The Impact of Blockchain Technology on Accounting Practices

Blockchain technology provides an unalterable ledger, making it an excellent accounting solution.

It’s already useful for supply chain management, digital identity verification, supply chain auditing and more.

Where accountants now spend much of their time on certifying and reconciling the correctness in transaction records, auditors working with blockchains might spend more time checking that a description of a particular object, such as its recoverable value, location and condition, is indeed correct.

Immutability

What makes the technology powerful is that transactions couldn’t be changed, ever, after being recorded on the platform; therefore transparency, security and reducing fraud risk along with making auditing easier and simpler are the big advantages.

As Rozario and Thomas explain: [T]his ‘decentralised blockchains’ provide real-time access to information for multiple stakeholders [but] at the same time, it [may] also tarnish the privacy of the users as their data would be simultaneously shared with third parties like service providers, tax authorities, etc.

Blockchain’s traceability also helps establish ownership of other physical assets such as art and real estate, while reporting operations such as reconciliation or automated regulatory compliance can bolster from tracking the transactions in real time, which would help lower the compliance cost and boost information reliability onto the financial statements. Simultaneously, automatic auditing can help immensely from blockchain technology as accountants need to spend less time on verifying documents and producing financial reports annually, thus subsequently cutting accounting fees.

Decentralization

With decentralised blockchain technology, we can achieve higher degrees of transparency while enhancing efficiency and security; however, the decentralisation of the system introduces new challenges in accounting and auditing. Following the suggestion proposed by Smith and Castonguay, in its internal control procedures, a company should incorporate technological and transactional safeguards, rigorous auditing requirements, and strict adherence to rules and regulations.

Whether inadequate early systems would improve is an open question, of course; while blockchain does seem capable of implementing accounting, it is a very early application today, and there are no extant good examples with which to illustrate the idea – but, needless to say, the potential is enormous. It would remove the need for reconciliations, and create certainty over the accuracy of the history of a transaction chain by matching a timestamp to the entry of information from across a collection of individuals in any given period. This alone would reduce the burdens currently placed on every accountant and auditor by orders of magnitude. Were it to occur, it might liberate accountants to interpret blockchain records for real economic purposes, rather than methodical parsing into endlessly archived accounts. Where are the assets? What is the realisable value?

Not only that, but blockchain can also remove some uncertainty about some of the information being lost if a central authority failed – thus encouraging more reliable and trustworthy supply chains.

Transparency

Blockchain is the brilliant new technology where management of documents, business processes and storage of information are sure to be revolutionised. Secrecy and transparency are crucial attributes that accounting requires; the Blockchain could be used to authenticate transactions – or create an audit trail – allowing accounting firms to service more clients, as they could focus on judgemental advice instead of reconciling bank statements and posting invoices.

A blockchain is a public ledger that is immutable: it contains every transaction that has ever taken place. It also relies on cryptography and is decentralised, such that no data can be changed without everyone noticing. And because a block on a blockchain has both the characteristics of a digital signature and a time stamp, it is all but impossible to falsify.

However, real-time dissemination of information on the blockchain will compromise the confidentiality of the actors and will in turn need new governance and control mechanisms to be put in place. It also has to take into account its complexity and the vagueness related to most accounting transactions that need to be captured appropriately on it.

Security

Blockchains are decentralised and immutable, which renders them almost impervious to tampering or unauthorised accesses – and therefore more secure in maintaining data integrity. As a consequence, concepts such as supply chains (which are harder for businesses to track) become easier to trace. For marketers, this makes perfect sense because it means that companies could keep better track of where products originate and more effectively detect counterfeiting.

For instance, they could verify a purchase: blockchain-based transactions can be timestamped and sealed with a consensus mechanism, thus verifiable without intermediaries and outrageously expensive.

But then, we should not forget that records are not abolished with a blockchain, just some aspects of the re-engineering processes are heightened, with more visibility but also more opportunities for fraud. A blockchain as such does not replace the need for an airtight auditing system. Accountants thus need to understand the technology behind a blockchain, such as learning the details of its cryptographic specifications.