Smart Contracts with Blockchain

 

In the near future, the Defense Contract Audit Agency will be positively impacted by blockchain technology.  Blockchain is the mechanism permitting bitcoin to be an international, inviolate, non-traceable currency without borders. 

Blockchain works for bitcoin across borders and cultures.  As the February 6, 2017, issue of PC Week says:

“Blockchain always has an immutable “ledger” that you can see, verify, and control. At the same time, it has no single point of failure from which records or digital assets can be hacked or tampered with. Because of its distributed-ledger technology, blockchain has applications across every kind of digital record and transaction. And in 2017 we’ll begin to see them explode.” 

It’s like a fax machine or a telephone.  The more people that are participating in a series of blockchain transactions, the more valuable and inviolate it becomes.  As noted above, there is no single point of failure, so the more points recording the transaction, the more difficult it becomes to modify them to commit fraud or theft.  Eventually, there is a point that makes an alteration of a public blockchain transaction impossible.

Blockchain possesses the potential to support much more than bitcoin.  This potential will make Defense Contract Audit Agency audits more efficient and effective. 

Also from the February 6, 2017, issue of PC Week says:

“People often get bogged down in technological complexity when trying to understand blockchain, but the basic concept is a simple and universal one. We have facts and information we don’t want accessed, copied, or tampered with, but on the internet, there’s always a chance it could be hacked or modified. Blockchain gives us a constant—a bedrock we know won’t change once we put something on it and where a transaction will be verified only if it follows the rules.”

In the 2016 book Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, authors Don and Alex Tapscott explain:

“Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large P2P network to verify and approve each bitcoin transaction. Each blockchain, like the [bitcoin blockchain] is distributed: it runs on computers provided by volunteers around the world. There is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network… and the blockchain is encrypted… it uses public and private keys (rather like a two-key system to access a safety deposit box) to maintain virtual security.”

Blockchain is going to be adopted by many of our contractors.  It’s too elegant, and the transaction savings are too great for them to ignore. 

As an Agency, we should be ready. 

I suspect that we have some “First Mover” contractors implementing blockchain systems now.  I believe we should canvass our contractors to determine if they are presently using blockchain or if they plan to.  If they answer yes, we should inquire when the technology was or will be adopted and for what purpose was or will it be implemented. 

We’re going to be impacted by the technology very soon.  From my readings, 2017 through 2020 the auditing world will be turned on its ear with the adoption of blockchain systems. 

It would be incredibly astute of our the Agency to get ahead of the curve.  We should undertake an effort to understand what blockchain means to us and what we can do to facilitate the adoption of the inevitable on our terms.   

We wouldn’t be the first Federal organization to do so.  Click Here.

“Jeanette M. Franzel, a board member of the Public Company Accounting Oversight Board (PCAOB), a nonprofit organization established by Congress to oversee the audits of public companies, recently noted that blockchain technology could drastically enhance, optimize and improve financial reporting and auditing.”

The article further states:

“While blockchain technology possesses the ability to significantly reduce operating costs, optimize auditing processes and cut verification periods with a real-time, transparent and unalterable ledger, Franzel emphasized that blockchain in the field of auditing will be most useful in improving audit quality.”

Followed by:

“Most recently, US banking giant JPMorgan successfully implemented a program called COIN, which is short for Contract Intelligence, to complete 360,000 hours of work within a few seconds. According to the developers of COIN, the program also allowed JPMorgan employees to spot mistakes in their contracts or loans accurately before processing.”

And finally:

“The efforts of organizations such as the PCAOB and JP Morgan, which are both actively investigating the potential of blockchain technology in the finance sector, could also lead to the development of a joint AI and blockchain platform, in which organizations and companies can process audits, transactions, and other financial operations with reduced costs and security risks.”

Big 4 accounting firms are moving quickly to adopt blockchain technology.  Ernst and Young have taken steps to assure that all of its 231,000 employees possess bitcoin wallets.  The company has gone so far as to begin accepting bitcoins for all of its consulting services. 

Marcel Stalder, the CEO of EY Switzerland stated:

“We don’t only want to talk about digitalization, but also actively drive this process together with our employees and our clients. It is important to us that everybody gets on board and prepares themselves for the revolution set to take place in the business world through blockchains, two smart contracts and digital currencies.”

Mr. Stalder’s reference to smart contracts should be of significant interest to us, as we are the Defense Contract Audit Agency.

This paper produced by the Digital Chamber of Commerce provides smart contract examples based upon blockchain technology that includes:

• Records
• Supply Chain
• Trade Finance
• Financial Data Recording

and many others. 

These efficiencies will be adopted by our contractors sooner rather than later.  The savings are too significant, and the efficiencies are too intriguing for anything else to happen.

Our agency is sometimes criticized as being too hidebound, too persnickety, too focused on perfection in our contractors.  We’ve been criticized for touting our ROI, i.e., we return more dollars to the government than we consume. 

Some think this is a negative.

We’ve been accused of losing sight of our advisory purpose.  Some assert that we’ve substituted recovery of funds and a strict compliance framework fixated on return on investment over our other role.  They suggest that we reorient our efforts towards helping decision-makers determine fair and reasonable prices for products and services provided to the warfighter.

A recent article in National Defense recites many of these concerns.  Click Here.

I disagree with the article.  I think we do a good job on both fronts.  Blockchain smart contracts will permit us to do a better job. 

Smart Contracts based on blockchain technology will become the norm, sooner, rather than later.  As these contracts will be self-enforcing, much of DCAA’s day to day activities and the repetitive work that we perform may be eliminated.  If proven correct, that will free many of our people to perform the higher level advisory functions the National Defense article claims we are not doing well enough.

From my readings, I’ve concluded that smart contracts are going to be a large part of the value derived from blockchain.  Contract auditing is what we do.

Commercial accounting firms and other government entities are moving forward.

Deloitte has already applied professional auditing standards to blockchain transactions.   Now that blockchain auditing standards exist, Deloitte has performed a successful blockchain audit.   As previously noted, the PCAOB is moving forward as well. 

Blockchain is happening and happening quickly.

Universal smart contracts supported by blockchain technology is upon us.  Our Agency would be well served by an internal study group tasked with making recommendations for the incorporation of blockchain into our operations on our terms.