The Heart of the Engagement Process for Financial Statement and Process Control Validation
If you are a reporting entity or wish to create controls that automate accounting, reporting, audit and analysis processes, you'll need to invite validators and create a cohort. BTW, until everyone in the accounting profession, especially regulators are comfortable with this new way of life, we call auditors "validators".
Binding your cohort of validators begins your new status as a reporting entity on the protocol or your new life as a creator of Process Control NFTs. It all begins with an external validation contract "EVC" engagement.
The EVC functions as a game theory incentive and trustless settlement layer with on chain community governance in a decentralized financial disclosure protocol ecosystem.
A minimum number of validators must accept the requested engagement in order to bind your cohort of validators to the engagement. This minimum number is set through community governance. The "create cohort" function outputs a new engagement contract between all parties. The EVC identifies the unique engagement between the reporting entity or Process Control NFT creator and the cohort of independent external validators.
Action on the Auditchain Protocol begins with registration of a role along with the submission of a profile associated with that role. You'll need a Web3 wallet loaded with AUDT to begin.
We would like to take this opportunity to apologize to all cypherpunks. All actors on the protocol MUST go through KYC/AML. We are asking auditors to do something they've never done before: blockchain based public attestation on all sorts of data and controls in exchange for a few cryptographic tokens, so be kind to them. Identify yourself and wash your wallet. This is one giant leap for the institution of accountancy.
The cohort of external validators begins performing validations of each financial state transition of the economic entity. A state transition under most current regulatory disclosure frameworks usually happens once every quarter. The output of a financial state transition produces a Merkle root of all of the data, logic and controls of a series of knowledge graphs and subgraphs, otherwise known as the financial statements.
Since a financial statement is a series of multi dimensional knowledge graphs and subgraphs, we often refer to them as Logical Systems.
External validators running instances of Pacioli will validate each state transition and output a validated instance of the state transition which also contains a Merkle root of the validation. In addition, each attestation made by each of the external validators is recorded in the EVC contract. When consensus among the external validators is reached, the validation is also recorded in the EVC contract. All attestations as well as the validation of the state transition can be viewed in the validation history as well as TXIDs on the Polygon or Ethereum Network through each of their respective block explorers.
Ok, the accountants are thinking; what are they talking about? What is a state transition?
Think of an enterprise as a state machine. In computer science, a state machine outputs changes in state for each input to an existing state. We think about economic entities as logical systems and state machines. We understand that you may be used to thinking about materiality when making assessments during audit procedure. However, in computer science, a state change is a state change if its one penny or one billion dollars.
In the world of cryptography, the integrity of information is protected from tampering. A single character change reveals a break in the hash values that bind the integrity of the information.
When the hash of the state transition and each validation match, it acts as proof of assurance (“PoA”) and triggers a call by the cohort EVC to credit AUDT to each validator in the cohort who attested to the state transition. The governing dynamics are designed to promote assurance levels on financial disclosure for any entity that theoretically match the integrity of the methodology with which transactions are validated on a public blockchain.
Our whitepaper describes the design and functionality of an Ethereum based gamified incentive settlement layer for actors on the Auditchain Protocol: a decentralized continuous audit and reporting protocol ecosystem for assurance and disclosure. It covers the functionality of Ethereum based core ERC20 factory smart contracts which enable an increase in assurance quality, auditor independence and objectivity, trustless settlement and the reduction of counterparty and regulatory risk.
Operating together the EVC outputs a new contract address which binds an enterprise actor to an external validation agreement with a cohort of independent external validators, on an each and individual basis, when a minimum number of validators have accepted the requested engagement.