The Impact of Blockchain on Accounting Practices

Blockchain technology has allowed for the creation of unalterable account books or ledgers, and automation of transaction recording, accounting and bookkeeping, all of which improved transparency and reduced errors and fraud, and enhancing the management of data.

As advances in technology bring about change, one or two of these challenges and opportunities will arise for accountants. In some cases, emerging technologies could reduce the number of reconciliations accountants have to make, but it might also allow a greater focus on judgemental elements of accounting, such as economic reality and value.

Immutability

But the main feature of blockchain is that it’s unchangeable: once recorded on a distributed ledger, the information is nearly impossible to alter, making the technology well suited to an age of fake news and cyber fraud. Everyone can trust that the information available among the many participants of a blockchain-based accounting record is the same as all the others.

Since a blockchain is replicated across vast numbers of computers, it would be all but impossible to alter the record significantly; for a single computer to revise the blockchain held by every other copy, it would have to upload the same file to every other computer – an expensive process that would make any tampering visible in huge volume.

The immutability of the blockchain will also ensure that the records of transactions have been checked by an accountant. Moreover, there will be less time spent reconciling and analysing data, allowing accountants to dedicate themselves to planning and valuation rather than the minutiae. This could lead to greater transparency and trust in businesses towards their investors and customers (small- and mid-sized businesses in particular may benefit from this).

Transparency

Blockchain technology has the potential to automate many accounting processes and streamline the company’s financial information. Quadruple entry bookkeeping is unnecessary with a Blockchain ‘business case’ and gives all companies the ability to access an audit-proof ledger to keep track of transactions. This can cut the risks of embezzlement, fraud or misappropriation, and keep operations running more efficiently.

Moreover, the immutability of blocks in a blockchain also prevents fraudsters from hacking in and altering data on transactions in a way that would otherwise trade illicitly. The same property also obviates the need for accountants to reconcile records, which is costly to do manually but necessary when merging records from different databases.

Since many of the errors in a company’s accounting arise during these intermediate stages, blockchain can make the company more accountable by reducing these errors. This straightforward technological alteration could help businesses meet regulatory demands more easily, while also giving them a better way to track the way money is moving through the company. Additionally, reducing fraud risk (because the auditing trail is simplified and made more accessible) could give a company some breathing space to focus on other matters (perhaps on planning or valuation).

Automation

It’s a legally binding, tamperproof record of transactions — somewhat like a digital ledger that facilitates trading of anything, whether it’s Bitcoin-like cryptocurrencies, or collectible art and real estate. The blockchain database can manage many parties, and produce a tamperproof record of contracts, payments and transactions. Things previously managed by humans are now susceptible to being automated. For example, by programming smart contracts that automatically activate themselves only once all conditions have been met, such as buying from one vendor and shipping to another.

Information asymmetry is eliminated as both buyers and sellers (or all the stakeholders) have real-time access to real data; transparency is better supported as decentralised technology makes information more accessible; increased accountability lowers the risk of fraud and also concurrently reduces the occurrence of errors. Continuous auditing is therefore made easier, and accountants can be freed up to offer more strategic advice to their clients.

Blockchain technology is still in its infancy and will need to be investigated and developed further by accountants if we wish to understand its implications for accounting practice. For this reason, accountants will need to work with system designers, policymakers and accounting practitioners to develop ecosystems that respond to the bespoke needs of the new digital accounting industry.

Energy consumption

Blockchain is probably most often identified with cryptocurrency, but its possible uses in accounting extend well beyond cryptocurrency to, for example, automate reconciliation and enhance regulatory compliance as well as store data securely and irreversibly (that is, erasing or altering any part of it erases the entire document), and provide total openness (as the ledger can be accessed by all accountants, auditors and clients at any time).

Reporting and auditing processes can also be improved by non­-editable read­-only blockchain nodes that provide reporting data in near real time, which makes reporting faster and reduces manual effort in accounting systems while improving data reliability and making it more visible, which decreases the risks of fraud.

Therefore, aside from any other implications of blockchain for the general practice of accounting, accountants must come to understand it. Accountants don’t need to become blockchain experts as such, but they should develop an appreciation for its fundamental technical constructs so that they can advise clients about adopting and using the new technology.