This article was first published in the November/December 2019 International edition of
Accounting and Business magazine.

With blockchain enabling the parties to a transaction to conduct their business without the traditional trusted intermediary (such as a bank or payment processing network), it is vital that accountants embrace this new distributed ledger technology.

Accounting has always relied on a centralised system, with internal controls to ensure checks and balances. But centralised systems have vulnerabilities. Blockchain can transcend these.

Its huge selling point is the transparency it offers. Blockchain is a shared database in which multiple identical copies of the ledger are stored in millions of computers dispersed across any number of geographical regions. A record is kept of each transaction, and the transaction cannot be falsified or modified. In addition, the transaction can be easily tracked, and the system keeps a record that is verifiable. It is also immutable: once a transaction has been initiated, it cannot be tampered with.

Accounting pros and cons

From an accounting perspective, this high degree of transparency generates a complete, understandable and unbiased picture of a company’s financial position. This helps reduce uncertainty in the capital markets.

Blockchain also brings positive changes to the way financial records are created, kept and updated. For example, because records in a blockchain are held by users who are distributed across a network, no single individual or business can claim ownership of them. Verification of the records is carried out by all participants, as each maintains a permanent record of the validated transaction. All parties have access to the same copy of the ledger, so accounts reconciliation is eliminated, reducing the costs of maintaining and reconciling ledgers. Assets that have in the past typically been held in centralised standalone systems are held permanently in the distributed ledger, removing the need to spend on such systems and providing absolute certainty about the existence of the assets.

However, there are some limitations. Accountants need to have specific valuation skills to assess the economic value of each transaction in the blockchain, and the condition, location and value of the assets. Those with specialised skills have to continually determine the method of accounting for different types of financial asset, such as derivatives, or cash-based and equity-based instruments. And because blockchain does not allow the modification of data, a significant amount of it has to be held in the system, so transactional-level staff with blockchain-specialised skills are needed to analyse the data periodically.

Auditing pros and cons

From an auditing perspective, the transparency offered by blockchain ensures a high degree of accuracy in the data, and the accountability of each party involved in the audit process.

Blockchain also gives access to real-time data, reducing costs and making audit more effective and efficient. It reduces the dependency on manual data extraction and analysis, which are typically labour-intensive and time-consuming. The application of blockchain requires auditors to design more automated processes that can operate across the digital network.

Some blockchain systems also offer such features as smart contracts, which provide the auditor with access to contract-related documentation (agreements, purchase orders, invoices, and so on), enhancing the audit of long-term contracts.

Blockchain is not, however, without risk to the audit. For example, the auditor has to assess the risk of information in the blockchain being inaccurate, either through error or fraud. Specialised auditing skills are needed to understand this and the protocols in the blockchain environment.

The auditor also still has to design procedures to provide appropriate audit evidence of all the financial statement assertions. For example, blockchain may provide evidence about accuracy and completeness of an asset transaction, but the auditor may not be able to determine whether ownership is fraudulent. Nor can blockchain ensure compliance with accounting principles such as IFRS Standards and the associated accounting judgments.

The risks of the use of blockchain in accounting and auditing need to be properly understood. But as the profession adopts the technology, there is no doubt that blockchain offers an opportunity to streamline the reporting and audit processes.

Julius Eka Abia FCCA is audit manager – projects, at Wabtec Corporation, US.