While the world debates whether bitcoin is the future of money or merely a bubble, there is another revolution underway using the technology associated with cryptocurrencies.
Blockchain technology promises to bring massive change to industries such as law, healthcare and insurance, with accounting and auditing likely to be among those most affected.
It could one day prove to be as significant to the accounting industry as the software we today depend on to record and reconcile financial transactions. Blockchain’s promise for the accounting industry is to vastly automate and streamline manual processes that still consume a large chunk of auditors’ and accountants’ time – while improving trust in, and veracity of, financial records.
Essentially, blockchain works as a global and public ledger without a central database that can be tampered with. It is a permanent, cryptographically sealed record that cannot be corrupted, creating a trail of financial DNA. Information relating to trades is stored across a number of computers, which makes hacking theoretically impossible.
The blockchain’s characteristics make it perfect for financial and accounting applications:
– Information is updated in real-time
– Each ‘block’ or transaction is time-stamped
– Data cannot be deleted; it also cannot be retroactively changed and all corrections are transparent
– It allows participants to verify and audit transactions without the need for a third party
Next level financials
What this means is that we can begin to really start digitising and automating financial transactions that today require manual control mechanisms, checks and balances. Audits, for example, remain costly and time-consuming since a team of humans will generally sit down with the financial records and go through them line-by-line to make sure everything is in order.
With the blockchain, companies will be able to write transactions into a global distributed ledger, with which it is nearly impossible to tamper, even if you’re the owner of the accounting system. The result is that it is difficult for an employee, for example, to change a transaction to conceal fraudulent activity. The result is that audits could be quicker, easier, more reliable and less prone to error.
Transparency and standardisation will enable auditors to verify many of the records they need to look at automatically. This could, within the next 10 to 15 years, reduce the manual tasks involved in auditing, though it is likely that human auditors will still be needed to sign off audits and provide advice around complex transactions.
Blockchain could also alter how companies record transactions with each other. Instead of a supplier and its customer keeping and reconciling records of the same transaction in their separate ledgers, they could record them in a shared blockchain ledger. This could vastly streamline invoicing, payments, and other business-to-business transactions.
When we bring blockchain and smart contacts together, we can automate many processes where we have used an independent third-party (like lawyer or clearing house) to verify transactions. Other future applications for blockchain in accounting might include authenticating the ownership and history of an asset the company is buying or selling – for example, a truck.
For accountants and auditors, the trend towards more automation is clear. However, there is still strong demand for financial professionals and practices that can give clients strategic advice around areas such as tax and growth.
The challenge for the next few years will be to move away from generating revenue from routine compliance tasks – such as audits and tax returns – towards becoming true partners and counsellors to their businesses and clients.