ABC: Audit and Blockchain -Camping Together

ABC: Audit and Blockchain

-         Camping Together

Ring in the New Year with Accounting Cheer

-         Avoid the Year End Chaos

Words like creative disruption, innovation and “uberisation” havecome to dominate many conversations today. Technological innovation isincreasing at a rapid pace and with that, so is its potential to disrupttraditional ways of doing business. Blockchain technology is the (relatively) new kid on the block. However,it is fast growing up. Originally created to serve as the foundation forcryptocurrencies, it has in recent years evolved far beyond bitcoin and isactively changing the way people and businesses engage with each other. Frompeer to peer transactions, it is now being tested in a broad range of businessand financial applications. The technology has also opened up a brand new setof challenges and opportunities for professionals within accounting and auditroles. For firms looking to stay ahead of the growth curve, it has becomeimperative for them to acquaint themselves with the technology, itscapabilities and what the future might hold for the world of finance.

Words like creative disruption, innovation and “uberisation” have come to dominate many conversations today. Technological innovation is increasing at a rapid pace and with that, so is its potential to disrupt traditional ways of doing business.  Blockchain technology is the (relatively) new kid on the block. However, it is fast growing up. Originally created to serve as the foundation for cryptocurrencies, it has in recent years evolved far beyond bitcoin and is actively changing the way people and businesses engage with each other. From peer to peer transactions, it is now being tested in a broad range of business and financial applications. The technology has also opened up a brand new set of challenges and opportunities for professionals within accounting and audit roles. For firms looking to stay ahead of the growth curve, it has become imperative for them to acquaint themselves with the technology, its capabilities and what the future might hold for the world of finance.

Blockchain Technology – The Nuts & Bolts

Blockchain is simply asecure digital ledger which records transactions and stores them among anetwork of “nodes” who are participants of the network. It takes its name fromthe ‘blocks’ of data it stores; as new data is collected a new block is made inthe chain of historical information. Blockchain uses a majority consensussystem across multiple participants (whose identities are protected usingcryptography) to validate transactions. Transaction updates can only occur whena consensus of 51% is reached among the participants, which means that no thirdparties are needed. Because of the vast, decentralised network, data cannot beremoved or edited and remains secure. Businesses can set up ‘smartcontracts’—programmes which impartially and automatically record and completecontracts once a set of terms have been met, which can make any transactionautonomous

Blockchain Technology – The Nuts & Bolts

Blockchain is simply asecure digital ledger which records transactions and stores them among anetwork of “nodes” who are participants of the network. It takes its name fromthe ‘blocks’ of data it stores; as new data is collected a new block is made inthe chain of historical information. Blockchain uses a majority consensussystem across multiple participants (whose identities are protected usingcryptography) to validate transactions. Transaction updates can only occur whena consensus of 51% is reached among the participants, which means that no thirdparties are needed. Because of the vast, decentralised network, data cannot beremoved or edited and remains secure. Businesses can set up ‘smartcontracts’—programmes which impartially and automatically record and completecontracts once a set of terms have been met, which can make any transactionautonomous

The Audit Industry – Courting a New Partner 

Blockchain has a wealth of additional applications and is slowlymaking its way into the audit industry as well. The way transactions arecurrently recorded between two parties can be inefficient, prone to errors andrequires tedious reconciliations leading to ever increasing auditing costs.Additionally, it continues to be liable to frauds. Each audit can be a costlyexercise, binding the company’s accountants for long time periods. 

Blockchain has the potential to improve the accounting industry byreducing the costs of maintaining and reconciling ledgers, and providingabsolute certainty over the ownership and history of assets. Instead of keepingseparate records based on transaction receipts, companies can use blockchaintechnology to directly enter all their transactions into a joint register,creating an interlocking system of enduring accounting records. Consequently,the data captured is secure and relatively immune to manipulation since all theentries on the blockchain are verified, distributed and cryptographicallysealed.

Blockchain Technology in the Audit Industry

Blockchain Technology in the Audit Industry

Always keep an eye out for potential landmines

Whileblockchain technology holds a great deal of promise and has a lot of potentialfor the auditing industry, there are some major roadblocks preventing its massadoption by the industry. Blockchain technology can be fairly nuanced and wouldrequire auditors to have significant technological understanding in order toharness its benefits effectively. Additionally, migrating from legacy systemscan often be a tedious exercise and if not done properly can negate thepositive impact of the new technology. Rather than eschewing traditionalsystems in favour of blockchain technology, auditors should seek to strike abalance between the two. 

 CPAs/CAs will likely be the most affected by the automation thatblockchain brings in the auditing processes. However, it is important to notethat blockchain can only be used to verify the transactions but not for thenature of transactions which an accountant will have to do. It is also possiblethat the technology can potentially remove redundancies, freeing up an accountant’stime from repetitive activities and enabling him/her to perform more rewardingtasks. Blockchain is truly a new frontier for a slew of industries andprofessions, and firms will continue to allocate resources toward figuring outways it can improve accounting and auditing.

While blockchain technology holds a great deal of promise and has a lot of potential for the auditing industry, there are some major roadblocks preventing its mass adoption by the industry. Blockchain technology can be fairly nuanced and would require auditors to have significant technological understanding in order to harness its benefits effectively. Additionally, migrating from legacy systems can often be a tedious exercise and if not done properly can negate the positive impact of the new technology. Rather than eschewing traditional systems in favour of blockchain technology, auditors should seek to strike a balance between the two.

 

CPAs/CAs will likely be the most affected by the automation that blockchain brings in the auditing processes. However, it is important to note that blockchain can only be used to verify the transactions but not for the nature of transactions which an accountant will have to do. It is also possible that the technology can potentially remove redundancies, freeing up an accountant’s time from repetitive activities and enabling him/her to perform more rewarding tasks. Blockchain is truly a new frontier for a slew of industries and professions, and firms will continue to allocate resources toward figuring out ways it can improve accounting and auditing.

Englobally Yours

Englobally Yours

There is something about year ends that makes us extremely emotional. It is a time to reflect upon the year gone by and make commitments with renewed vigour for the year ahead. For businesses, it is also the time to take stock of financial accounts and align all business interests. This, as we all know, is easier said than done.

 

 

The Challenges

 

The challenges are similar for most business across the world and can pertain to both internal land mines as well as compliance with regulatory requirements. Some of the pain points are closely associated with manual oversight while others pertain to complying with the key differences in the approach determined by the GAAP (generally accepted accounting principles) that is being applied, i.e. IFRS (international financial reporting standards) or local GAAP or US GAAP.

 

A close examination would indicate that most of the internal issues start earlier in the financial year and get magnified by year-end. These usually stem from:

 

*      Financial surprises during year-end review

*      Delayed or incorrect data

*      Smaller issues which could have appeared during the monthly or quarterly close, but had not been discovered until year-end

*      Communication gaps amongst teams

 

Companies that operate in multiple jurisdictions have to additionally contend with preparing both group as well as local financial statements. For such companies, the challenges primarily stem from identifying the substance as well as the form of economic transactions. Local rules can vary significantly and what might be in compliance in one jurisdiction might be lacking in another. For example, the scope of provisioning in the Netherlands is different from the provisioning requirements in Germany and Italy. The former allows a provision to be made even if an obligation does not exist, while in the latter countries, the risk areas covered by provision are larger. In China, individual branches of companies are subject to virtually the same level of compliance obligation as a local headquarters, even if they are not separate legal entities. In HongKong, on the other hand, a private company which has applied for a dormant status (i.e. a company that has no relevant accounting transactions during a financial year) under the Companies Ordinance is altogether exempted from filing annual returns.

 

There can also be significant differences in the contents of the financial statements and the level of disclosures required. For example, in France and Germany, cash flow statements are required to be prepared only for consolidated accounts or enterprises listed in capital markets whose financial statements follow the IFRS while other jurisdictions like the Netherlands, Italy and Portugal have done away with the requirement of a cash flow statement.

 

Local rules can vary greatly and such differences combined with internal inefficiencies can have a significant impact on both local as well as group accounts. These issues can mount through the year and cause unwarranted stress at year-end.

 

Solution

 

Navigating the legal and tax quagmire is no easy task. Which is why companies should adopt a proactive and consistent approach that can make the year-end closing process smoother and less edgy. Close communication and coordination amongst teams is fundamental to this. Instead of working in silos, legal, accounting and finance teams should regularly communicate and ensure that local as well as group compliance requirements are being met.

 

The year-end Framework

 

 

The bottom line is that planning and operating proactively for the year-end is a best-practice approach for success. This can help companies save cost as well as time and focus on what they do best i.e. building a business. Looking forward instead of concentrating on the rear-view will ensure a smooth and successful journey ahead.

 

The Englobally Group

 

The Englobally Team is present across the major regions of the world and is focused on helping firms build as well as expand their businesses, beyond geographical boundaries. Our in-depth local knowledge and expertise and personalised solutions ensure that we become trusted long-term partners to our clients. Contact us to know more about us and understand how we can add value to your business.