Why Blockchains Will Not Replace Double Entry Accounting (Yet)
@CryptoLawReview tweeted me a few days ago to get my views on this medium article claiming that blockchain will eliminate the centuries old, well respected, yet often scoffed field of accounting. The theory posed is that rather than making two entries in a ledger for a transaction, it’s conceivable to make “infinite” entries, thereby eliminating traditional accounting systems.
Although I like the sentiment in the article, I believe it goes too far. Sure, blockchains could potentially streamline accounting processes — but replace? I would say it’s a long shot. To better understand why, let’s quickly go through how we go to our current standards today.
Why Is Accounting a Thing?
Accounting as a profession has been maybe one of the slowest progressing professional fields. Changes in standards do not happen easily, and with good reason. If we look at the development International Accounting Standards Committee (IASC) we see the kind of time it takes for a consensus to be reached. The group was first formed with representatives from the UK, US and Canada in 1967. It took until 1984 for the group to meet with the U.S. SEC to compare its framework against the U.S. centric Generally Accepted Accounting Principles (GAAP). The European Commission did not mandate the use of IAS until almost 40 years later until 2005.
The International Financial Reporting Standard (IFRS) principles then need to be applied according to the laws of each jurisdiction. Companies, especially multinational corporations, have spent decades ensuring their back offices can take in and accurately organize their financial data according to these standards. The prospect that these functionalities will be replaced by a decentralized ledger system that doesn’t integrate with other ERP systems is not realistic at the moment.
At the fundamental level of accounting, transactions that are intermediated by a blockchain still produce the same organizational needs that current accounting standards provide — how much went where and why?
Blockchains right now do not automate all of this data in an easily consumable format. If a company chooses to transact on a public blockchain, corporate risk management best practices would not allow for the company to simply trust the blockchains version of the transaction. They need to book it into their own system in a manner that is able to audited. What happens if the blockchain experiences a hack or for some other reason outside of the control of the company that data source is compromised?
The reality of the U.S. business environment is that we are still a bit far away from having companies that run on blockchains that can be easily aggregated and arranged into financial statements. We are in a growing phase where supportive technologies are needed to make it easier for companies that want to get in the game. This is why we started VeriLedger.
Like many young business school students, I was dreading the accounting class required as part of my program. I bought into the notorious conception that accounting is boring, tedious and time-consuming. Also like many, I learned quickly that accounting is much less about math than it is about organization.
For someone like me, who gets pleasure out of being hyper organized, I quickly discovered accounting classes to be my favorite. I wasn’t alone, my first accounting professor (Dr. Harry Davis) received a standing ovation at his last lecture. He ended the semester with a sermon about the power of accounting — at its best it fosters integrity, transparency, forward thinking. These are some of the foundational principles of our company.
Those who do not understand, nor maybe appreciate, accounting may be quick to nominate it as one of the antiquated fields that is ripe for technological replacement. In my opinion, the accounting industry is one the most interesting places to be in the blockchain environment because it fundamentally analyzes how we as people or as businesses interact with one another. Blockchains have the ability to make accounting easier for sure, but not to replace the discipline as a whole.