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You may be familiar with the term Blockchain or at least heard it somewhere before. With our current accounting practices that rely heavily on labour intensive mechanisms, Blockchain acts as one of the prominent yet promising model that would help alleviate the problem. According to Statista, spending on Blockchain solutions is expected to experience a tenfold increase from 1.5 billion in 2018 to an estimate of 15.9 billion by 2023 (Liu, 2020).
So, what is Blockchain?
Put simply, Blockchain is a chain of blocks containing webs of information - with blocks representing digital information and chain as the public database. When talking about the composition of a block, there are 3 important components: the data, a hash, and a previous hash. Hash essentially represents a digital fingerprint of each block. Once a block is tampered with, the hash or its identity changes, and the previous hash contained in the subsequent block will therefore be invalid. This mechanism of hashing and proof of work, which is the process of finding the valid block fingerprint to reach a consensus between the users in a peer to peer network, utilises distributed ledger technology and cryptography to ensure transparency and security.
Figure 1: Understanding Blockchain Technology
Source: altcointradingsignal
Where Accounting and Blockchain Intersects
The similarity between Accounting and Blockchain lies in the trust through their provision of verification and confirmation. For instance, the audit profession aims to ensure reasonable assurance that financial reports and transactions recorded are not materially misstated and reliable. In Blockchain terms, it means the assurance that the transactions recorded have not been tampered with.
Figure 2: Blockchain technology enables complete, conclusive verification without a trusted party
Source: Deloitte
Figure 3: One approach to verify the integrity of records using the Blockchain
Source: Deloitte
By storing a computer code widely known as Smart Contract on a blockchain, auditing procedures such as internal control tests and analytical procedures could potentially be conducted autonomously. What this means is that an external auditor and inspector would have to agree on a predefined procedure that would be transformed into a set of conditions included in the smart contract. For instance, the use of 'IF-THEN' rules on assessing the risk of material misstatement for the revenue account based on comparison between actual sales and predicted sales from multivariate regression model analysis (Rozario & Vasarhelyi, 2018)
Figure 4: Depiction of smart contract for sales between buyer and supplier
Source: The International Journal of Digital Accounting Research
Big 4 & Blockchain
It is not surprising that the Big 4 have begun diving into the blockchain landscape. As to what extent and how long it might take to be fully immersed, however, are two questions that remain unanswered.
Figure 5: Big 4 in the blockchain landscape
Source: KPMG, EY, PwC, Deloitte
Let us look at two of EY's blockchain platforms: EY Blockchain Analyzer and EY OpsChain and their functionalities as shown in Figure 6:
Figure 6: Understanding the EY Blockchain platforms
Source: EY
EY Opschain can transform a complex business agreement into a digital smart contract through tokenisation of business assets. This platform allows various interactions through public or private blockchains without clients having to visit a digital marketplace and therefore avoiding the risk associated with monetization of data (Brody, Farrell, Drouot, & Kapur, n.d.).
However, despite blockchain's immutability nature, it is misleading to say that the data retrieved is guaranteed to be trustworthy. A potential loophole may originate from the interface between blockchain and the real world. To tackle this challenge, Blockchain Analyzer supports the audit team in reconciling off-chain data and on-chain data (client's books and public ledger records) through an integrated view of many different blockchains and the ERP system (Brody, Farrell, Drouot, & Kapur, n.d.).
Evolution, not elimination
Kacee Johnson, a strategic advisor for CPA.com said "The shift to advisor rather than record keeper is even more prevalent with the advent of blockchain. The role of auditor and accountant will evolve to be predictive and prescriptive rather than assemble and record." (Alexander, 2019) With the automation of record keeping, fewer reconciliation tasks are needed as errors resulting from traditional repetitive random based sampling work verification could be eliminated, thus reducing audit procedures. Consequently, expertise can be used on other areas of focus that require a high level of judgment such as how transactions are recorded, classified, and recognized in the financial statements. This is equally important due to the probability that the transaction recorded in a blockchain may be unauthorized or wrongly classified in the financial statements.
The methodology approaches in accounting practices may be disrupted but this does not necessarily mean elimination of accounting jobs. While jobs pertaining to bookkeeping and reconciliation are no longer of importance in the future, there are rising demands for more specialized accounting with the rise of technological advancement. This is not limited to the existing auditor profession but also other service lines. For instance, advisory practices on the cryptocurrency landscape such as initial coin offering or crypto-tax liabilities reporting (Alexander, 2019).
So, one may wonder why blockchain is still in its infancy...
Just like how conceptual framework and accounting standards came to life, setting regulations and standards is crucial and yet, possibly the toughest to construct. This process requires time, consensus across different jurisdictions, trials, and most importantly - adopters. As the vision of most accounting firms generally strive to best serve their clients' needs, the adoption rate of blockchain or any technology for that matter relies heavily on their clients' progression.
Bibliography
Alexander, A. (2019, December 3). Blockchain: Unlocking new potential. Retrieved from Accounting Today: https://www.accountingtoday.com/news/blockchain-unlockingnew-potential
Andersen, N. (2016). Blockchain Technology A game-changer in accounting? Deloitte. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/Blockchain _A%20game-changer%20in%20accounting.pdf
Bible, W., Raphael, J., Taylor, P., & Valiente, I. O. (2017). Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession. Deloitte, CPA, AICPA, UW CISA. (2018).
Blockchain and The Future of Accountancy. ICAEW. Retrieved from https://www.icaew.com/-/media/corporate/files/technical/informationtechnology/thought-leadership/blockchain-and-the-future-of-accountancy.ashx Brody, P., Farrell, C., Drouot, Q., & Kapur, R. (n.d.).
Blockchain platforms. Retrieved from EY: https://www.ey.com/en_gl/blockchain/blockchain-platforms Deane, M. (2020, January 30).
The Impacts of Blockchain on the Accounting Industry. Retrieved from The Blockchain Land: https://theblockchainland.com/2020/01/30/impacts-blockchain-accounting-industry/ Liu, S. (2020, March 13).
Blockchain - Statistics & Facts. Retrieved from Statista: https://www.statista.com/topics/5122/blockchain/#:~:text=Worldwide spending on blockchain solutions, estimated 15.9 billion by 2023.&text=The financial sector accounts for, industry from healthcare to agriculture. O'Neal, S. (2019, September 1).
Big Four and Blockchain: Are Auditing Giants Adopting Yet? Retrieved from Cointelegraph: https://cointelegraph.com/news/big-four-andblockchain-are-auditing-giants-adopting-yet Psaila, S. (2017, September 22).
Blockchain: A game changer for audit. Retrieved from Deloitte: https://www2.deloitte.com/content/dam/Deloitte/mt/Documents/audit/dt_mt_article_bl ockchain_gamechanger-for-audit-sandro-psaila.pdf Raphael, J., & Steele, A. (2020).
Audit transformation and opportunities in cognitive, blockchain, and talent. Deloitte. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-audittransformation-and-opportunities-in-cognitive-blockchain-and-talent.pdf Rozario, A. M., & Vasarhelyi, M. A. (2018).
Auditing with Smart Contracts. The International Journal of Digital Accounting Research, 18, 1-27. Smith, D. S. (2020, February 11).
Understanding blockchain and its impact on accounting. Retrieved from Sage: https://www.sage.com/en-us/blog/what-is-blockchain-andexamples-for-the-accountingprofession/?ClickID=3%3Ai1n3xpKxyLWtx0OGSitWCIUkEx5gwZfUsMSs0&irgwc=1& utm_source=affiliate&utm_medium=leadGenSage&utm_campaign=ImpactAffiliatePr ogramme&utm_term=ImpactAffil
UNDERSTANDING BLOCKCHAIN TECHNOLOGY: FOR DUMMIES (2019 INFOGRAPHIC). (2018, July 17). Retrieved from altcointradingsignal: https://www.altcointradingsignal.com/understanding-blockchain-technology-2018- infographic/
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