A quick lesson on blockchain for accountants: Part 3 – cryptography
Following from the previous two posts, today I will explain cryptography in the simplest way I can – in reality, it is more complicated. However, a basic understanding is useful to appreciate blockchain – which will be the final post on this topic.
Cryptography is the art/task of creating and solving codes. Messages have been sent in code from centuries, and you can read a good summary of some methods here. The basic idea of cryptography is to render communications unreadable to the human eye by mixing up inputs (e.g. letters) to give a different output. One of the more famous uses of cryptography was the Enigma machine used by the German armed forces during WWII. The Enigma worked by scrambling letters into other letters and relied on the sending and receiving machines being set up the same. The set up was from three initial letters, resulting in over 17,576 (26^3) combinations. As you may know, it took a computer and some captured settings to break the Enigma code.
Move forward 70 years and a lot of information sent today over the internet uses some form of cryptography. There are two basic forms 1) encryption and 2) hashing. Encryption is what the Enigma did, an original message was scrambled on one end, sent via morse code, and de-scrambled on the other end. Hashing only involves scrambling. It uses an algorithm to derive a fixed length string which is different from the original text. A good example is a password. Passwords are usually not stored on servers in their original form, but as a hash value. If you enter a password, it is run through the algorithm and if it matches the stored hash value, you’re in. A commonly used hash is SHA256, which has 2^256 possible combinations – let’s just say that is a big number.
Encryption, as mentioned above, is a two-way thing. While I could write a lot more, let me try to keep it simple and explain the most common form, which is asymmetric encryption. First though, let us remind ourselves that encryption means some form of setup or code is needed, which is usually referred to as a key. In asymmetric encryption, there are two keys, a public key and a private key. Here is a simple example of how this works. Let’s say I want to send you an encrypted message. Your public key is sent out to anyone who may want to send messages to you. To send the message, I use your public key to encrypt it, so the message is secure when sent across any networks. When you receive the message, your private key unscrambles it. Only the combination of these pair of keys can do this, making the system quite secure. An example of an asymmetric encryption protocol (or set of rules) is TLS (Transport Layer Security) which is embedded within most operating systems and web browsers. It also offers 256 bit security, which is 2^256 – see more about TLS here. The current agreed TLS version is 1.2, and below you can see it is embedded within my version of Windows.
So, to sum up, encryption is complicated, but it is commonplace in our daily lives and apps. So can it be broken/cracked? Yes, but it would take a long long long time. See a great infographic below which details how long it would take to crack the code/cipher used in AES 256 – which is used by the TLS protocol mentioned above.
So now you know a little about cryptography, the next post in this series will cover blockchain.
New edited book
Have a look at a new book I joint edited – here is the link
The book is a collection of 22 chapters on many aspects of Accounting Information Systems. It gives an excellent summary of current research and thought on AIS. Enjoy
Moving your accounts to the cloud -my Intuit (QuickBooks) experience
Okay, it’s been a while, as I have been ill. But normal service is resumed 🙂
From previous posts, you’ll know I am a fan of cloud products and technology in general. I also study and write on change, so a recent experience with QuickBooks software (UK version) is great material for me.
I have been a QuickBooks (QB) customer since 2006 – before the cloud was widespread. I have had four desktop versions which in total earned about €1100 for Intuit. So at the end of December, I decide, let’s put this online. I signed up as an Irish customer (as I am based in Ireland, obvious one would think), created my company, and then went back to the desktop product (QB 2015 on my laptop) and ran an export to online company menu option. The end result was not as expected, I had two companies. As I signed on as an Irish customer, my data cannot be transferred from QB 2015 UK desktop version. So, I would have to subscribe in £ for a UK online account if I wish to have my data transferred.
So, what’s my point other than bad service – as I had no indication of what to do correctly online. Well:
- I am a very small business – what if I had a few thousand transactions a year I do not want to lose
- The change to online cloud accounting, while I like it, results in fewer features that accountants or clever managers like to use – for example, more detailed reporting. So would I want to then have a double sacrifice – lose my data and less reporting
Don’t get me wrong, the cloud is the way to go, but surely Intuit (and others) can do better!
Cloud accounting providers – building on their data
Just a short post today – I will get back to more regular posts soon.
I have written before about several aspects of cloud accounting – see here for example. But we can also think about what cloud accounting providers can do for their clients.
Simply, these providers have lots of data and insights on their clients. The Intuit group seem to have been quite clever in recent years with such data – mainly in the US market though as far as I am aware. Here is their latest offering, offering loans to small business. If we assume the potential market is users of Intuit’s Quckbooks, then I could easily surmise that data – even aggregated – from the software could be used to assess the ability to repay and so on. If you are thinking there may be privacy concerns on the data, well I think any bank or lender would ask for financial statements regardless.
Accounting for Bitcoin
We have probably all heard of the digital currency Bitcoin – there are some others but Bitcoin is the best known I think. I read a nice article on the Bitcoin magazine website recently which reminded me of the basic things us accountants need to consider if dealing in foreign currency or if a new currency comes along – it is not that long ago since the Euro came our way.
The article summarises well the three steps I experienced when operationalising the Euro more than a decade ago now. Like Bitcoin, the Euro was for me then a non-physical currency to begin with. The first “step” with the Euro and actually happening now with Bitcoin is use as a payment method. With the Euro, we had the ECU as a payment method first. In this case, the accounting entry is the same as any other payment method – such as a credit card or PayPal – all amounts are in local currency. Step 2 would be to treat Bitcoin as a foreign currency. In my experience this typically happens when volumes of payments to/from customers/suppliers become larger. For example, many Irish SME treat GBP as a foreign currency in their accounting systems, but treat the USD more like a payment method. As the articles notes, if Bitcoin is treated as a foreign currency then exchange gains and losses need to be accounted for. Step 3 is adoption as a base currency. This may not happen of course, only time will tell. Let’s assume it does happen, then the accounting system works pretty much the same as in step 2. The would also be some work in translating assets and liabilities to the new currency. With the Euro this was relatively simple as fixed exchange rates were agreed and then it was matter of running a routine within the accounting software to do the calculations.
As the article suggests, more businesses are accepting Bitcoin (as its stabilises in value) and thus are at step 1.
A new approach to cloud accounting software?
I am writing this post without using the software I mention, so apologies if I am incorrect.
Sage (a leading provider of accounts software) have recently extended their most popular product to the cloud. And they have done to in a way which seems to address a lot of concerns.
My experience of cloud accounting software is that while it is functional and easy to use, it does lack some of the capabilities that desktop accounting software offered. What Sage appear to have done is taken their best product for SME – Sage 50 – and retained the best of both worlds. The news release at the link above suggests a new product, Sage Drive, allows the user to retain the desktop functions but store data in the cloud. This has several advantages. First, the sharing capabilities of the cloud are available once the data is stored there. Second, existing functions are maintained and this may particularly suit the accountant users. Third, it may ease some security concerns accountants often mention with the cloud. From my understanding, only the data is cloud hosted. Some desktop software is still needed to make sense of the data.
Does new technology in accounting wipe out the old?
Quite a tough question above I guess. I have always been interested in what technology can do for business – both as a management accountant and academic. It is probably fair to say that the past decade has so much more technological change than previous decades. We have seen smart phones, tablets, the cloud and social media all appear and take over our lives and change how business is done.
Personally, I am watching how accounting in small business is now potentially so much easier than ever before. For example, all a sole trader needs is a smart phone and they can issues invoices, records expense and even get paid. I would hope that over time this will become a reality. However, at the same time I am quite aware that it will be while before we see small businesses not having some manual recording.
I have also recently become a little interesting in accounting history. It has been commonly accepted that symbols used on clay tablets used by traders in ancient Mesopotamia were a precursor to modern writing. These clay tablets were in effect what we call invoices or delivery notes today. One would imagine that writing would help simplify business of the ancient Mesopotamians, and replace the symbols on the tablets. Recent archaeological finds in Turkey however suggest otherwise. It would seem the tablets and symbols survived for many centuries after paper and writing were in common use. So I wonder will it a few centuries before small businesses take advantage of the present day accounting technology ? Incidentally, it seems tablets (but not clay ones) are probably a very simple way to manage small business accounting.
A management accounting system – in a police car!
More and more, technology is used to help many of us do our job. I read an article a few months in the Wall Street Journal about how increasing integration of technology in NYPD police cars is helping officers fight crime. Of course, in-car systems are not confined to NYPD, and many European police forces use technology in patrol cars.
The article mentions a smart car, which is being trialed in one NYPD precinct. The car is equipped with number plate recognition, video cameras and even radiation detectors. All data collected is transmitted back to a central location, where it can be analysed at a high level if needed. The technology also allows officers make decisions while on patrol – for example, ignore a car with an outstanding parking ticket, but stop if if stolen.
So, where is the management accounting system is this police car? Ok, this is a trial, but it is likely to reflect what an actual patrol car will do in the near future. I define management accounting as the provision of information to make decisions. Using this simple definition, there are two ways we could describe the smart patrol car as part of a management accounting system 1) it provides officers with information to make decisions on the spot and 2) the information gathered may also be used to inform higher-level policy and strategic decisions.
Artificial intelligence in Accounting
In the latter part of 2013, I noticed several new developments in cloud accounting software. I suppose one of the key advantages of cloud accounting software is that it allows the software provider to concentrate on what they do well, while at the same time allow other software providers to integrate with their products. And, some of these products include some level of artificial intelligence.
To give an example of a non-cloud product first, Irish firm OCRex use optical character recognition to help accounting practices do bank reconciliations when smaller clients don’t do this – see http://www.ocrex.com/home. This software reads scanned bank statements and reconciles opening and closing closing balances, and leaving the accountant with the job of checking for missing items only. Thus, this product is intelligent in that it matches items on the bank statement using amounts and other information like to a reference.
Now let’s take this idea to the cloud. Several accounting software products can now scan emails., faxes and scanned documents to determine not only the amount of a business transaction, but also determine what kind of transaction it is. For example, xero software offers an add-on which reads transactions and posts automatically to the correct expense account. From my understanding of the xero add-on, it also learns as it goes, learning what supplier is posted to which expenses account etc. This certainly has a lot of potential for small businesses, reducing processing time and storing documents in the cloud.
Should you put your small business accounts in the cloud? | Guardian Small Business Network | Guardian Professional
A good friend and colleague, Dr Gerhard Kristandl is mentioned in this article from The Guardian.
(Image from The Guardian)
Should you put your small business accounts in the cloud? | Guardian Small Business Network | Guardian Professional.
Accounting and changing technology – an infographic
From time to time I come across some nice infographics which are worth sharing. Here is a good one which gives a brief summary of the story of accounting and technology change. If you can’t see it correctly, here is a direct link.
A great reporting tool from Excel – PowerMap
As you might know from some of my previous posts, I really like concise presentation of information. The infographic is one of my favourites. Graphical reporting is always great, and managers tend to really like it – it simple, conveys trends, and it’s not boring accounting numbers.
I read a piece on CIMA Insight about a new add-in for Excel 2013 called GeoFlow, or more correctly PowerMap. You can read the full article here. The add-in uses Bing Maps (from Microsoft) and you can plot up to a million rows of data against a map. You can also plot date data, so you could for example see how sales have trended over time on a map. The data can be presented in 3D format, as bubbles, or as a heat map. This tool will certainly create really cool business reports.
Cash accounting – an alternative to accruals accounting? And what about accounting software?
In Ireland and the United Kingdom (and maybe come other countries) it has always been possible for smaller business to pay VAT based on cash received rather than on an accruals basis. You probably know what the accruals concept is, but if not click here. When I teach accounting or prepare accounts, the accruals concept is used almost without exception. The profit & loss account (income statement) and balance sheet (statement of financial position) will definitely use the accruals concept. In fact, these financial statement often take a different name and format when prepared for a cash-based business. For example, when I teach how to prepare the financial statement of not-for-profit organisations such as clubs, we often refer to a “Receipts and Payments Account” and a “Statement of Affairs”. The former is like an income statement, but is based on cash records; the latter is a list of assets and liabilities and will normally draw on the accruals concept.
From April 1st 2013, the UK tax authorities permits smaller unincorporated businesses to use a cash based accounting scheme where the turnover is less than £77,000 (see here for more detail). I’m not a UK tax expert, but from my reading about the topic on the web, the “income” of a small business will be the cash received, and the “expenses” will be cash paid for business expenses. This sounds like a reasonable effort to simplify the tax system for the smallest of businesses. The accruals concept may not be that relevant to many of these businesses as, for example, they may have few assets (to depreciate) and receive payment for most work as soon as it is done. So all fine? Well apparently, many accountants protested this new scheme, and that’s not surprising given how the accruals concept is engrained not only in the teaching of accounting, but also in accounting regulations. As a management accountant, I would always encourage the smallest of businesses to think in cash terms – it is easier for business owners with little accounting skills to understand. But I do see one big problem with this scheme in the UK. It centres around what happens when turnover exceeds £77,000. Once this happens, the business must revert to accruals accounting. This would cause much confusion if a business is using accounting software. Normally, accounting software incorporates accruals accounting, but some also support cash accounting in the way described here. I’m not 100% sure, but I would imagine if you set up software to work in one method, it may not be that easy to switch. So even though this cash scheme is easier and optional for small UK business, if they use accounting software (and more and more do) then it is probably best to stick to accruals accounting.
Big data and business decisions – humans still needed
Here is a good article from CGMA magazine which highlights the importance of human interpretation of data. It is a reminder that although we have technology to analyse data which we could not do ourselves, we still need the human eye to make sense of data trends etc. and relate it to organisational context.
- Infographic: The Physical Size of Big Data (domo.com)