While blockchain advancement has been discussed at length for some time now – it’s now very much impacting the world of data and global finances. No longer an abstract curiosity – blockchain is here to stay.
People across all walks of life are now quite aware of the term ‘blockchain’. But what do you know about the emergence of blockchain in bookkeeping and accounting?
We all know about blockchain based crypto currencies like bitcoin, and we’re now being exposed to further developments like Non Fungible Tokens (NFT) and the metaverse.
The blockchain technology behind these developments can of course be used for a multitude of pursuits and will transform the underpinning technology behind a lot of existing technology and services. Blockchain accounting is one such service.
What is blockchain technology?
Blockchain or blockchain technology is a de-centralised form of database known as ‘Distributed Ledger Technology’ (DLT).
Otherwise termed a type of ‘distributed database’, a blockchain is a digital ledger which is duplicated and distributed across the entire network of computers in the blockchain.
Every ‘block’ in the ‘chain’ records transactions using a unique cryptographic signature or ‘hash’. Whenever a new transaction takes place on the blockchain, this transaction is duplicated and recorded on every single participant’s ledger.
This leaves an almost foolproof transaction record that amounts to a ledger with a shared, secure, and visible history.
As Don & Alex Tapscott, authors of Blockchain Revolution, put it:
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Why is blockchain so secure?
Because the ledger or database is not stored in one place and uses cryptographic signatures when making changes, it is extremely resistant to hacking or alterations.
If one block in the chain was tampered with or altered (possible by nefarious actors) This would be extremely obvious, as every other block would have a different (correct) record that conflicts with this tampering.
So, if a hacker were to try and alter the blockchain in any way, they would have to theoretically alter every single block in the distributed system. This, for lack of a better word, is impossible.
How does blockchain differ from a regular database?
A regular database, while often shared, is usually able to be altered or manipulated. Let’s say you have an SQL database – there’s usually someone in charge who can change entries in such a database.
This is where blockchain differs. With blockchain technology there is no one entity in charge with the ability to change entries across the whole distributed blockchain ledger. It all comes down to accuracy, accountability and the erasure of errors and manipulations.
As Ian Khan, TEDx Speaker, author and Technology Futurist explains,
“As revolutionary as it sounds, Blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved.
Above anything else, the most critical area where Blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.”
How can blockchain be used in accounting?
Blockchain in accounting is a relatively new and rapidly developing area of interest. The relevance between blockchain and accounting is rather clear – it represents ledgers and databases that amount to an unassailable single point of truth.
Blockchain accounting is largely concerned with the existence of a reliable database of financial information, assets, and the transference and ownership of these assets.
For many accountants, business advisors and financial planners, their focus often comes down to not only the ownership of property, but also the transference, obligations and rights associated with this property. Blockchain allows the creation and preservation of unassailable records of such financial data.
Thus, the advantage is clear – efficiency and accuracy in the recording and reporting of financial information will be immensely increased.
Getting your firm ready for blockchain accounting
Every accounting firm on the planet should be concerned with readiness for blockchain accounting methods.
While the idea has been floating around for some time now, it has become increasingly obvious that this is no fad or passing trend.
This impending advancement of blockchain technology on the accounting industry will represent a change on two primary fronts – the technology you use and the people you hire.
Not only will blockchain technology need to be adopted into your regular workflows and technology mix, you’ll also need talent on board who can understand and work with this technology.
When blockchain technology in accounting becomes more prevalent, record keeping and transactional accounting will become even more automated. This is also true of auditing – there will be the potential of an ‘always-on’ auditing methodology.
This means that successful accounting firms will be those who can understand and relay the real-world interpretations and implications of blockchain databases and records.
What the top accounting firms are saying about blockchain
As a parting meditation, here’s what some leading firms and voices are saying about blockchain’s impact.
“[Blockchain will] allow auditors to verify a large portion of the most important data behind the financial statements automatically. The cost and time necessary to conduct an audit would decline considerably.”
“Even though most of the public’s interest has been in Bitcoin, blockchain is about so much more than just money. As more of our lives revolve around the internet and we share more information, there will be an increase in online scams and cyber threats. People want to know they can trust the internet and what they do online is secure and safe. Blockchain basically provides this layer of trust.”
“As blockchain moves beyond the hype towards effective implementation, it quickly becomes clear that the process involves more than just the technology. When solving business challenges with blockchain, companies need to account for the complex regulatory, tax, auditability, risk, and compliance implications that come with any global transaction platform.”