ABC: Audit and Blockchain -Camping Together
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.
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
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.