Blockchain technology has the potential to revolutionize industries. Blockchain has ignited curiosity among industries and sectors, especially in finance. Blockchain has often been called “the future of financial services infrastructure”. While the financial sector has dominated the headlines over the past couple of years, other industries are beginning to embrace this technology in a bid to democratize markets.
For accountants, using blockchain provides clarity over ownership of assets and existence of obligations, and could dramatically improve efficiency.
Current State of Accounting
Everything is about automation in business. If there’s a task that’s still being performed manually, it’s costing companies time. To achieve its daily targets the industry still relies on mutual control mechanisms, checks and balances. This affects every day’s operations. Among other things there are systematic duplication of efforts, extensive documentations and periodical controls. Most of them are manual, labour intensive tasks and they are far from being automated.
Modern financial accounting is based on a double entry system. Double entry bookkeeping solved the problem of managers knowing whether they could trust their own books. However, to gain the trust of outsiders, independent public auditors have to verify the company’s financial information. Each audit is a costly exercise, binding the company’s accountants for long time periods.
Blockchain: The Savior Arrives
Blockchain has the potential to further enhance the accounting industry by reducing the costs of maintaining and reconciling ledgers, and providing absolute certainty over the ownership and history of assets.
While using blockchain, instead of keeping separate records based on transaction receipts, companies can write their transactions directly into a joint register, creating an interlocking system of enduring accounting records. As all entries are distributed and cryptographically sealed, chances of destroying or manipulating them to conceal activity is practically impossible. This is exactly similar as the transaction being verified by a notary — only in an electronic way. This will allow auditors to verify a large number of data in a short period of time. The cost and time necessary to conduct an audit would decline considerably.
Advantages of Blockchain technology in Accounting
The blockchain technology promises a lot of advantages for the accounting firms whether big or small. Here are few of the benefits:
- Reducing Errors : One of the biggest advantage of blockchain in accounting is its ability to make almost negligible errors. Once data is in the chain, smart contracts will make many accounting functions automatic, reducing human error.
- Increasing Efficiency : Blockchain is fast and powerful database. Using blockchain, getting data into and out of the system can be done more efficiently than interacting with legacy accounting software applications.
- Reduces Cost : Blockchain will lead to increased efficiency and reduction in errors which will eventually lead towards cost reduction. Following initial adoption cost, accounting firms can expect to see rapid cost savings over conventional accounting systems.
- Reduces Fraud : The immutable nature of blockchain makes it extremely difficult to perpetrate and difficult to manipulate. In order to modify a record, the same change would have to be made on all copies of the distributed ledger at the same time, which is highly infeasible.
- Reduces Time : One key feature of blockchain that accountants should be excited about is its ability to reduce audit time. With the use of smart contracts, many auditing functions can be automated which will reduce the time, an auditor needs to look after the records. The inherent traceability built into blockchain makes auditing fast and easy.
Blockchain as a source of trust can also be extremely helpful in today’s accounting industry. It can be gradually integrated with typical accounting procedures: starting from securing the integrity of records, to completely traceable audit trails. This will lead to a future where the fully automated audits will become a reality.
How Big Four Firms are Using Blockchain
Ernst & Young was the first to begin accepting Bitcoin as a payment method. In April 2018, E&Y launched “Blockchain Analyzer” that will facilitate EY audit teams review and analysis of transactions on the blockchain. The pilot will lay the foundation for automated audit tests of blockchain assets, liabilities, equity and smart contracts.
KPMG laucnched “Digital Ledger Services” program in 2016 to help financial services companies investigate blockchain applications. The firm has also partnered with Microsoft to create the “Blockchain Nodes” initiative with the stated goal of identifying new applications and use cases for blockchain technology. KPMG is a member of the Wall Street Blockchain Alliance as well.
PwC started accepting Bitcoin at its Hong Kong office in December 2017. I n April 2018, the firm announced its first ever wide-release blockchain auditing service with crypto businesses already signed up.The service audits company blockchain services, ensuring they’re using the technology correctly and effectively.
Deloitte has been playing the blockchain game all the way back from 2014 when they launched Rubix, billed as a “one-stop blockchain software platform.” Since then, they’ve continued to diversify their offerings, exploring initial coin offerings (ICOs). Their partnership with Waves Platform is poised to make ICOs and crypto-trading more accessible than ever before.
Two Factors Stopping the Mass Adoption of Blockchain in Accounting
It is true that blockchain technology offers lots of promises but integrating your business with blockchain is not an easy job to do.
- If we look at the non-technical side, the thing that stops blockchain to reach the accounting industry is the lazy nature of the industry that will wait for too long to embrace DLT technology. While the accounting industry can’t be totally blamed for this as it is also true that enterprise-ready blockchain solutions for the accounting industry are not yet readily available. But this excuse will soon evaporate as innovators and investors move into to satisfy this emerging market.
- Looking at the technical side, you will find that right now most of the accounting softwares are not compatible with blockchain technology. Even if you want to put your accounting firm on the blockchain your current software might not be friendly. Adoption will require purchase of cloud-based accounting services as they become available, and possibly hiring a blockchain developer to create custom user interfaces for your firm. But as more and more accounting firms are coming forward to adopt the blockchain technology, many cost-effective solutions will start to emerge in the near future.
How Should Accounting Industry Prepare Itself
Accountants are experts in record keeping, application of complex rules, business logic and standards setting.Accountants can transform how blockchain will be used in the future and how the development of blockchain-led solutions and services take place.
There is almost no need to confirm the accuracy of blockchain transactions with external sources, but there is still lot of work needs to be done on the part that how these transactions are recorded and recognised in the financial statements, and how judgemental elements such as valuations are decided. In long term, more and more records could move onto blockchains, and auditors and regulators with access would be able to check transactions in real time.
As more companies are joining the crypto economy, the accounting firms that serve them will soon be forced to include cryptocurrency transactions in their accounting processes. Furthermore, accountants who accept crypto for payment will also open themselves up to a the sector of Millennials who seek crypto-friendly companies to do business with. Some companies accept only Bitcoin as payment, and this is an opportunity for blockchain-savvy accountants to capture their business.
As blockchain development infiltrates the accounting industry, regulators, technology providers, and accounting industry leaders must work together and seek ways to make the transition beneficial for all parties. Accountants are not engineers and might not have the detailed knowledge of how blockchain works. But they will need to know how to advise on blockchain adoption and consider the impact of blockchain on their businesses and clients.
Conclusion
Blockchain is a new frontier for the accounting and there is still a lot that needs to be figured out and lot that still needs to be developed. Blockchain is here and it’s only going to get bigger. The one who start early will always have the upper hand. Despite the hurdles that lie ahead, it is widely believed that DLT could revolutionize the core infrastructure systems of accounting industry around the globe, thereby bringing in greater transparency and efficiency. It will be interesting to see how the industry develops itself near future.
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