When you first came to know about the blockchain technology, chances are it was in the context of bitcoin. The cryptocurrency explosion in the last few years has put blockchain into the mainstream, but validating new currencies is only the tip of a huge iceberg when it comes the potential accounting applications of this disruptive, fast evolving technology. Nowadays, blockchain is on accountants’ and auditors’ mind as the blockchain aligns so seamlessly with this profession. Blockchain brings an opportunity in the form of a novel kind of accounting ledger; one that can be updated and verified on a continuous basis without the risk of being corrupted or altered. The article discusses the blockchain opportunities in the accounting sector, its implications, the strategies used and barriers, and the way it can disrupt the accounting and auditing industry.
The Current Accounting Scenario
Today, everything is related to automation in business. If there is any task being executed manually, it is anyhow costing businesses time. To achieve its targets, the industry still counts on mutual control systems, checks and balances. And this impacts daily operations. Among other factors, there exist systematic duplication of efforts, periodical controls and extensive documentations. Most of these are labor-intensive, manual tasks, far from getting automated.
Modern accounting consists of a double entry system. Double entry bookkeeping is used to assure managers that they can trust their books. However, to attain the trust of outside parties, the external auditors must verify the company’s financial position. Each audit comes with a cost and binds the accountants of the company for long time.
Blockchain Based Accounting — The Current Picture
Blockchain technology bears an enormous potential to impact recordkeeping processes, including the ways accounting transactions get initiated, processed, validated, recorded, saved, accessed and reported. The changes taking place in the business processes and models may affect back-office tasks like tax preparation and financial reporting. Likewise, external auditors should understand blockchain as it is implemented and used by their clients. Both the skillset and role of the auditors may change as the novel blockchain-based processes and techniques are integrated within the accounting and auditing functions. For instance, approaches for getting adequate and proper audit evidence would need to take into an account both traditional general ledgers and blockchain ledgers. In addition, there seems a potential for higher standardization and increased transparency in accounting and reporting, which would lead to more efficient data extraction and assessment.
Blockchain technology brings new opportunities and challenges to the audit and assurance as well. While conventional audit and assurance services are still important, the auditors’ approach can change. Just as the profession of audit and assurance is evolving with the audit innovations in data automation and analytics, the blockchain technology might also have a significant effect on the way auditors carry out their tasks. Moreover, the accountants and auditors must broaden their knowledge and skillset to meet the expected demands of the industries as blockchain is more widely deployed. The American Institute of CPAs (AICPA), the University of Waterloo Centre for Information Integrity and Information System Assurance (UW CISA) and Chartered Professional Accountants of Canada (CPA Canada), all advice the accountancy and audit professionals to learn the impacts of the rising blockchain technology on their profession and global auditing standards.
Blockchain — The Savior for Businesses
Blockchain further improves the accounting by decreasing the costs of reconciling and managing ledgers, providing utmost certainty over the history and ownership of the business assets. While using this technology, rather than keeping separate records based on transaction receipts, businesses can record their transactions into the joint ledger directly, making an interlocking system of the lasting accounting records. Since all entries get distributed and cryptographically sealed, the possibility of manipulating or destroying the records to conceal the activity is not possible. This is exactly like the transaction being validated by a notary, just in an electronic manner. This allows auditors to check and verify a huge amount of data in short span of time, thereby reducing the time and cost incur to conduct an audit.
Blockchain & The Big Four
Ernst & Young is the first among big 4 that started accepting bitcoin as a payment mode. In 2018, the firm launched Blockchain Analyzer that would facilitate the EY audit team to review and analyze transactions over blockchain. The pilot would form the basis for automated audit tests for blockchain liabilities, assets, smart contracts and equity.
KPMG introduced Digital Ledger Services plan in 2016 to facilitate the financial services firms in examining blockchain applications. KPMG has also collaborated with Microsoft to make the Blockchain Nodes program having an objective to identify new use cases and applications for blockchain technology. The company has also acquired the membership of the Wall Street Blockchain Alliance.
PwC began accepting bitcoin in Hongkong in 2017. In 2018, they announced a wider-release of their blockchain auditing service with crypto businesses already signed up. This service will audit company’s blockchain services, making sure they have been using the technology effectively and correctly.
Deloitte has been into blockchain implementation since 2014 when it launched Rubic, a one-stop blockchain software platform. They have been diversifying their services, exploring the ICOs. For instance, their partnership with the Waves platform is aimed to make the ICOs and crypto trading accessible to everyone.
Blockchain And the Future of Audit
Blockchain also bears implications in audit. Performing auditing of the company’s financial position would be less essential if some or all the transactions that make up that position are visible or stored on the blockchains. This means a huge change in the way auditors work. A blockchain, when combined with suitable data analytics, can facilitate the transactional level assertions in the audit, and the skills of the auditors will be better used answering higher level questions.
For instance, auditing is not only assessing the details of whom a specific transaction was between and the monetary value, but it is also about how it was classified and recorded. If the transaction credits the cash, is this outflow because of the expenses or sales, or is it paying off a creditor or making an asset? These judgmental factors usually need the content that is not available to public and rather necessitate the business knowledge, and with blockchain implementation, the auditors would have more time for focusing on such questions.
Blockchain streamlines audit processes. The accounts reconciliations, journal entries, trial balances, sub-ledger extracts and spreadsheet files are given to auditors in various manual and electronic formats today. In presence of blockchain, the auditor will give near real-time access to this data through read-only nodes over the blockchains, letting him obtain the information required for the auditing in a recurring, consistent format. Blockchain-based digitization lets auditors deploy more analytics, automation and machine learning abilities like automatically pinging relevant parties regarding unusual transactions on almost real time basis.
Compliance with Accounting Standards
One of the most important and appealing features of the blockchain technology is related to the compliance perspective, which is all about its practical immutability- a feature that ensures compliance with accounting standards. It implies that as soon as the data is recorded onto the chain, it cannot be deleted or changed. Hence, the blockchain is used as the proof of document for the digital asset transfer, for instance, for bitcoin, digital currencies, assets and foreign exchange. By the same way, it can also be used as a record of ownership of the physical property- a way presently passing through testing by many real estate companies, where the blockchain-backed system for recording and registering land titles is trying to digitize the real estate procedures. Blockchain’s utmost immutability makes it an application of the proof-of-process for the compliance. It is used to trace the steps prescribed by the regulation. Recording transactions and their outcomes in an immutable way over the blockchain can create an audit trial for the regulators for verifying compliance. As importantly, the regulators can have read-only, almost real-time access to the company’s blockchain to analyze financial information. This helps them play a more active role in analyzing the data in a real-time mode. In simple words, this makes them participants rather than the customers of this process. This kind of chance can radically decrease the effort and time, and thus cost, that financial firms incur on regulatory reporting and to improve the accuracy, confidence and quality of and in this process.
One of the most important regulatory compliance areas where the blockchain plays an important role is the AML (anti-money laundering) and KYC (Know Your Customer). Banks and financial institutions need to complete various steps and tasks as a part of the on-boarding cycle for the new customers. Apart from data collection, they have to follow important rules pertaining to validation, verification and confirmation prior to the onboarding of the new clients. In markets, this process often takes months. Many of the steps involved in this process can be removed if the data existed already in a safe, tamper-proof, database- which is an immutable blockchain. Any modification to the customer data is distributed to the users in the blockchain on an immediate basis. The blockchain can deliver the records of compliance activities and processes for every client. It plays the role of the proof-of-process, so all the steps become easily traceable while the regulators gain confidence for the veracity of the data. In addition, people would be the co-custodians of the data on the blockchain, which can offer additional protection to prevent identity theft (affecting or even disintermediating the businesses such as credit-monitoring agencies).
Vision and Opportunities
The blockchain technology can be applied to almost every area of the accounting and audit and brings a broader vision of its application as well as opportunities. The areas of accounting that are related to the transactional assurance and executing property transfer rights would be transformed by the blockchain and smart contract approaches. The reduced demand for the reconciliation and conflict management, combined with an increased certainty around the rights and obligations, would lead to greater concentration on how to account for and consider a transaction, and facilitate an expansion in what areas can be accounted for. A lot of present-day accounting department activities and procedures can successfully be optimized via blockchain as well as other modern technologies if applied in integration, including machine learning and data analytics. This would improve the value and efficiency of the accounting functions in a wider perspective.
Auditor of smart contacts and oracles
Blockchain-based smart contracts being used in accounting and auditing are rising as a strong, disruptive force, which may change the way financial audits are carried out and delivered. With their high potential to autonomously perform audit procedures on auditor’s behalf and disclose the outcomes of such audit procedures, the blockchain-based smart contracts bear a great potential to improve audit quality and fulfill the information demands of a number of vested parties involved, for more transparent, faster and timely audit reporting. Smart audit processes are basically the autonomous audit processes, including the autonomous internal control tests as well as analytical processes, deployed on the auditor’s blockchain. This deployment in the distributed blockchain ledger leads to real-time reporting for many stakeholders like major investors, suppliers, the SEC, audit inspectors, and the audit committee. As the blockchain offers a platform for the implementation of smart audit processes, these processes can be distributed to the participating nodes, thereby meeting the needs for timelier and more transparent audit reporting.
Service auditor of consortium blockchains
As the blockchain technology is becoming more mainstream, a lot of businesses will likely create blockchain platforms which can be used by the other organizations for their own purposes. However, prior to subscribing to such platforms, those organizations would require an independent assurance as to the robustness and stability of the blockchain’s construction. Therefore, the blockchain businesses would like to engage the accountants to offer assurance as to the efficiency of controls on the private blockchain. Consortium blockchains are usually seen in the banking sector. A pre-selected collection of nodes controls the consensus process, for instance, one might think of a consortium of 10 financial institutions, each operating a node and of which 5 have to sign each block to make the block as valid. The right for reading the blockchain can be public, or can also be limited to the consortium’s participants.
Administrator of blockchains
For the private blockchains, many organizations would hire an independent party –like a CPA — to execute the jobs of a central access-granting administrator. CPAs can validate the implementation and monitor the blockchain’s protocols. If any of the blockchain’s users were to do such functions, that individual can win an undue benefit over the blockchain’s other users. Having an autonomous auditor serve for this role creates more trust for all the blockchain’s users.
Arbitration of blockchain issues
While blockchain technology executes contracts, many of us still think of those contracts’ terms. This implies there is room for an error. In a world experiencing a rising blockchain, CPAs can be able to work as an arbitrator for the cases where the smart contract’s scope exceeds a legal document, contractual agreement or anything in between. With evolving role of the CPAs being viewed in the blockchain ecosystem, education and standards must also evolve to address the more complex blockchain issues in the short and the long run. These new blockchain opportunities in accounting and audit raise questions that these professionals must consider, like:
· What kinds of skill sets does their profession require to remain pertinent?
· While offering an assurance across the blockchain, who would be the client?
· How can a CPA assurance provider examine engagement hazard for an autonomous system?
· How could the independence rules be applied to the blockchain users?
Embracing Disruption — Concluding Points
With the updated and proper knowledge, all accounting firms can take benefit of blockchain technology for saving their money and time in the accounting and auditing process. After all, this instantly accessible, immutable, decentralized ledger bears a huge tendency to make it easier to obtain and authenticate information instantaneously. Conversely, the auditors who fail to embrace this technology might find themselves going in the stone age. Whether or not auditors and accountants succeed in grasping it, blockchain may endure to define the accounting and auditing industry future.
 KIVIAT, T. I. (2015): “Beyond Bitcoin: Issues in Regulating Blockchain Transactions”, DukeLaw Journal, vol. 65: 569–569