How Blockchain Implementation will Impact Accounting

The remarkable growth of the blockchain technology has raised both excitement and concerns for the global accounting industry. Is blockchain implementation and accounting going to have a symbiotic relationship or as suggested by some experts, should the accountants start to look for a new line of job? Like the blockchain technology itself, the answer to these questions is complex. Blockchain is one of the hottest and fastest rising technologies in 2018, and for good reasons. As a kind of incorruptible and indestructible ledger, the blockchain offers a novel way to save and share data in a way that it becomes simultaneously inter-operable. This may reduce the demand for accountants to save data in disparate locations without any need to consolidate and validate it. Will the blockchain implementation increase the efficiency of the accounting functions and result in improved performance parameters, is another debatable question. This post discusses the potential of the blockchain technology for the global accountancy industry and the probable ways it can be implemented within this domain. The post also includes the future of the accounting and auditing in the same context.

The Blockchain & Accountancy — Where They Meet

Many experts argue that the blockchain is an accountancy-based technology[1], which seems true up to some extent. After all, while the blockchain is mostly known to us as the technology underpinning bitcoin and other cryptocurrencies, it, in fact, underpins them by reconciling the accounts. When we talk about other industries like automotive and real estate, blockchain is mostly implemented to track the assets value and ownership at which they were purchased and sold [2]. That’s also the reason why this technology bears high potential for the accounting. It offers a much more durable and transparent framework for the accounting firms to measure and track their assets. It can make it easier for them to understand and recognize which assets are available in the real-time, their values and other commitments that may impact potential cashflows.

The impact of the blockchain implementation on accounting is evident. Rich de Moll, the Vice President of the Blockchain Solutions for Finance at IBM explains that how the blockchain technology allows the accountants, financial experts and auditors to trust the data it provides[3]. Since the data is absolute and unchallengeable, these people can save considerable time and decrease cost. He states that, from the audit point of view, using technologies like blockchain technology, cognitive tools and artificial intelligence, can enhance audit volume to help examine massive amount of data. The blockchain technology also helps accounting businesses prevent collusion and fraud both internally and externally.

Blockchain Implementation in Accounting & the Role of the Accountants

Will blockchain replace the accountants, is a million-dollar question.

The good news is that the answer is no. One of the very first things that we start worrying about if a disruptive technology rises is its possibility of replacing people. With accountancy, the blockchain is expected to massively impact almost everything, ranging from auditing to cybersecurity and everything in between and to the way information is stored, accessed and interpreted.

Blockchain presents a huge opportunity. The accountants and the accountancy firms that embrace the technology and understand its underlying concepts would be the ones most highly sought after in the coming years. With every day passing, a blockchain-oriented future is looking even more likely. Accountants are usually experts in terms of record-keeping and the blockchain can effectively help records to be reserved on an interoperable system that the auditors and authorized third parties can access safely and securely. In this prevailing period, accountants should oversee the blockchain implementation and maintenance as well as other modern technologies.

Blockchain Implementation in Accounting & the Role of the Auditors

Blockchain also bears implications in audit. Performing auditing of the company’s financial position would be less essential if some or all the transactions that make up that position are visible or stored on the blockchains. This means a huge change in the way auditors work. A blockchain, when combined with suitable data analytics, can facilitate the transactional level assertions in the audit, and the skills of the auditors will be better used answering higher level questions.

For instance, auditing is not only assessing the details of whom a specific transaction was between and the monetary value, but it is also about how it was classified and recorded. If the transaction credits the cash, is this outflow because of the expenses or sales, or is it paying off a creditor or making an asset? These judgmental factors usually need the content that is not available to public and rather necessitate the business knowledge, and with blockchain implementation, the auditors would have more time for focusing on such questions.

Potential Uses for Blockchain In Accounting and Audit

Traceable audit trails

An audit trial investigates the way a source document has been translated into the account entry and inserted into the financial statement of the company. It presents the documented flow of the transaction. Blockchain keeps records on the inter-operable system, making it easier and safer for the auditors to access the data and ensure everything is complied with the standards[4]. Businesses will just need to maintain a single, joint register rather than multiple distinct records. Thus, apart from protecting the record from corruption and eliminating the chances of errors, the process makes a concrete traceable audit trial. The transparency of the blockchain provides visibility to all the transactions for the approved users, decreasing the work of the auditors for sampling and verifying the transactions.

Automated audit processes

In the coming years, the finance teams would use distributed ledgers, along with artificial intelligence, for automating multiple processes, ranging from payments to foreign exchange to tax returns fillings[5]. As the data is saved in the distributed ledgers and authenticated by the multiple parties as well as updated on a continuous basis, it provides the teams a possibility of real time reporting to the management as well as auditors, and thus being able to work in a more effective way with the external auditors as well as tax providers.

Authentication of transactions

Blockchain forms the basis for an online P2P network that utilizes computer-powered cryptography to help exchange of value. The computers linked to the network, called nodes, verify and save the transactions simultaneously, letting parties who don’t know each other to execute transactions without the need of any trusted third-party intermediary like a bank or a financial network.

Tracking ownership of assets

The market for the fake goods makes businesses bear loss worth of trillions of dollars per year. Currently, this is incredibly hard to prove that an asset is fake. However, if the businesses were to begin recording their assets on the blockchain, it would become far harder for the counterfeiter to prove his or her assets as authentic. One of the fundamental features of the blockchain is that if something once put on the blockchain, it cannot be counterfeited or altered[6]. And a use case that has risen to pop up for the blockchain technology is the ownership verification tool. Once the asset gets listed over the blockchain, the ownership of it becomes immutable unless any change is verified by the asset’s owner.

Development of ‘smart contracts’

The blockchain-based smart contracts are rapidly rising as a disruptive tool that can transform the way the financial statement audits are carried out and delivered. With their high potential ability to execute the audit processes autonomously on the behalf of the auditors and show the outcomes of these processes, the blockchain based smart contracts can greatly enhance the audit quality and meet the reporting needs of different vested parties for more transparent, accurate and faster audit reporting[7].

Smart audit processes are basically the autonomous audit processes, including the autonomous internal control tests as well as analytical processes, deployed on the auditor’s blockchain. This deployment in the distributed blockchain ledger leads to real-time reporting for many stakeholders like major investors, suppliers, the SEC, audit inspectors, and the audit committee. As the blockchain offers a platform for the implementation of smart audit processes, these processes can be distributed to the participating nodes, thereby meeting the needs for timelier and more transparent audit reporting.

Registry and inventory system for any assets, ranging from raw materials to intellectual property

The blockchain solutions can be used to capture the information regarding the assets as it is registered in the inventory system, passes from one party to another within a supply chain, and as the position of the asset is modified, for instance, capitalized. Capturing the information about the assets including raw materials and intellectual property on the blockchain chain gives accountants and their company’s supply chain partners as well as external auditors a sole source of truth about the core asset information[8]. This also provides the value as stakeholders use only one system to obtain all the information about an asset.

Transaction processing

Apart from automation trends like machine learning, the blockchain technology leads to more transactional-level accounting. Successful accountants will work on examining the real economic interpretation of the blockchain records and match them to economic valuation and reality.

Reconciliation and control

Blockchain has the potential to replace reconciliation work, manual control and bookkeeping. Elimination of reconciliation and offering certainty over the transaction history, the blockchain can increase the scope of accounting, highlighting areas that are presently seem too hard or uncertain to measure, like the value of the data held by the company.

The Impact of Blockchain on Audit Practices

Blockchain streamlines audit processes. The accounts reconciliations, journal entries, trial balances, sub-ledger extracts and spreadsheet files are given to auditors in various manual and electronic formats today. In presence of blockchain, the auditor will give near real-time access to this data through read-only nodes over the blockchains, letting him obtain the information required for the auditing in a recurring, consistent format. Blockchain-based digitization lets auditors deploy more analytics, automation and machine learning abilities like automatically pinging relevant parties regarding unusual transactions on almost real time basis[9].

Digital Identities

Using a blockchain ledger for managing identities makes it extremely hard for the fraudsters to intervene the system without leaving an evident digital trial. A blockchain’s immutable record empowers the accountants to take control of their data tied to their identity and make sure its accuracy with time. With blockchain decentralized identifiers (DiDs), users can regain full control over their record. DiDs are the secret URL saved on the blockchain ledger, with each being allocated to diverse parts of the user’s identity like their name, social security number or birthdate[10].

Conclusion

For accountancy and auditing, the blockchain-based systems will keep the functions and professionals on their toes by enhancing transparency and making it easier for the accountants and auditors to streamline and speed up the processes while reducing costs and make sure that everything is in line on a real-time basis.

Copyright Bryant Nielson. All Rights Reserved.

[1] https://www.inc.com/john-white/9-industries-that-will-soon-be-disrupted-by-blockchain.html

[2] https://www.inc.com/james-paine/top-real-estate-tech-trends-to-watch-in-2018.html

[3] https://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/blockchain-will-impact-accounting

[4] https://www.journalofaccountancy.com/news/2017/nov/blockchain-opportunity-for-accountants-201717900.html

[5] https://www.ey.com/en_gl/assurance/how-blockchain-could-introduce-real-time-auditing

[6] https://coincentral.com/why-blockchain-asset-tracking-is-not-just-for-the-super-rich/

[7] BARTOLETTI, M.; POMPIANU, L. (2017): “An empirical analysis of smart contracts: platforms, applications, and design patterns”. https://arxiv.org/pdf/ 1703.06322.pdf. https://doi.org/10.1007/978-3-319-70278-0_31

[8] https://www.blockchain-council.org/blockchain/blockchain-within-asset-registry-how-it-works/

[9]https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-audit-blockchain-technology-and-its-potential-impact-on-the-audit-and-assurance-profession.pdf

[10] https://fintechnews.sg/20937/blockchain/xenchain-digital-identity-kyc/