Blockchain acts as a highly secured digital ledger, which is shared among participants and stores information. This digital ledger records transactions across many computers. It was introduced by Satoshi Nakamoto in the year 2008 as the basis for the Bitcoin cryptocurrency. It is a distributed database, which doesn’t have a centralized point and acts independently whenever the predetermined programs and conditions are met. Its capability to reduce the interactions of third-party intermediaries will save a lot of money for the companies.
Blockchain technologies have been integrated with accounting in recent years but still, they do not have the capability to replace the accounting function. This is mainly due to different legal, regulatory and technical barriers. Even though Blockchain is still in its infancy, it has been able to make a significant impact in the accounting world. Currently, most companies are doing experiments and researching to solve the issues related to implementation.
Use of block chain in Accounting
Triple Accounting
As we, all know Double entry system, which was introduced by Luca Pacioli, can be recognized as the most widely used accounting practice in the entire world. This method identifies a dual aspect of every transaction and makes debit and credit entries accordingly. However, this commonly used system has a lot of errors; especially related to disclosing errors and frauds, because transactions are recorded by two different parties separately. At this point, the system indicates a need for an independent third-party accounting provider. Blockchain will address the trust issues and human manipulations by creating a connection between two independent double entries (not another entry). This enables participants to access all the details about the transactions.
Blockchain lays the foundation for triple accounting, as it doesn’t require a central point for data recording & storing. Further, this is backed by the fact that once a transaction is recorded in a Blockchain; it is hard to make changes to it.
Trade Clearing and Settlement – Smart Contracts
According to Investopedia, Nick Szabo introduced Smart Contracts in the year 1994. Smart Contracts can be simply defined as a type of contract, which is created digitally and will automatically execute whenever the pre-set conditions are satisfied. These programs in Blockchain perform the relevant tasks after verifying pre-set conditions. Blockchain will be updated after completing the transaction and making alterations is difficult for already completed transactions. Saving time and money, high efficiency and accuracy levels and increase transparency and security are some of the benefits, which are recognized by IBM. These contracts will reduce the risk associated with partial completion by enabling parties to carry out their tasks at the same time and facilitating mutual exchange.
Distributed Ledgers
A distributed ledger can be simply defined as a database shared among users of the Blockchain. As per the Investopedia website, it enables “public witness” and participants will have the accessibility to every transaction. Each member will receive an exact copy of the transactions and its real-time synchronization will update the ledger instantaneously according to the modifications made.
Further, there won’t be any human manipulations as the copies are distributed among different parties. Therefore, these distributed ledgers can minimize the attacks of cybercriminals and fraudulent activities. Most importantly, its automation capabilities will increase the efficiency related to transactions.
Verifiable Financial Records
The financial records which, are connected to Blockchain technology, will enable an automated searchable facility. Its irreversible feature will create difficulty in making changes and alterations. As control and decision-making are transferred to different parties, transactions will be highly protected. Therefore, one party cannot make a single change in a transaction without the consent of others. Hashes play a major role in validating the accuracy of files and documents as it changes with the modifications.
Auditing
Deloitte’s Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession report shows the need of conducting independent audits even though the companies are powered by Blockchain technology. Blockchain technology will help auditors in the process of collecting information but still, auditors need to develop and perform audit procedures to provide a reasonable assurance. Further, unauthorized, illegal transactions, classifications errors and off-chain transactions increase the need for auditors. Furthermore, the audit assertion “Occurrence” can be met to some extent with the help of Blockchain but still, there are some other important financial statement assertions to be considered before concluding the audit.
Inter – Entity Reconciliation
Reconciliation is a time-consuming task, which requires a lot of effort; especially in viewing different sources and databases to match and identify transactions. Blockchain’s transparency, distributed and searchable features will simplify the reconciliation processes. Further, a report, which, was published by TATA Financial Services has recognized that Blockchain technology can be used for Inter-entity reconciliations of banks. Further, it can increase accuracy and save a lot of time and money. However, the report indicates that further research and experiment trials are required before using this technology for reconciliation.
Benefits of Blockchain in Accounting
Transparency
This independent, distributed Blockchain technology will increase the transparency of transactions and strengthen the trust between parties by smoothening the operations. Further, it will act as proof of work, which can be easily accessed by other members.
Accuracy
Centralized and double-entry accounting procedures are prone to errors; especially when recording transactions into the systems. Blockchain will increase the accuracy level of information as it is created and stored based on certain conditions and are which are automated.
Frauds
The most important benefit of using Blockchain is that once a transaction is recorded it will be hard to make changes. In addition, members can easily view the updated transactions whenever another participant alters a record.
Time and money saving
It simplifies auditing and reconciliation by helping to gather information and acting as a common database. Further, it increases the number of transactions that can be occurred within companies. This will eventually increase the efficiency of business operations.
Winning New Customers
Companies can target and win different customers from all over the world without spending too much time on risk evaluations as Blockchain address the risk of partial completion.
Future of Accounting with Blockchain
There is a widely spread idea that the Blockchain has the capability to take over some positions in the accounting profession; especially those connected with bookkeeping and reconciliation. “ACCA’s Blockchain: is it still the great accountancy disruptor?” article, indicates a threat to the audit trials, as the information stored in the Blockchain is unable to change and there is a very low chance for human manipulations. Further, it discusses a threat for lawyers, which will be created with the use of Smart contracts as these contacts enable to make transactions without intermediaries. Finally, it implies a threat for bookkeepers, which will be created with the use of triple entry accounting. However, this disruption has not happened yet because Blockchain is still in the early stage of development.