Impact of Blockchain Technology on Accounting & Auditing

Blockchain Technology is either the greatest thing that happened to us or the dread of our lives. It will change with whom, where and how CPA/CA’s work. To survive the radical technological advancements, we shall need to learn and unlearn on a pace which might seem overwhelming considering the speed at which technologies are syncing with our routine. It has created the backbone of a new type of internet.

Photo by Clint Adair on Unsplash

What is Blockchain Technology and How it works?

It is a unique digital ledger, where digital information of economic transactions is stored over the distributed network. The data is distributed not copied. Imagine a spreadsheet which is copied across the network of computers. The network will update and reconcile regularly. to understand blockchain using the google document example refer the article by William Mougayar, Venture advisor, 4x entrepreneur, marketer, strategist and blockchain specialist

The benefits are that the data is not stored in a single place for someone to corrupt it. Since it is openly available and traceable, it is more verifiable and transparent.

Blockchain can be programmed to record anything that has an intrinsic value. It has the potential to impact many industries. Especially the financial sector which may undergo a disruptive change. Even though the technology has caught the attention of many of the largest financial institutions, actual usage still remains in the experimental phase.

The below flowchart displays how it works.

To know how Blockchain and Bitcoin are related to each other refer to my earlier blog post ‘The Laymen’s Guide to Bitcoin”.

How will this technology affect accounting and auditing?

Double entry bookkeeping solved the problem of managers knowing whether they could trust their own books. But, to gain the trust of outsiders, external auditors verify the company’s financial information. Each audit is a costly exercise, Blockchain will ease this exercise for both the accountants and auditors alike. This technology is changing the way businesses work, how they transact. Thus impacting how accountants record and process it. It will vastly automate accounting processes in compliance with the regulatory requirements.

1. Data generation — As external auditors we do not place blind reliance on data generated directly within the organization due to degree of risk that management or internal fraud can take place. Transparency is embedded within the network as a whole, data is completely public. It cannot be corrupted altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.
2. Degree of accountability — With an open traceable audit trail it will be easy to track the party to transaction. And with data entries taking place real time chances of suspense, incorrect entries is reduced.
3. Fraud mitigation — The entire accounting system will be built, such that forgery is impossible or at least very costly.
4. Cost beneficial — distributed ledger has significant cost saving compared to traditional accounting systems.

Are there any concerns or grey areas around it?

1. Data Security — financial data of companies need to be kept secure from competitors. But with all data out there in public to maintain a firewall between internal company only data and public data will be a challenge.
2. Regulatory Requirements — high regulatory requirements in respect to validity and integrity of such accounting database based on blockchain technology.

The blockchain technology has the potential to be a game-changer in the field of accounting and auditing. But it will also create a wide spectrum of skills to change what we do the way we do. Whether you believe Bitcoin is a bubble to burst or is the currency of the future, the validity of the technology behind it is not a matter of debate. Blockchain is here to stay. The earlier we start understanding and using it the better it is for us.

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