Can blockchain revolutionise accountancy?

By Jaren Nichols, COO, ZipBooks

This article was originally published on our sister site, bobsguide.

Many industries have begun experimenting with blockchain—independent of Bitcoin.  In fact, the World Intellectual Property Organization handed out 406 blockchain patents in the last year alone.

And while the fate of cryptocurrency is uncertain, the tech underlying it seems to have some interesting applications (along with some reasonable doubt), specifically in the realm of accounting.

Blockchain is an accounting technology—it is, first a foremost, a ledger. Currently, that ledger is primarily registering cryptocurrency, but the transfer to standard accounting is intuitive.

An openly available, cryptographically sealed ledger opens up many possibilities for accountants, including simplifying compliance to regulatory requirements and enhancing the double-entry bookkeeping system.

Blockchain reflects changes by multiple parties in a way that prohibits manipulation.  As a technology based on accounting principles, the applications to this industry are plentiful.

Blockchain enhances security

Security is the strongest pull for all industries toward the blockchain. While not perfect, the technology offers some great advantages for data protection and asset management.

Because blockchain is based around a network of computers, rather than one entity, decentralization provides security advantages. It would be difficult to wrangle enough computing power to hijack an entire network of nodes once a blockchain service has reached scale.

Additionally, the encryption and validation included protects data from being altered. File signatures and blocks will mark records as invalid if they have been changed.  All of this infrastructure makes hacking nearly impossible—even if one block is compromised, a hacker can’t break the whole system.

The indestructibility of the blockchain ledger offers new opportunities for accounting. Record-keeping can occur in an interoperable system that is protected from being destroyed or manipulated. The structure of blockchain technology enforces transparency, deters falsification and provides security.

Blockchain reduces fraud

The security of blockchain and durable framework also provides protection from falsifying or corrupting records, helping to reduce fraud and accounting errors.

All parties in a blockchain network have access to the transactions, but they each have to validate the transactions as well. Because there is only one source of truth around customer identity and historical ownership of assets, there is greater clarity.

The enhanced data integrity that blockchain provides means that once a “deal” is made, neither party can go back and rewrite the terms. Blockchain encrypts transactions and provides absolute certainty over asset ownership, transfers and obligations.

In an audit trail, this kind of accuracy would help to show compliance, fight fraud and eliminate errors. In a recent study, KPMG predicted up to 95% reduction in accounting errors because ledgers would never be out-of-sync or irreconcilable.

On the other hand, these kinds of predictions do fail to consider human dishonesty. You can still enter false information into a blockchain system, which creates nothing more than a cryptographically sealed lie. The validation provided by blockchain is valuable for reducing fraud, but it must be acknowledged that the system itself does not magically provide accurate data or trustworthy people.

Blockchain simplifies auditing

The security, validity and clarity provided by blockchain would also simplify the task of the auditor. The structure of blockchain systems makes it easy to audit whether data has been tampered with. In fact, it is possible to envision a future where auditing happens in real time, and each relevant party is informed along the way— “a true continuous audit.”

With one single source of information, auditors would be able to verify huge amounts of data in short periods of time. The cost and time of audits would decrease considerably. It would be much easier to determine whether financial statements match tax reports and in turn, match the blockchain ledger. In other words, for better or for worse, auditors will be able to tell if clients are telling the truth, all the time.

Audits would likely still be performed at regular interviews, but the increased accuracy and interoperable ledger provided by blockchain would present the possibility of a continuous audit, done in real time.

Blockchain integrations: The Big Four

While some blockchain applications are still hypothetical, there has been some forward movement in the realm of accounting. The Big Four Firms—Deloitte, Ernst & Young, PricewaterhouseCoopers (Pwc) and KPMG—have each started experimenting with blockchain integration.

Deloitte got in the game first, when in 2014 they launched “Rubix,” an advisory service for blockchain software products. They have also dabbled in initial coin offerings (ICOs) and crypto-trading.

Ernst & Young (EY) was the first firm to accept Bitcoin as a payment and have also been working to commercialize blockchain tech. In April of 2018, EY launched their “Blockchain Analyzer” which facilitates auditing reviews and transaction analysis.

PwC has also started accepting Bitcoin and is exploring blockchain auditing. Their service, also announced this April, ensures that crypto companies are using blockchain technology correctly and effectively. Additionally, PwC is using blockchain to monitor digital assets, address supply chain fraud and rebuild trust in the food industry.

KPMG has focused their efforts on identifying and investigating applications of blockchain technology.  In 2016, they launched “Digital Ledger Services” for this purposes and have since partnered with Microsoft in the “Blockchain nodes” initiative, supported by the Blockchain as a Service (BaaS) platform.

Not a replacement for human intuition

The perpetual fear with new technology is the loss of jobs.  The advantage of blockchain and accounting integration is that they are actually mutually beneficial.

With their knowledge of working ledgers and collaborations, accountants offer a unique insight to the realm of blockchain.  Likewise, accountants who embrace the efficiency and security of blockchain technology will be better able to diversify their offerings.

The clarity provided by blockchain records, allows accountants to be more confident in their interactions with clients.  They will be able shift their focus from record-keeping to human connection.  Accountants will have more time given back to them, allowing them to prove their true value.  Blockchain can never replace human intuition and connection, but it can create  better accountants.

The skills of accountants must expand to offer insight and understanding of blockchain functions.  Accountants are not expected to become engineers, but they ought to do a little research into blockchain tech and its benefits.  In fact, more and more accountancy schools are offering courses, certifications and even qualifications regarding blockchain.

The long road ahead

Blockchain is a cool new tech that has accomplished great notoriety.  And while the infrastructure is valuable to accountants (as well as other industries), it still has a long way to go before it’s practically useful.

Critics of the blockchain cite a solution without a problem.  Fans of cryptocurrency are in it for the game, not the power that comes from a mathematically enforced technology.  Though industries and the big four have dabbled in real-world applications, cryptocurrency is still the only enduring blockchain use case—and we’ll see how long it endures for.

Additionally, some argue that the trustless system of blockchains has less validity than the trusted financial system we have in place.  While people can sometimes let you down, it’s better to trust people than software.

Blockchain isn’t a magic solution to the world’s problems—or even the problems of finance—but it does open a new door of opportunity that is worth exploring.  Blockchain technology may or may not stick around for the long-term—that remains to be seen.  However, the promise of blockchain is a great motivation for accountants and businesses to move towards greater data security and integrity.

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