Blockchain in Accounting

Illumeo Customer Success's Profile

Blockchain, also known as distributed ledger technology (DLT), is a technology that enables the existence of cryptocurrency – the likes of Bitcoin. Blockchain is an accounting technology that is concerned with the transfer of ownership of assets and maintaining a ledger of accurate financial information.

In accounting, records are maintained and stored in a centralized location, a database of an accounting software application etc., and an accountant makes changes and retrieves the data as per the client’s needs. Only the accountant and auditor have direct access to the centralized ledger. Unlike conventional accounting, Blockchain technology uses an approach that is more modern. Records are entered, maintained, and stored in a distributed ledger that is accessible to all the relevant parties. 

With the potential to enhance the accounting profession, Blockchain has the ability to reduce the cost of maintaining and reconciling ledgers and providing absolute assurance over the ownership and history of assets. Accountants could have more clarification over the available resources and obligations of their organization and concentrate more on planning and valuation rather than recordkeeping. Since accountants have their expertise in record keeping, application of complicated rules, business logic, and setting standards, they can work as advisers to companies and develop services and solutions led by blockchain, and provide advice on the effectiveness of the new system.

Blockchain for auditors

With the help of Blockchain, performing an external audit would be less necessary if the transaction that confirms the financial status of a company is visible on blockchains. Blockchain solutions combined with proper data analytics could help increase the efficiency of transactional queries, involved in audits, and the skills of the auditors could be utilized in a better way. It becomes convenient to calculate the overall cash transition and manage multiple data easily. Blockchain accounting also ensures better outflow caused by sales, payment to the creditor, and creating assets.

As organizations are increasingly exploring the use of private or public blockchains, auditors need to be acquainted with the potential impact this may have on their audits as a new source of information for the financial statements. The confirmation of the accuracy of blockchain transactions with external sources may become less necessary, but a lot of attention needs to be paid to how those transactions are recorded and recognized in the financial statement and how valuations are decided.

Smart Contracts

A smart contract is an electronic agreement that uses computer programming and blockchain technology to execute without third parties, such as the banks that verify payments/transactions. Smart contracts is another useful development for the accounting industry. The computer programs can build rules, contracts, and can then enforce the agreement once the rules are met. Since a smart contract removes reliance on a third party when establishing business relations, the parties making an agreement can transact directly with each other. A smart contract is stored inside a blockchain where all data is stored in a distributed manner, no one is in control of money. A smart contract can never be changed and no one can tamper with or break a contract. The outcome of a smart contract is validated by everyone in the network.

Facilitate Near Instant Transactions

Updating accounts and managing financial transactions is a difficult task. Businesses perform a month-end close to keep accounting data organized and ensure all transactions for the monthly period were accounted for. For larger organizations with complex accounts, the task becomes difficult and time-consuming.

Blockchain technology uses distributed ledgers and real-time processing of transactions, which makes it easy and efficient for accountants to have seamless settlement through the network. The transactions taking two-three days could be completed with near-instant settlements that are favorable to businesses as they minimize time delays and errors.

Cost savings

With no human interference and automated accounting functions, blockchain technology reduces errors in accounting processes and improves efficiency, resulting in reduced cost. Compared to other accounting software, blockchain is a faster and robust database, helping organizations save a lot of Haan and increased efficiency.

Reduces accounting fraud

A blockchain is a distributed digital ledger containing transaction data that is shared across a network and continually reconciled. Using a shared digital ledger can help reduce fraud because if its increased visibility and transparency of transactions made between members of a network. 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.

Transactions recorded on blockchain are immutable because they cannot be deleted or changed. By using blockchain one can see the origin and history of a transaction, where it came from, where it’s been, and who’s had ownership of it. All the participants of a network can see the history of the transaction, so fraudulent transactions are easier to identify.

Permissioned networks can be great for fraud prevention because they restrict who is allowed to participate and in what capacity. Even the user that has permission to view the record in blockchain cannot temper with the record without consensus, as the record is encrypted and requires the permission of all the users in the network. 

The accounting profession will see increased opportunities for understanding and explaining blockchain technology, implementing blockchain to enhance accountability and auditability of financial reporting, and discussing lead risk analysis associated with a shared ledger system. Blockchain may seem like an amorphous and difficult-to-understand concept, but it is also an opportunity for CPAs and accounting professionals to embrace this disruptive technology. Different professional associations offer a variety of blockchain CPA training, and online CPE for CPAs to equip them with the foundational constructs behind blockchain and crypto assets, structure, and functionality.