The accounting industry is amidst a period of major technological change. Cloud-based technologies, process automation, artificial intelligence – but of all the technologies being talked about currently, the most promising – and for some, the most worrying – is blockchain.
Combining blockchain and accounting can deliver some incredible business benefits – but first and foremost, what is blockchain – and how does it work?
What is Blockchain?
Blockchain is a continuously growing, decentralised public ledger of all transactions. Completed transactions or records are called ‘blocks’ and are distributed to a peer-to-peer (P2P) network of computers. Blocks are connected to each other in a linear, chronological order, and each block contains a cryptographic hash of the previous block, ensuring data remains secure, along with a timestamp and transaction data. The data can be distributed securely but not copied and once blocks are recorded, they cannot be altered without altering subsequently blocks, which requires collusion of the network majority. When a record is altered, it is assigned a new hash.
Blockchain and accounting: what does it mean for the accounting industry?
In many respects, blockchain and accounting go hand in hand. Blockchain technology presents the next logical step for more sophisticated, accounting with many potential impacts including:
- The end of paper receipts?
As blockchain provides an instantly verifiable and robust set of records that cannot be tampered with or altered without the collusion the entire network – in this instance, all of the accountants working on the transactions – blockchain could well be the end of paper receipts.
Transactional data – at any time – would be instantly recorded and added to the blockchain with its own unique hash code. Should auditors or accountants need to retrieve that information, all they need is the relevant hash code and the receipt or proof of transaction is there. Having blockchain act as a record for transactions will remove the need for auditors and accountants to contact different departments across businesses to get receipts to help validate transactions.
- Streamlined accounting
Through blockchain, accountants and auditors can standardise records and consolidate them in a ledger that’s accessible to all approved users, wherever, whenever. With all transactional data in one place and updated in real time whenever a change is made, accountants and auditors have a clear view of all activity and can collaborate across departments to reconcile accounts. With such an approach, the time and cost associated with manually reviewing transactions can be reduced considerably, freeing up time for both accountants and auditors to focus on other value-adding services.
- Instantly verifiable transactions and asset history
For auditors, verifying transactions and asset history is fundamental but often this process can be time-consuming and complicated, especially when businesses have complex and diverse accounts. With data security becoming ever more important – especially in the wake of the General Data Protection Regulation (GDPR) – blockchain provides a way of proving that files have remained unaltered.
By using a unique hash as a digital fingerprint and timestamp, auditors can easily cross-reference and quickly verify transactions. If a record is altered in any way afterwards, a new hash is generated and the record is once again timestamped. If this information differs from what the auditor has on hand, they can be certain that the record has been modified and will have a clear audit trail.
- Improved compliance and control
When it comes to compliance, many firms take several months to update or modify their internal accounting and finance processes to accommodate new regulations, standards and approaches.
With blockchain, however, any changes to the ledger are reflected across all copies within minutes – and as it’s a decentralised database, no drastic changes need to be made for the modification of data and approved users all have access. So, if an accountant needs to update a record to take into account reporting hierarchies or new standards, this can be done quickly and easily.
What does the future hold for accountants and auditors?
One of the major changes we can expect to see is banks starting to offer accounting type services as part of the business package. In 2017, NatWest applied Open Banking protocols to share data with FreeAgent, a cloud-based accounting product, giving customers more visibility over the process and allowing them to share their information directly between the bank and the accounting software. By adding blockchain and the right software to the mix, the record keeping process could be automated and, using open banking protocols, information could be shared directly.
The question then becomes: do you really need an accountant?
The future of accounting and auditing very much lies in integrated solutions that can all communicate with each other in real-time whilst delivering unparalleled security; but these solutions are blurring the line between what auditors and accountants do and what technology can automate.
While some would perceive the technology as a threat, it is in fact, an opportunity for auditors to focus on controls and investigating anomalies within the transactional environment. Blockchain is an opportunity to enhance processes, yes, but accountants and auditors can still apply their expertise and insight to deliver value to their clients.