What is Blockchain?
Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.
A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent. Of course, blockchain is more complicated than a Google Doc, but the analogy is apt because it illustrates three critical ideas of the technology:
Blockchain Explained: A Quick Overview
• Digital assets are distributed instead of copied or transferred.
• The asset is decentralized, allowing full real-time access.
• A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scalable way for myriad uses.
Blockchain and the Future of Accountancy
Blockchain could help accountants gain clarity over the available resources and obligations of their organizations, and also free up resources to concentrate on planning and valuation, rather than recordkeeping.
Blockchain is a replacement for bookkeeping and reconciliation work. This could threaten the work of accountants in those areas, while adding strength to those focused on providing value elsewhere.
The Accounting Perspective: Implications for Auditors
• Blockchain has applications in external audit. Performing confirmations of a company’s financial status would be less necessary if some or all of the transactions that underlie that status are visible on blockchains. This proposal would mean a profound change in the way that audits work.
• A blockchain solution, when combined with appropriate data analytics, could help with the transactional level assertions involved in an audit, and the auditor’s skills would be better spent considering higher-level questions. For example, auditing is not just checking the detail of whom a transaction was between and the monetary amount, but also how it is recorded and classified. If a transaction credits cash, is this outflow due to cost of sales or expenses, or is it paying a creditor, or creating an asset?
• These judgmental elements often require context that is not available to the general public, but instead require knowledge of the business, and with blockchain in place, the auditor will have more time to focus on these questions.
Some Important Points
• Transfer of ownership of Assets: Perhaps the clearest case for where blockchain could be advantageous is provenance and transfer of ownership of assets.
For Example, Land registry is a particularly good case.
• Smart Contracts: There are already many examples of automated contracts in place in the present-day financial system – from the mechanical simplicity of a vending machine, to a bank-operated standing order or direct debit. The idea of a smart contract is to allow for all kinds of transactions to be made automatically and simply, in the same way as a vending machine purchase – and without the need to rely on (or pay) a central party to adjudicate the operation of the contract terms.
End of Summary:
Ultimately, blockchain is likely to be a foundational technology. It will take years – perhaps even decades – for it to be fully developed, standardized and embedded in the architecture of the internet and the financial system. It will also need to work quicker, more efficiently and have lower operating costs. But the rewards are trustworthy records and reduced reconciliations. So we can expect that if not blockchain, then some implementation of distributed ledger systems will emerge as a key business technology. Accounting will be more efficient due to the increased trust in the information available and the reduced time spent in reconciling and disputing records with other parties. This will lead to greater focus on the ultimate aims of accountancy – interpreting the economic meaning of transactions, and providing information to support better decisions.
Definitions / Glossary:
• Blockchain: A block chain is a type of database that takes a number of records and puts them in a block (rather like collating them on to a single sheet of paper). Each block is then ‘chained’ to the next block, using a cryptographic signature. This allows block chains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions.
• Smart Contract: A smart contract is code that is set to add certain transactions automatically upon certain trigger events taking place; it works something like a self-operating escrow account. The code that makes up the smart contract is examinable, so that the parties can confirm how it will operate ahead of time.