What Is Blockchain?

Blockchain is a technology that effectively connects people or companies in a direct way or on a peer-to-peer basis. For the past 20 years people have shared information through the internet. They have sent emails, posted to social media, and shared documents. Blockchain as a technology, takes the connectivity of the internet one step further. Blockchain offers users the internet of value.

As opposed to exchanging only information, participants can now also exchange value on a peer-to-peer basis. Although most commonly associated with Bitcoin and other cryptoassets, blockchain technology supports both applications (such as decentralized apps or dAPPs) and complex programming (such as smart contracts). It is through these smart contracts that blockchain offers the potential to easily and efficiently undertake a wide range of transactions and transference of rights and property.

Smart contracts can easily and cost effectively transfer ownership of a car or transfer corporate shares without needing a third party, such as a bank or a stockbroker, and with immediate settlement. It is this removal of “middlemen” by enabling trusted peer-to-peer exchange that is driving what some have come to refer to as “Web 3.0”, and the creation of $2 trillion of wealth in the last ten years.

Key Blockchain Features: Immutable and Decentralized

The key feature in blockchain is that anything that is stored on the blockchain is there forever, the information is immutable and cannot be erased. The information that is stored on the blockchain offers us a level of transparency that has not previously been seen. It means that if Person A owns something and transfers the ownership or value of it to Person B there will always be a record in the blockchain that Person A owned it. It also guarantees that the record cannot be manipulated—no one can change the record. This level of immutability is why blockchain technology is commonly referred to as a “trust machine”.

Another key feature of the technology is its decentralized nature. No one person, entity, or government owns or controls the information. This effectively means that Person A has a copy of all of their information as does Person B, and as does the next person. In a decentralized environment, all participants have access to the same information and users can then choose to share it or not. Information will no longer need to be aggregated and stored in central databases as it will be stored everywhere at once and, if desired, under direct user control rather than the company offering the service.

Through this transformation toward decentralization, the incidence of abuse of information as well as cyber attacks and hacking may be reduced if not entirely eliminated.

What Does This Have To Do With the Accountancy Profession?

Auditing requires the confirmation of transactions and balances on firms’ accounting ledgers at the end of the reporting period due to time-lags, reconciliations, and accounting entries. Each side of the transaction keeps its own records.

Blockchains and their almost immediate provision of an immutable record of transactions provides for shared transaction information, automatically synchronized across each location. Such a provision of information removes transaction level reconciliations and facilitates developing continuous auditing. For auditors, this offers the potential for a transition from a periodical or annual exercise to a continuous matter, one that can now encompass both parties to a transaction simultaneously.

As blockchains allow recording and settlement of transactions to occur at the same time as the transaction itself, auditors can obtain data in real-time and in a consistent, recurring format. Monitoring what happens in real time rather than testing (selectively) and reconciling what happened in retrospect is a substantial departure from contemporary audit techniques.

Due to distributed ledger technology, blockchain technology eliminates the need for entering accounting information into multiple databases and potentially removes the need for auditors to reconcile disparate ledgers. This could save substantial amounts of time and the risk of human error may be considerably reduced.

Reconciliation of accounting data will not be fully automated through blockchain technology as auditors’ professional expertise and experience is required to assess the accuracy of complex accounting transactions. However, the ability to trust that both parties are recording the same base transaction information and the real-time availability of this accounting data offers immense benefits for the efficiency with which accounting data can be reconciled and analyzed.

Imagine the power of this technology combined with Artificial Intelligence (AI) where the testing for discrepancies through analytical review could take place in real time and without the risk of missing transactions or the auditor having a blind spot in analyzing the information.

Looking Ahead

At its core, blockchain technology is a ledger system. It’s immutability and decentralized nature make it unique, but its function of recording transactions makes it familiar to those in the accountancy profession. To support the accountancy profession in understanding blockchain technology, the Accounting Blockchain Coalition (ABC)—a global coalition of representatives from blockchain industry leaders in the accounting, law, tax, technology and higher education—authors guidance on accounting for digital assets and currencies that run on blockchain technology. IFAC member organizations, including the Institute of Singapore Chartered Accountants, The Institute of Chartered Accountants of India, Institute of Chartered Accountants of England and Wales, CPA Canada, American Institute of CPAs, and South African Institute of Chartered Accountants, are building awareness of blockchain technology and digital assets, educating their membership and stakeholders, and offering insight or guidance in accounting and auditing for blockchain and digital assets. Developing professional knowledge and understanding of this emerging technology and its applications will be crucial to ensuring the profession’s relevance and future readiness.

As blockchain technology continues to advance and new and different uses are found, it will be up to the accountancy profession to ensure that its promises of transparency and accountability are fulfilled.