I will look for you, I will find you, and I will correct you

Accounting is the practice of recording all financial transactions of an organisation with the aim of summarising, analysing and reporting information to executives or third parties. From a company standpoint, accounting is crucial for making more informed decisions, while for regulatory bodies it is important to ensure market fairness and transparency.

In the last decades, some firms have started to offer auditing services; the term auditing refers to the practice of conducting independent examination of a firm’s financial accounts in order to establish whether the information provided by the firm is truthful and accurate. In the last few decades the industry has experienced a dramatic growth due the importance of providing transparency to regulators in order to avoid errors like those that brought to the financial crisis in 2008 and scandals like that of Enron.

Due to the large number of regulations and rules the industry is subject to, accounting and auditing have not undertaken dramatic changes in the last few decades apart from a slight shift to the digital world. This means that the sector is ripe for disruption. Blockchain technology might indeed bring a breath of fresh air to the sector.

The accounting system currently used by most companies was devised in the XVth century by mathematician and economist Luca Pacioli. The system, also known as double-entry accounting, aims to reduce errors by introducing a credit and a debit for each transaction; this implies the need to consult with the counterparty when auditing the books to verify whether the entries match. The problem with this system is that if the books do not match it is not possible to understand whose transaction was recorded correctly.

In the case that a company’s entry does not match its counterparty’s, the introduction of a third blockchain-enabled distributed ledger would provide auditors with an unquestionable source of trust to verify whose entry was the correct one; in this way, it would be very easy to identify manipulation or human error. This new model is known as triple-entry accounting, and it basically eliminates the need for auditors to search for errors in financial books, allowing them to move further up the value chain towards more strategic roles.

Triple-entry accounting is expected to revolutionise accounting and auditing as blockchain technology is likely to solve some of the main issues in the industry; the most crucial are listed below along with the respective solutions offered by blockchain:

INFORMATION BIAS

·     Problem: in the current accounting system, the reliability of the information provided is heavily dependent on the actions of both auditors and clients. On the one hand auditors might want to alter financial data to grant repeat business with the client for the next accounting period; on the other hand clients themselves might want provide inflated financial data to make the company appear in a better shape than it actually is. In addition, the digitalisation of the profession has made ledgers vulnerable and easily subject to human error as well as fraud and manipulation

·     Solution: blockchain technology could eliminate the problem of trust and biased information by providing an additional ledger where entries are added through cryptography and are verified by the network itself. As a result, companies would have no need to rely on external verification (e.g. auditors) to ensure reliability and validity of data, and can rest assured that financial information remains traceable and cannot be altered in any way

STATEMENT PERIODICITY

·     Problem: financial statements provide a snapshot in time of the firm’s financial health. The problem with this system is that such snapshots are taken periodically. In a century where engagement in business is easier and faster than ever before, providing information only over certain periods might prevent executives and stakeholders from understanding the company’s financial health and take action in a timely manner

·     Solution: the introduction of blockchain technology would allow to record financial transactions right as they occur. In other words, the firm’s periodic financial statements could be replaced by ledgers that are updated in real time, thereby providing executives and stakeholders with timely and accurate information

OPERATIONAL REDUNDANCY

·     Problem: in double entry accounting, both firms involved in a transaction may be using auditors to check exactly the same entries, which causes duplication of efforts, both from a time and a cost perspective

·     Solution: the introduction of triple-entry accounting substitutes auditors in the process of checking the books and looking for errors. As a result, the redundant use of auditors from counterparties involved in a financial transactions is eliminated

A final remark goes to The Big Four, which are the undisputed giants leading the auditing industry. The Big Four, and in particular Deloitte, are massively investing in the development of blockchain applications and protocols through partnerships with banks and government organisations in order to understand how to improve the auditing process. Whether blockchain technology will allow for full automation or will never utterly eliminate the need for human intervention in auditing is still under discussion. What is certain is that change is unavoidable, and auditors can but choose to embrace the disruptive force and shift their focus accordingly. Things are never going to be the same.