Process Control NFTs
The "Lego Building Blocks" of Accounting, Reporting, Audit and Analysis - Moving the Institution of Accountancy Toward Automation
A Process Control NFT is an immutable, transferrable digital representation of a control that automates an accounting, financial reporting, audit or analysis process. A Process Control NFT uses the ERC721 standard on the Ethereum or Polygon blockchain, or other EVM chain.
The ERC721 standard began its initial use case for representing art. Its use is rapidly expanding to music, media, event ticketing, memberships and more.
Process Control NFTs represent the dawn of ERP, accounting and reporting infrastructure for the modern crypto centric enterprise. The Auditchain Protocol is a representation of the first use case for internal and external enterprise process automation, assurance and business intelligence infrastructure. We like to call them Lego Building Blocks for accounting, reporting, audit and analysis.
Anyone can create a Process Control NFT so long as they have knowledge of these processes. Process Control NFTs are externally validated on the Auditchain Protocol. Every time they are used, the creator and the validators who validated them get paid a royalty. Neat, huh?
Click to Enlarge Image
A typical global 1000 enterprise spends a significant amount of shareholders' capital on consulting and advisory. These are valuable experts that build, fine tune and monitor the business processes and components that guide the trajectory of growth of an enterprise.
Depending on the objectives of the enterprise, the annual costs for outsourced professional service are a delicate balance between capitalization, amortization and tax efficiency. At the end of the day these costs are sunk. The ROI is internally challenging to prove and even more difficult to communicate on a balance sheet.
Financializing controls over business processes allows creators to "rent" them to others and receive a royalty per use. We call this "computational" or "decentralized professional services". An enterprise can operationalize and monetize what would otherwise be a sunk cost.
A Process Control NFT is a digital asset, and is classified as an intangible under US GAAP - ASC350 and IFRS - IAS38. It is recorded at cost and can be impaired but accounting rules make it difficult to apply a higher fair value to a unique asset than it cost to create. So the question is, what is the fair value of a Process Control NFT? As a practical matter, the value of an asset can be a multiple of its actualized income or return on investment.
We are not providing accounting, reporting, audit or tax advice and this illustration should not be interpreted as such.
We postulate that Process Control NFTs have a potential to supercharge a balance sheet. The chart below illustrates an example of the impact on stockholders' equity over a 3 year period assuming, (i) capitalizing the total $400,000 cost in year 1 to create the Process Control NFTs, (ii) impairment of $100,000 for each of the two subsequent years, (iii) income from Process Control NFTs in each of the three years and, (iv) the realization of a gain on sale of the Process Control NFTs based on a 10X multiple of income in the third year. AGAIN, this is ONLY an illustration.
Data aggregation from regulatory agencies is hard. You can ask any CFA who works for an institutional investor. This makes business intelligence hard without subscribing to expensive centralized data aggregators.
Process Control NFTs are a disruptive solution for extracting data from machine readable instance documents and creating controls that populate an investment thesis or business intelligence solution.
Process Control NFTs can be used to create and automate analysis processes for individual and institutional investors. They can also be used to create business intelligence components. Again; If you can create an xls formula, then you can create a business intelligence or analysis Process Control NFT.
The Auditchain Protocol is initially equipped with an existing library of controls that automate financial reporting and financial report validation. These controls are based on the XBRL Global Standard Syntax. XBRL is the language and dialect of global regulators.
The UI will provide a few constraints to keep users on the right track based on the type of control a user is creating. If you can create a .xls formula, you can create a control. A drop down list of default control types is provided which then allows the user specify the attributes of the selected control type. Once the user has selected the control type and its attributes, the user will enter other URIs to associate other controls with the new control. The user will enter the description of the control and also enter its title.
Every accountant knows the accounting equation. Equity=Assets+Liabilities. This simple logic is the over arching control that governs other accounting controls.
Upon submission, Pacioli begins processing the output of the control in the form of one or more XML files containing all of the attributes of the control with a payload of the other URIs to other XML files that the control refers to in order to achieve the functional objective of the newly created control.
The newly created control is then submitted to the cohort of external validators running the AVM client; which we lovingly call "Pacioli" for validation under the IASE 3402 engagement standard. The control is processed by the external validators to verify that the control (i) works properly, (ii) does not conflict with or break other controls and (iii) complies with specified logical and functional objectives.
When consensus of the cohort is reached that the control meets the conditions of the specified objectives, a validation is outputted and recorded by the EVC. The EVC triggers the settlement in AUDT and also enables the creator to claim the Process Control NFT.
Click to Enlarge Image
The NFT represents ownership of the control and points to an immutable URI on IPFS. The payload of the file linked by the URI contains the control and all other relative URIs as well as metadata that states; the creator's name and Ethereum address, name of each of the external validators and their Ethereum address, the EVC cohort address and the Merkle root which is the basis of the Proof of Assurance, "PoA".
The magic of this process and the use of the NFT format allows creators and validators to get paid each time the control is used on the Auditchain Protocol. This incentivizes the creation of more controls which enables global disclosure frameworks to move from periodic sprints to a continuous audit and near real time financial reporting framework that is suitable for open ledger based blockchain and DeFi systems and decentralized autonomous organizations.
Proof of Assurance "PoA" is a critical piece of the knowledge graph populated during the control creation process. The control creation process populates a knowledge graph that associates all of the attributes of the control and includes the attributes in the metadata section of the control. As the controls are consumed by other actors, the knowledge graphs become extremely useful. Actors can create additional controls (subgraphs) that become part of other knowledge graphs created by them that play a critical role in communicating accounting, audit, financial reporting and analysis logic and information in a machine-readable way.
The knowledge graph is also critical for reporting entities and auditors who are involved with financial statement audits in Europe which must include machine-readable data and logic as well as human readable rendering of financial statements under CEAOB guidelines.
Congratulations! You just performed computational professional services that populated the AVM with a new consumable control which you now own! Every time that new control is used, you and each of the members of your EVC cohort who attested to the effectiveness of the control will receive AUDT as a royalty.
Do you REALLY want to perform manual accounting and analysis work for 10-12 hours a day for the rest of your career? Or do you want to come with us, get a life and change the world?