As technology continues to rapidly develop, businesses across all industries are embracing the innovation produced. However, some industries have proven more resilient to the advances of technology than others, specifically accounting.
Regardless, with the development of blockchain, there is an opportunity that the accounting industry, that is often recognized as being resilient to change, can now embrace innovation. In this article, we look to share our opinions and insights on how blockchain will impact the accounting industry going forward.
What You Will Learn
1. Blockchain’s Accounting Potential
Blockchain Accounting has various traits that have prompted a number of discussions on how this technology can impact industries going forward. While there are many industries that will most likely be impacted by blockchain, few stand out as much as the accounting industry.
Near Real-Time Settlement
Blockchain enables the near real-time settlement of transactions, reducing the risk of non-payments by one party involved in a transaction. For businesses, the benefit is clear. Being able to receive and settle payments near instantaneously will improve the efficiency of recording transactions and can result in stronger cash flow positions for those who utilize blockchain.
Distributed Ledger
Blockchain is built around the concept of a peer-to-peer distributed network whereby all participants will have a copy of all information recorded on the blockchain. Whenever new information is added by any participant, everyone else on the network will be updated on the developments. Due to the transparency and wide distribution of all information, blockchain records offer greater legitimacy to a company’s financial statements, offering a secure record of proof that a transaction has occurred.
Irreversibility
Blockchains are designed to be immutable. Once a piece of information is recorded onto a blockchain, it cannot be altered without also altering every version of the distributed ledger. While it is theoretically possible to alter the information recorded on a blockchain, the amount of computing power required to do so makes the task realistically impossible given our current level of technology.
Because trust is a crucial factor in providing legitimacy to a company’s reported financials, the irreversible nature of blockchain can provide others with reasonable assurance that financial statements will be free from material misstatement due to fraud or error.
2. Fraud Reduction
Information recorded on a blockchain cannot realistically be altered, the technology can be used as a source of verification for transactions. As a practical example, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily inspect the information that is made public on blockchain ledgers.
3. Improvements in Auditing and Regulatory Compliance
Keeping up with the constantly changing regulatory environment can be challenging for not only businesses, but also the regulators themselves. Currently, there is a heavy reliance for businesses and regulatory authorities to rely on manual processes. For instance, account reconciliations, trial balances, supporting documentation and more are provided to auditors in a variety of formats for them to vet and review. Auditors must then vet these documents against information provided by third-parties to validate the authenticity of the information provided.
Audits are thus costly and time-consuming. In addition, keeping up with the constantly changing regulatory environment can be challenging for not only businesses, but also the regulators themselves.
Blockchains use of a distributed ledger has the potential to eliminate the need for manual processes. Because blockchain information is, by design, shared amongst all participants, regulators will no longer have to collect, store, reconcile and aggregate all information themselves. For example, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify transactions on publicly available blockchains. The automation of this verification process drives cost efficiencies of audits.
In addition, the effective application of blockchain technology can drastically reduce the time, cost and effort that companies often spend on their regulatory reporting. Lastly, blockchain also improves the quality, accuracy, and confidence of this entire process!
Going forward, instead of maintaining separate financial records, companies and regulators can utilize a joint distributed ledger. This not only standardizes the format of information that auditors will have to verify, but will also reduce the cost and time necessary to conduct audits.
4. Stronger Regulatory Compliance
Keeping up with the constantly changing regulatory environment can be challenging for not only businesses, but also the regulators themselves. Currently, there is a heavy reliance for businesses and regulatory authorities to rely on manual processes.
Blockchains use of a distributed ledger has the potential to eliminate the need for manual processes. Because blockchain information is, by design, shared amongst all participants, regulators will no longer have to collect, store, reconcile and aggregate all information themselves.
In addition, the effective application of blockchain technology can drastically reduce the time, cost and effort that companies often spend on their regulatory reporting. Lastly, blockchain also improves the quality, accuracy, and confidence of this entire process!
5. Reconciliation Benefits
Because blockchain relies on distributed ledger technology, the use of these systems eliminates the need for businesses to manage their accounting information on multiple databases. For accountants, this could potentially eliminate the need to reconcile different ledgers for consolidation purposes.
However, we believe that while the task of reconciliation can be largely automated, the process should not entirely be. As some accounting transactions can be incredibly complex, especially when reconciling between different accounting standards, auditors and accountants will still be required to utilize their professional knowledge for complex accounting transactions.
6. Error Evasion
For businesses, many transactions can only be made and recorded once certain conditions are met. For example, an employee can only receive their salary at a certain time each month. The specific requirements of certain transactions can create difficulty when doing manual bookkeeping as it complicates the tasks of accountants.
In accounting, many errors arise during data entry when transactions are recorded by bookkeeping staff. The most common reasons for errors occurring is:
- Omission of information
- An entry is calculated incorrectly
- An entry is not in accordance with local accounting standards
Blockchain will help minimize any errors that accounting firms and businesses come across through the use of smart contracts. Smart contracts are transaction protocols that are intended to automatically execute once certain terms or conditions are met.
For complicated transactions, smart contracts can help recognize and handle any difficult transaction in real-time, in accordance with local accounting and tax regulations. This eliminates the need for accountants to personally handle such tasks themselves.
7. Cost Benefits
While the core proponents of blockchain will argue about the technology’s disruptive nature, we find that its initial impact will be based around its ability to reduce cash outlays for businesses.
As previously mentioned, manual tasks are very time-consuming and costly. The ability to relieve accountants from many of these processes will allow accountants the chance to focus more efforts on revenue driving activities while also limiting the costs associated with performing manual tasks.
8. Impact on Accountancy Jobs
While blockchain will certainly disrupt the accounting industry, the need for accountants and their job responsibilities will most likely remain. Financial information will still need to be interpreted and managed. We see the main impact that blockchain will have on accountancy jobs is that it provides accountants with greater tools to add value to their clients.
Because blockchain provides accountants with greater access to their client’s financial information it is clear that there will be greater transparency. With increased access to information, accountants will be able to offer higher value, and more insightful advisory services.
Despite the development of blockchain technology, adoption is still sparse. In the immediate future, blockchain technology will not replace standard practices of financial reporting and financial statement auditing. Users of financial statements will still expect auditors to perform an independent audit and utilize their professional skepticism. However, going forward accountants will need to start familiarizing themselves with blockchain as its adoption is very likely.
Conclusion
Blockchain is a wonderful piece of new technology that we at FastLane are excited to see being developed and adopted. While the benefits of blockchain are widely recognized, the application and development of this technology is still in its early stages. Regardless, the FastLane Group is excited to see how our industry will adopt this new technologies and ideas going forward!