.” Originally, blockchain was just the computer science concept for how to structure and share data. The concept was theorised and used in computer science data structure texts as early as 1973 (this is the earliest record generally noticed, but the term may be older). Popularly, 2008 is known as the year of the Blockchain as Satoshi Nakamoto applied it to what was given a nomenclature – Electronic Peer-to-Peer System.  Nakamoto is thought to be one person or even a group of people who worked on Blockchains. Developers have since worked on evolving Blockchains and the technology has gained in popularity and trust world over. It's now common to call blockchain as the “fifth evolution” of computing. 

Blockchain is not a new technology. Rather, its an innovation away from centralised method of the design to use of distributed database. Due to public interface and fad about digital currency, most of the blockchain is generally confused with Bitcoins.  It's a common misperception that has a bearing on the growth and adoption of blockchain technology.

Some Basic Concepts

One must get familiarized with the following core blockchain architecture components:

Node: User or computer within the blockchain architecture (each has an independent copy of the whole blockchain ledger)

Transaction: The smallest building block of a blockchain system (records,                   information, etc.) that serves the purpose of blockchain

Block: A data structure used for keeping a set of transactions which is distributed to all nodes in the network.

Chain: It is a sequence of blocks in a specific order.  A hash that links one block to another, mathematically “chaining” them together. This is one of the most difficult concepts in blockchain to comprehend. It’s also the magic that glues blocks together, forms blockchains and allows for the high level of security and trust.

Hash: The hash in the blockchain is created from the data that was in the previous block. It has a pointer which points towards the previous block. The hash is a fingerprint of this data and locks blocks in order and time.

Consensus (consensus protocol): It is a set of rules and arrangements to carry out blockchain operations. Any new record or transaction within the blockchain implies the building of a new block. Each record is then proven and digitally signed to ensure its genuineness. Before this block is added to the network, it should be verified by the majority of nodes in the system.

Network: The network is composed of “full nodes.” Think of them as the computer running an algorithm that is securing the network. Each node contains a complete record of all the transactions that were ever recorded in that blockchain. Nodes can be located anywhere in the world.  When you hear the term “mining” it’s the use of a node and its computing power for the processing of a blockchain algorithm. 

Smart Contract: It is autonomous software that can make financial decisions. The blockchain world is abuzz about smart contracts because they’re both amazing and terrifying in their implications for how the world economy operates. Smart contract programming requires a different mindset than standard contract writing. There is no third party to make things right if the contract executes in a way that you didn’t expect or intend.

Applications of Blockchain in Asset Management in Public Sector

Governments are plagued with frequent scams and fraud. How blockchain will help                governments in fighting back against cybersecurity threats and safeguard of assets is being discussed widely. This technology may be used to record, facilitate or validate transactions. Transactions may consist of change of ownership of records, goods or services which may be broadly classified as tangible or intangible asset. Blockchain technology records all transactions in a distributed ledger.   Distributed ledger is a book of records which is shared across a network consisting of the stakeholders. 

Multiple transactions are recorded and placed together in a block. Recording of transaction and sharing of data calls for business logic and rules. These rules are embedded in the ledger via “smart contracts”, which can be triggered automatically and immutably when certain defined conditions are met. These rules and logics are operated through smart contracts. In order to record transactions and make it secure, cryptography is required. Every transaction is made secure through encryption and hash is used as pointers to the encryptions connecting one block with the other and forming a chain. Thus encryption is done and pointers are passed on to next block. These blocks and chains are operated through nodes which are points to facilitate transactions.

Procurement of asset or its creation is an activity done by many government agencies. Since Government of India and States maintain their books on cash basis, book entry of assets is done at the incidence of payment. Subsequent records of assets are maintained through subsidiary reports or records/statements. It is always a challenge to update these records and in the process they are invariably not very reliable. Blockchain can very easily solve this problem. 

Any procurement of asset in government is initiated through a proposal or requisition. There are several stakeholders in the process of approval of the requisition/proposal, execution, payment etc. All stakeholders including the office making requisition of the asset, fund providers, budget, approving agencies, execution agency, agency making payments and other potential stakeholders may be dealt as node and become the part of the Chain. As per the existing business rules, smart contract may be designed assigning the roles and responsibilities of all stakeholders and rights assigned to them in the blockchain. Network will capture details and store it in an encrypted form.Therefore, every detail of the asset and process will be recorded in encrypted form at these nodes and any change will be effected only through consensus of all relevant stakeholders, while each node will get an updated and immutable record entry in the ledger of its own. It implies that any change in the status of the asset will again have to follow the same process of providing data to all nodes. Thus at any given time asset related details would be available in the chain with due visibility and verifiability. 

Conclusion

With the use of blockchain technology, current format of registers would be supported and same may even be generated in physical form. It will facilitate trust between stakeholders by providing a shared and verifiable history of transactions. Blockchain uses multiple technologies to ensure that after the transaction is recorded it cannot be modified. Further, data can only be appended and old and new data will remain visible to all stakeholders. This will ensure that no asset related data is lost or tampered with. Use of blockchain will definitely improve and change the asset management in public sector. 

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[1] By Dr.Ajay S Singh, ICAS, 1994. Views are personal.

Case Study of Use of Blockchain Technology in Rural Development[1]

Introduction

Government and Public Sector Organisations throughout the world are responsible to maintain records and trusted information. In India, information like. Aadhar, birth, death, expectancy, SECC, degrees is maintained by public sector organisations. Several transactions are happening daily where huge data and funds are transacted. Information about the same is also maintained and preserved by the Government. Direct benefit transfer and other payments made by the government has huge transaction data where beneficiaries and other stakeholders continuously interact and look for the gaps in transactions until it is concluded. Further, managing and using these data can be complicated and involve sensitivity. Some records exist only in paper form and for any amendment; citizens often must appear in person to do so.

Individual agencies tend to build their silos of data and information-management protocols, which preclude other parts of the government from using them e.g. GST database. There are several instances of the data security breach as data is not significantly protected against unauthorized access or manipulation, but errors are difficult to find due to lack of audit trail. Blockchain technology could simplify the management of such trusted information. With this technology, it is easier for government agencies to access and use critical public-sector data. Further maintaining the security of information is possible with blockchain as “Blocks” are created and collected in a chain, they cannot be changed or deleted by a single actor. Blocks are verified and managed using automation and shared governance protocols.

Currently, there are several databases which are stand-alone and they rarely talk to each other. From a technical perspective, there is no good reason for keeping data in silos. With some effort, many governments could create central repositories or enterprise systems for sharing information across agencies. Government agencies would gain from experimenting with blockchain technology for sharing and productively using relevant data kept under different silos.

Ministry of Rural Development

Ministry of Rural Development of Government of India is responsible to formulate policy for the development of rural India and promote the welfare of its rural people. In this process, it also runs several people-centric schemes through the States (sub-national) Government. These schemes have a very elaborate process and they offer benefits to marginalised and poor of rural India. To ensure that benefits are transferred to intended beneficiaries, many accountability matrices have been put in place.

There is ample scope to implement blockchain in any of the processes of many schemes run by the Ministry of Rural Development. However, to begin with, there is a need to deploy blockchain strategically through pilot projects. Blockchain can help agencies digitize existing records and manage them within a secure infrastructure. Even individuals to gain control over all the information kept with the government. It is a known fact that the policymakers have a powerful incentive to embrace digitisation. Integration of data is the in thing. Synergy is giving unexpected benefits and throwing many challenges. Blockchain will bring in confidence in data stored in different warehouses and policy formulation depends on the same.

Selection of Project for Pilot

While deciding to do a pilot project in the Ministry of Rural Development, these factors were kept in mind. Benefits of using blockchain were found to be quite significant, however, there were many challenging in choosing the project without compromising with the ongoing processes and likely inconvenience it may cause to the users. Further, there are sensitivities in the schemes of rural development hence taking up any project in the active and main process flow of the schemes were considered to be too risky. Accordingly, it was thought prudent to do a proof of concept for the implementation of blockchain technology in the process flow and documentation of the internal audit process. As this process does not affect any live process flow affecting the beneficiaries, it was considered to be safe for experimenting with new technology. Accordingly, a proof of concept was prepared and the pilot was started to implement blockchain technology in internal audit of rural development schemes. Internal audit process of the Ministry was primarily manual.

An effort was made to automate process flow for two leading schemes namely Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Pradhan Mantri Awas Yojna- Grameen (PMAY-G). A portal namely Grameen Internal audit Portal (GRIP) was developed and the same has been put to use for these two schemes. GRIP has been developed by NIC with the framework of the Office of Controller General of Accounts (CGA) and as per the requirements and inputs provided by the Chief Controller of Accounts, MoRD. The software has been designed to facilitate both online as well as offline Internal Audit. It also has provision for maintaining the past audit records of the Auditee along with the associated list of the Internal Auditors and internal audit team involved in the audit. It acts as an excellent accountability and monitoring tool to enhance the effectiveness and performance of the audited agency and optimize resources. The Internal Audit para are drafted, posted, edited and approved on the portal itself. Once approved, various audit reports are generated automatically and electronically sent to the auditees and other stakeholders. Risk-based analytical reports are also generated by the system and sent electronically. The dashboard of the GRIP Portal provides the online status of internal audit paras. The Portal also has the features of Graphic representation of the data such as dashboard indicating pendency of internal audit para, risk wise status of para etc. This feature makes GRIP a User-Friendly Portal.

Features and Benefits of GRIP

GRIP has not only brought computerisation but also facilitated system improvement. Manual processes have been improved to make them more efficient. Process flow of internal audit before the implementation of GRIP and after has been tabulated as under:

Audit Activity	Internal Audit - Manual Process Flow
	Mode of Documentation	Mode of Delivery	Time Taken		Challenges
Formation of Audit Team	Manual Documentation	Individually	2-3 days		Auditors information to be captured manually and individually every time before the audit is scheduled
Audit Memo Communication	Physical Document	By Post	7 days		The documents delivery and acknowledgement may be delayed, which will impact the audit team visit and further planning.
Recording Entry/Exit Conference	Manual Documentation	By Hand	1 day		Document Misplaced
Recording Observations (Draft)	Manual Documentation	By Hand	2-3 days		The intensity of the original information captured during the field visit may be diluted a no provision to document the draft reports
Evidence Collection	Manual Documentation	By Hand	2-3 days		Evidence collected from the field visit may be misplaced or auditors may forget to collect evidence
Audit Para Preparation	Manual Documentation	Individually	15-20 days		Auditors may use different reporting formats which will create confusion and time taking to consolidate
Guidelines referencing	Manual Documentation	Individually	5-10 days		It is difficult to remember all the guidelines for all the schemes. Hence auditors have manually referred the scheme documents. Sometimes incorrect referencing due to lack of scheme knowledge
Audit Para Approval	Manual submission	Individually	10-15 days		Unless all para were prepared, the report never used to move to higher formation for approval
Final Audit Report	Physical Document	By Post	7 days		The documents delivery and acknowledgement may be delayed
Preparation of Action Taken Report	Manual Documentation	By Post	15-20 days		Auditees submit the action taken reports in Differences in the reporting formats
Evidence Submission	Physical Document	By Post	7 days		Auditees may forget to provide evidence
Action Taken Report Submission	Physical Document	By Post	7 days		The documents delivery and acknowledgement may be delayed
MIS and Reporting
Audit MIS Reports	Manual Preparation	By Hand	7 days		Many man-hours are required to consolidate all audit reports and difficult to avoid human errors
Executive Dashboard	No	-	-		No such dashboards are available in manual process
Individual Auditor Task Dashboard	No	-	-		No such dashboards are available in manual process
Individual Auditor Performance Dashboard	No	-	-		No such dashboards are available in manual process
Audit Activity	Re-engineered process flow – Internal Audit using GRIP
	Mode of Documentation	Mode of Delivery	Time Taken	Improved process
Formation of Audit Team	Online	Online	Same day	Auditors information can be captured only once and used for audit configuration whenever required
Sending Audit Memo	Digital Document	Online	Same day	Timely delivery and immediate acknowledgement
Recording Entry/Exit Conference	Online	Online	Same day	No chances of misplacing the documents.
Recording Observations (Draft)	Online	Online	Same day	All draft versions will be saved in the audit trail
Evidence Collection	Digital Document	Online	Same day	Evidence collection is a mandate
Audit Para Preparation	Digital Document	Online	7-10days	All auditors use Pre-defined format
Guidelines referencing	Digital Document	Online	Same day	GRIP assistance in guidelines referencing
Audit Para Approval	Digital Document	Online	Same day	Single para can be sent for approval without waiting for the entire report to be ready
Final Audit Report	Digital Document	Online	Same day	Timely delivery and immediate acknowledgement
Preparation of Action Taken Report	Digital Document	Online	7-10days	All auditees use Pre-defined format
Evidence Submission	Digital Document	Online	Same day	Evidence can be verified and intimated easily
Action Taken Report Submission	Digital Document	Online	Same day	Action Taken on Single para can be sent for approval without waiting for the entire report to be ready
Integrated MIS and Reporting Mechanism
Audit MIS Reports	Digital	Online	Automatic		All the audit-related information is made available in various reporting formats to all the users
Executive Dashboard	Digital	Online	Automatic		Dynamic dashboards are available for higher management
Individual Auditor Task Dashboard	Digital	Online	Automatic		Every auditor can monitor the assigned and pending tasks under their name
Individual Auditor Performance Dashboard	Digital	Online	Automatic		Higher management can monitor every Auditor performance
Grievance Redressal Mechanism	Digital	Online	Automatic		Any Citizen can submit grievances. It will directly be reported to Internal Audit Wing, O/o CCA, MoRD. The resolution will be provided on priority.

Challenges in adopting Blockchain in GRIP Process

a)    From the above description, it is clear that GRIP deals with document processing, monitoring of audit para and archival of reports. While raising audit para evidence are created and this evidence needs to be stored in a manner that it is not tinkered with at any stage. Similarly audit para and responses of the auditee also need to be kept safely with a provision to ensure its authenticity and security.

b)   There are multiple nodes but for the pilot, only a few need to be identified for implementation of blockchain technology at the working level.

c)    The ecosystem of rural development is huge, complex and partly connected ecosystem of multiple stakeholders. There are multiple Ministries, States, District, blocks, gram panchayats, implementing agencies, NGOs etc. They collaborate to deliver the benefits of social schemes like MGNREGA to citizens and workers. Several opportunities exist to optimize the functioning of this ecosystem.

d)   There are several disconnected systems with multiple versions of truth leading to inefficiencies.

e)    In such a huge and complex ecosystem there a known inability to have consistent visibility of the entire ecosystem. Several inconsistencies go undetected, leading to wasteful expenditure.

f)     Systems are prone to manipulation at each level, without the rest of the ecosystem knowing about changes. Therefore it is very difficult to set accountability.

g)    There are several stages where there is discretionary control before benefits reach citizens. All this gets further complicated due to the huge administrative costs of running these schemes. Use of blockchain to mitigate the identified risks is a challenge which was taken up during this project. It was expected that systems can be optimized by automation & working on trusted data.

h)   Within Ministry, 8 large groups working on different schemes face some of the same challenges as outlined above. Partly-connected groups are working on systems which don’t talk to each other. Same beneficiary listed under various schemes of Ministry without a consistent view of the beneficiary. Scenarios like: Program under Scheme A, delivered by the agency under Scheme B, giving benefits to the beneficiary under Scheme C are quite common – current technologies don’t allow any visibility into wasteful spends.

i)      Trusted auditability and accountability are a challenge – data used during audits changes (without a trace) behind the scene without the ecosystem knowing it was changed

Use of Blockchain will manage these Challenges

It facilitates trust between parties by providing a shared and verifiable history of transactions. Blockchain accomplishes this by requiring participants to agree that a transaction is valid. It then uses multiple technologies to ensure that after the transaction is recorded it cannot be modified. To implement blockchain it is essential to set up and manage Local Blockchain Environment(s). It was decided to replicate GRIP's current schema in Blockchain. An analysis was carried out to decide what type of data should go as Transactions on Blockchain. To be extra cautious it was decided to take an initial data dump of GRIP (baseline data).

With the available baseline data Blockchain, Identities for Users present in GRIP were created. It was decided to periodically get Data from GRIP Production DB. There were two options considered for data interchange. GRIP / NIC publishes data to a suitable location/format by Pushing it there. In the second option, we write a job to pull data from GRIP DB. Where GRIP Tx data have associated documents, get the documents as well on our side and store them in a repository. Job(s) to submit incoming data as Transactions to Blockchain (real-time as we get from GRIP).  Where documents are involved, the hash of documents is put on Blockchain. Tx are submitted using Blockchain Identities of equivalent Blockchain Users. Scope and solution summary of this arrangement has been diagrammatically depicted as under:

In this project the following Use Cases were presented to highlight 'value of Blockchain':

•      #1: Identity Management

•      #2: Trusted and Immutable Trail of Data

•      #3: Trusted and Immutable Documentary evidence

Following solution has been created:

•      A 2 Peer Local environment (on a physical server)

•      Hyperledger Fabric v1.2 based Blockchain

•      A Java-based frontend to demonstrate Use cases. Go and NodeJS for writing Chaincodes.

•      3 environments to setup- Dev, Test, Production environments

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[1] Ajay S Singh is a civil servant and views are personal.