Blockchain Technology and The Future of Accounting

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With innovative technology and new automation comes concern about the role of human professionals in the field. We see it time and time again. We want to start by saying: Experts do not see blockchain technology replacing the significant role of the people in this industry and we will explain why!

This technology will, however, be making its way in as a component of the job. For this reason, it is extremely important for accounting professionals to learn all about how blockchain technology affects them and their customers!

What Exactly Is Blockchain?

Blockchain is a digital ledger, a chronological database of transactions, shared among parties in a network. It captures every transaction since its creation. It uses peer-to-peer networking technology to allow parties who are unrelated to each other to go about transactions without requiring a trusted intermediate party like a bank or processing provider.

How Does Blockchain Work?

Here are the basics:

Every participant is a “node” along the chain.

Each node maintains an identical copy of the ledger.

Every time a transaction is entered into the chain it represents an exchange of value (digital assets) between participants. 

When one participant wants to send along value to another participant, all the other nodes on the chain communicate to check that the new transaction is valid and OK to add.

Once the consensus is to accept the transaction, all copies of the ledger are updated to include that new transaction information. 

Once an entry is added and time-stamped, the entire network of nodes validate it and it cannot be deleted or altered in any way thereafter.

Transactions are grouped together along the way, which are how the “blocks” are formed.
Each block has information that refers to previous blocks, and all the blocks are chain-linked together in sequence.

What Problems Does Blockchain Technology Aim To Solve?

  • Reduced risk of non payments by having almost real-time transaction settlements.
  • Decentralizing transaction processes by allowing the distribution of the entire history of transactions along the peer-to-peer network.
  • Participants are incentivized to take part in validation of new blocks by the rules that govern the blockchain model they’re involved in maintaining. The chain can continue with momentum without any single source. It is difficult to sensor because of this, by the way.
  • There is no double-spending along the line for items or edits to the ledger once an event is verified. Transactions cannot be reversed!

Impact on CPAs and Auditors

There’s no denying that blockchain technology has the potential to shift record-keeping altogether, from the transactions themselves all the way down to the reporting of value transfers over time.  Roles like tax preparation and reporting of financials will inevitably be changed, which impacts entire business processes.

CPA auditing will change shape, and already is in some ways, to account for not only those stand-alone ledgers but also these blockchain ledgers as businesses adopt blockchain as a valid method.

All of the above considered, it becomes clear that CPAs absolutely must come to understand blockchain technology and implementation.

At first, it might seem that this is a hugely negative implication of this new technology on the CPA workforce. However, clients will benefit greatly from and place high value on accountants, CFOs, and auditors who are adapting to and becoming well-versed in this paradigm shift.

Contrary to what you might think at first, blockchain a massive potential opportunity.

Below we outline some of the specific ways that CPAs can establish new revenue opportunities in order to remain profitable in the context of blockchain and the evolution of financial transaction technologies.

Opportunities for Accountants and Auditors

First of all, blockchain would make it possible to have real-time access to node-specific transactional data. This would save an auditor or CPA countless hours it usually takes for average auditing tasks to reconcile, review balances and entries, extract supporting files and documentation, and the like. This all means less time between preparation and verification of data. CPAs could offer more efficient, time-sensitive auditing and can take on more complex scenarios which often comes with higher risks involved.

Accountants are experts in ledgers, right? They are very adept at using technologies to analyze and leverage information available. The role of the CPA doesn’t stop at verification of transactions. Just because the transactions are captured accurately does not guarantee that the nature of the transaction itself was appropriate and lawful; therefore, transactions involving blockchain technology are not unassailable. The potential role of auditing in these context might mean they’re ensuring the following:

  • Transactions are classified appropriately in statements
  • Transactions are legal and there was not fraud or unauthorized parties involved
  • Buyers and sellers are related and the business cases are relevant
  • Costs captured in statements reflect estimated values that are consistent with historical data

Verifying occurrences of transactions is just one aspect of an audit. The role of the accountant or auditing individual or firm involves a much more comprehensive assessment. There may not be sufficient evidence from an audit perspective that the transaction’s nature was valid and true to the supposed context.

Cloud-based software solutions

Some of the big firms are starting to offer digital ledger analysis services and have even developed software to go along with that. The reality, though, is that most accounting software is not actually compatible with blockchain technology, so adoption requires significant new development and services.

If blockchain does gain enough momentum as a trusted exchange, it does have the potential to eliminate centrally hosted solutions. This is largely due to its very nature – it involves small, individual-level accounting and distributed databases. Accounting, tax, and audit software providers will need to continuing to drive forward with a deep knowledge of regulations and processes involved in their role that a software or tool would not provide.

Aside from the above more obvious implications of blockchain on the accounting industry, there are some other plausible hats that the CPA may wear in the future. Here are some of those:

Vetting access

In the absence of central administration, there is little true examination of those who request to be granted access to a blockchain. CPAs may, in the near future, be qualified to take on that trusted third party role to ensure that the blockchain is operating with participants who are known to be trusted nodes.

This is going to become especially relevant as the Internet of Things (IoT) builds its presence. IoT is still not a fully interconnected, secure network within or across any one industry. It is extremely expensive to establish identity trust between parties involved in transactions, and it is difficult to ensure that data is exchanged securely.
Auditors can account for the trust issues in data transactions and entity interactions, reducing the potential costly implications of these pathways when left unmonitored.

Auditing Smart Contracts

As they are adopted more widely, it is imperative for businesses to minimize the amount of reconciliation and payment management required to account for blockchain transactions. High-impact contracts can aid in achieving this. Accountants and auditing professionals should be educated on how these contracts are executed on a blockchain, what those controls are actually impacting in terms of assurance and engagement, and how the participants are ensuring the ongoing management and execution of those contracts put in place.

Mediation

Although this role is not yet defined in these contexts, CPAs may be required to assume arbitration over negotiations that seek to parse out participant settlements and identifying executors of estates, for instance. If businesses are participating in blockchain, the terms of potential changes like acquisitions or participation in capital markets should be carefully considered. The function of the CPA here would be to implement contractual agreements and identifying appropriate legal frameworks according to the context. This may not end up being the role of an auditor, but it is no doubt a topic requiring background knowledge on the part of the CPA. They may even want to find business partnerships that would facilitate that mediation in lieu of taking on this task directly in the long run.

What Does All This Mean?

Even though there is so much influence implied, there are still a lot of unknowns. The impacts of blockchain technology on industries across the globe, accounting and auditing included, are still in question because it is still unclear as to the speed of adoption and how soon businesses will receive this new technology and address it in their services in turn.

We hope that by staying ahead of blockchain and other emerging technologies and processes, accountants will be able to lead with confidence and even have a hand in paving the way for responsible blockchain-involved services.

We can help you organization stay ahead of new technologies and emerging trends. Get in touch with us:

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