A few years ago we were talking about blockchain’s potential to radically disrupt the accountancy profession. And not if, but when. Any day now, many said. The thing is, the conversation hasn’t changed much in the intervening years – the potential for blockchain to disrupt accountancy remains – in other words, it hasn’t quite happened yet.
Why is this? The truth is, it is happening, but slower than many expected. This can largely be attributed to the fact that outside its known use in cryptocurrencies (eg Bitcoin), it is barely in its infancy. It will radically affect many industries and services – private and public – so it could be said that, along the lifespan of blockchain, we’re in an embryonic phase, we’re still getting to grips with its potential scope, we’re doing some tests and some are starting to implement it.
For example, UK government agencies are running pilot programmes to test blockchain in the food sector and social services. Uganda is working on a project to use blockchain to prevent counterfeit drugs entering the market. In the wake of the Operation Car Wash corruption scandal in Brazil, a state government will use blockchain to secure public contract bidding processes. In China, huge tech firms Alibaba and Tencent are working with the government on blockchain projects in healthcare and logistics.
Blockchain is also known as distributed ledger technology (DLT), a digital system that records asset transactions and their details in multiple locations simultaneously. Blockchains are building blocks of interactions and transfers. These blocks can be assets of any digital kind, for example, money, securities, land titles, information on identity, health and other personal data.
Traditional accounting maintains and stores records in a centralised location, typically in the database of an accounting software application. This model is based on a double-entry accounting system, which has been around for centuries. An accountant will enter all records into the system and perform all necessary changes. When information is needed by a client or regulator, the accountant will retrieve the data – only the accountant and auditor have direct access to the centralised ledger.
However, blockchain is accessible to all relevant parties by employing a triple-entry bookkeeping model. This means all stakeholders – accountant, auditor, client, regulator – will have an identical copy of the ledger at all times, shared across a peer-to-peer network of nodes (computers) spread across multiple sites. To alter information in the ledger requires the permission of everyone involved, which means information on the blockchain can be accurately relied upon. And the security is bullet proof as blockchain technology utilises cryptography to secure information, and private and public keys to authenticate users.
1) Death of the audit?
Because all entries in a blockchain are distributed and cryptographically sealed, it is virtually impossible to destroy or manipulate information, preventing people from being able to ‘cook the books’ or conduct other forms of financial fraud. Blockchain records are often referred to as immutable – unable to be changed.
In such a system, there seems little need for an auditor, after all, if transactions are recorded in an immutable chain of digital blocks, with no apparent way of being altered, it creates a perfect audit trail, so dispensing with audits and auditors. However, auditors need not worry too much, they will still have a role to play – as long as humans are involved and bring their inherent risk for making mistakes and conducting fraud, a third party is needed to provide assurance over the validity of transactions.
However, the auditor of the future will be a different beast. They will be more closely concerned with validating systems of governance and controls, validating the security and integrity of data within systems, and being capable of determining whether platforms or applications are operating as intended.
2) Smart contracts
A smart contract is a computer protocol that runs on top of a blockchain. It sets rules for contracts and enforces agreements once the rules are met. A smart contract holds funds and automatically releases them once contract conditions are fully met. They will completely change how accounting works by replacing normal financial transactions and doing away with third party intermediaries, such as lawyers.
3) The age of triple-entry accounting! The end of the bookkeeper?
As mentioned, triple-entry accounting will do away with double entry. Double-entry bookkeeping means every entry to an account requires a corresponding and opposite entry to a different account. Triple entry adds a third layer or entry – all transactions and involved parties are written on the blockchain and the information is shared with everyone involved. The bookkeeping role could totally disappear with blockchain in place.
‘Imagine a blockchain economy, where every transaction is written on a blockchain – government’s will never lose money through unpaid taxes there is less audit work, but it won’t make the auditor reductant, rather the new auditor will investigate the blockchain and not the individual or tax evader. If you are a tax accountant, your role will disappear and a new role in blockchain-tax audit will emerge, which will audit the system from an IT approach,’ said Ayodeji Chris Oyeniyi FCCA, an independent director at bitcoin trading platform Belfrics and co-founder of ‘Uber for trucks’ platform KariGO in Lagos, Nigeria.
‘Blockchain will definitely disrupt, it is a threat to some accounting roles and not the accounting profession, but an opportunity that makes the accountants job more fun,’ he continued. ‘The future accountant must have a flare for IT and not just numbers. The accountant must work closely with the IT department, so that they understand one another’s language.’