Blockchain in Inter-Entity Reconciliation: Maintaining the...

Blockchain in Inter-Entity Reconciliation: Maintaining the Integrity of Balance Sheet

Capital Markets CIO Outlook | Tuesday, August 27, 2019

The reconciliation process, integrated with blockchain, powers the process of financial accounting accurately and strengthens security by detecting the fraud at an earlier stage to thwart errors.  

FREMONT, CA: Blockchain is alarmingly becoming the focus of strategic business initiatives at financial institutions across the world. Major players in the industry are beginning to explore the various operations where blockchain technology can improve efficiency. The inter-entity reconciliation, the vital activity of the financial reporting function is one such considered area.

Having spread their service across various geographical locations, financial institutions are mandated to use different accounting methods to match local requirements and regulations. These banks indeed find it extremely challenging to perform inter-entity reconciliation at the organizational level. In this case, blockchain-based solutions are used to simplify the process, which makes the financial reporting process more accurate. Capital markets firms are exploring ways for a standardized reconciliation process to perform activities in real-time.

To counter the ill effects of the manual process for inter-entity reconciliation, financial firms need to establish a sound mechanism. It will minimize the involvement of personnel whose expertise can be channelized to other core business process, thereby bringing more value to the firm. A blockchain-based solution can considerably accelerate the inter-entity reconciliation process. It can help maintain and reconcile inter-entity accounting entries easily with its inherent feature of the distributed ledger. A blockchain-based solution will also provide the necessary APIs for integration with existing accounting systems. Inter entity accounting entered to respective ledgers can be agreed upon and reconciled in real-time using distributed edger functionality.

Additionally, the use of the digital signature-based solution can significantly enhance the efficiency of the inter-entity reconciliation process. For this financial firms need to factor consider two things that the blockchain technology is still in its infancy and is only at the stage of experimentation at most financial institutions, and there are only very few commercially available solutions. This stresses the importance of conducting elaborate demos and proofs of concept to ensure the readiness of a blockchain solution before planning a large scale implementation. The digital signature can also help in the audit by keeping a precise record of any change made in the Blockchain network.

Blockchain backed solutions enable common ledger within all participating entities, which will avoid undesired activities and records during reconciliation. The data storage capability of blockchain is shared across all the participating entities so that the transactions captured in the transactional ledger are shared with all the other nodes making real-time reconciliation a unique possibility.

The reconciliation process involved in different groups may be manual, which is error-prone, and time-consuming and assuring accuracy becomes a challenge. After each transaction, a vast amount of data gets accumulated, and this may lead to errors in accounting, duplicate entries, cancellation charges, transfer pricing, and thus complicating the situation. For effective management of reconciliation process firms are creating centralized reconciliation teams or seeking help from the external service providers. To multiply the effectiveness and efficiency of the reconciliation process enters blockchain.

Check this Out: Top Reconciliation Companies

There are some complex activities involved in maintaining the records and challenges related to inter-entity reconciliation. The entities are distributed over the geographical locations, and possess-varied and isolated accounts limit the visibility of the transactions at the organizational level. Also, the financial groups include takeovers, mergers, and acquisition, which curtails the standard accounting process.

Financial institutions are exploring the applicability of blockchain technology in various operations and business scenarios. Inter-entity reconciliation is indeed a ripe area where it can deliver significant benefits. However, the technology is still at its infant stage, comprehensive use case testing is mandatory. Financial enterprises are conducting elaborate tests to prove the readiness of this technology concerning scalability and security.

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