The Blockchain Transformation of Accounting and Auditing


The Blockchain Transformation of Accounting and Auditing

Blockchain is a growing list of record, called blocks that are linked using cryptography. Explained in its most basic form, block chain is a chain of blocks where block refers to digital information stored in chains, which refers to a public database in this context. The block is made up of digital pieces of information. These information include the date, time and value of transaction, information on the participants in the transaction. Each block stores a unique code which distinguishes one person from another, called the hash.
The past few months bear witness to the fact that Blockchain is a revolutionary new technology that has far-reaching implications for almost all spheres of human industry. Highly venerated publications like The Economist have called Blockchain the most critical advancement in record keeping technology since the invention of double entry bookkeeping in Florence, Italy in 1494. It has taken us over 500 years of experimenting to finally come up with Blockchain technology to usher in the next era of accounting and auditing. Let’s take a look at what makes Blockchain a good candidate for the next generation of record keeping.

Strengths of Blockchains

It’s important to first understand how Blockchain works before it becomes clear what they can offer to account and auditing. Essentially, Blockchains are distributed ledgers that run on millions of devices across the world simultaneously. Its unique configuration gives Blockchain a number of advantages:

  • Immutability – This is one of the biggest advantages of Blockchain, one that has made Bitcoin successful in the past 10 years. Blockchain creates permanent, immutable, signed and time-stamped records of information. The information stored can vary anywhere from identity, ownership proof, transactions or contractual commitments.
  • Elimination of Middlemen – Blockchain allows two parties to transact directly with each other over the internet, making the process cheaper as third parties do not have to be paid for the exchange. For this reason, Blockchain has been called the “trust protocol” as it helps establish trust on an insecure medium like the internet. This has enormous implications for most businesses as it allows them to conduct their business directly without paying a cut to unnecessary intermediaries saving them money.
  • Transparency – Blockchain provides unparalleled transparency in the field of finance as with public blockchain, all of the participants can witness all of the changes being made to the ledger. Blockchain also helps to ensure that only people with the pre-requisite authorization can make changes to the ledger.

Evolution of Blockchain for Record Keeping

The first and foremost use case of Blockchain technology was Bitcoin, the world’s first decentralized digital currency. Bitcoin’s blockchain has been operating for the last 10 years, with billions of dollars worth of Bitcoin exchanged in that time period. No cybercriminals or world governments have been able to hack it for the time being, which speaks volumes about its resistive capabilities. People quickly realized that Blockchain could be used for storing other information as well, like medical records, identity documents, and real estate property deeds. Additionally, with next-generation blockchain like Ethereum, we can also store smart contracts on the blockchain. Smart contracts are nothing but self-executing pieces of code that exist and operate on the blockchain. For example, one could program a smart contract to automatically make a payment when certain conditions are met.

Smart contracts are already changing the way we conduct business. Earlier, international trade required around ten days to sort all of the transfer of ownership and settling of payments. Now, with blockchain technology combined with the power of smart contracts, the entire process takes under 10 minutes. This is a very powerful advancement that is undoubtedly here to stay.

Uses of Blockchain

Blockchain technology have been adopted for various uses over the period. Asides from its primary use of being the distributed ledger for cryptocurrency most commonly bitcoin, other uses of blockchain include the following:

  • Bank use: Integration of blockchain into banks, has led to significant reduction in processing time of transactions. With blockchain technology, it could take as little as 10 minutes (basically the time it takes to add a block to the blockchain), compared to the ususal 1-3 processing days it might ordinarily take a bank to verify and complete a transaction. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely.
  • Property record use: The process of recording property rights at the local recorder’s office could be burdensome and time consuming. With blockchain technology, there is no need for tracking down physical file in local recording office, as storage and verification on the blockchain affords owners have some confidence on the accuracy and permanent state of their documents.
  • Healthcare use: The blockchain technology can be used by healthcare providers to securely store their patients’ medical records. When saved in block chain, it provides the patient the confidence that such records cannot be changed. Pricvacy of such records can be achieved by ensuring restriction of access to authorized individuals only through encoding with private keys.
  • Smart contract use: A smart contractis a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. The terms of the agreement are automatically executed, when the specified terms and conditions are fulfilled.
  • Supply chain: Suppliers can use blockchain to record the origins of materials that they have purchased. This allows companies to verify the authenticity of products, along with health and ethics labels e.g. are products truly organic as they claim to be. As reported by Forbes the food industry is moving into the useof blockchain to increasingly track the path and safety of food throughout the farm-to-user journey.
  • Voting: There is a greater chance of reducing election fraud and malpractices and also boosting voter turnout with the use of blockchain, as wasdepicted in the November 2018 midterm elections in West Virginia, USA. With blockchain, each vote is stored as a block on the blockchain, making them nearly impossible to tamper with. Transparency of the electoral process, reduction of personnel and provision of instant results are some benefits of using blockchain for voting.

Applications for Accounting and Auditing

Public blockchains are a great way for all the participants of any given ecosystem to be on the same page. The shared ledger gives users of any ecosystem access to the details of every transaction related to accounting entries. The consensus mechanism employed by Blockchain ensure that the ledger is completely authentic. Additionally, with private blockchain, organizations can tailor user access to the best of their needs. This will allow them to give read-only access to external entities like regulators and auditors. This, in turn, allows the auditors to verify the transactions in real time instead of having to wait several weeks or even months to sort through all of the records. This will make audits more automated and quite continuous. CPAs would no longer need to shuffle through file cabinets for days to look for suspicious transactions as financial irregularities could be uncovered and stopped in real time. This saves a lot of resources in investigating and later enforcing fraud protection.

Given enabled blockchain based general ledger and smart-contracts, theoretically speaking, we can move accounting and, hence, auditing processes into the real-time dimension. The real-time accounting can in a matter of moments compile any form of demanded up-to-date report for investors and shareholders. Inventory can be tracked and updated in the inventory bin with easiness and enable greater flexibility in planning and budgeting. Imagine the possible implications in other routine accounting and auditing operations and processes, beginning form end-of-year workload spikes to daily AP, AR and Payroll to Inventory control and to Fixed Assets. Intelligent bookkeeping can be the next software solution available in the line of management information systems solutions.

Related Posts