Blockchain Accounting Technology

Blockchain Accounting Technology

Introduction

The first part of the present paper discusses Blockchain accounting technology.  Blockchain accounting technology was built with the main intention of controlling the transfer of ownership, including assets, and maintaining ledgers. It is concerned with the transfer of ownership of assets and maintaining a ledger of accurate financial information (Dai and Vasarhelyi, 2017). A blockchain is a digital ledger created to capture transactions conducted among various parties in a network. It is a peer-to-peer, internet-based distributed ledger that includes all transactions since its creation. The accounting profession is broadly concerned with the measurement and communication of financial data, and the analysis of said information. Much of the profession is concerned with ascertaining or measuring rights and responsibilities over the property, or planning how to best allocate financial resources. For auditors, using blockchain delivers clarity over ownership of properties and actuality of obligations, and could radically improve efficiency.

Blockchain has the prospective to enhance the accounting profession by reducing the costs of preserving and reconciling ledgers and providing absolute certainty over the ownership and history of assets. Blockchain could help auditors gain clarity over the accessible resources and obligations of their organizations, and also free up resources to concentrate on planning and valuation, rather than recordkeeping.  Alongside other automation trends such as machine learning, blockchain will lead to more and more transactional-level accounting being done – but not by accountants (Dai and Vasarhelyi, 2017). Instead, successful accountants will be those that work on assessing the real economic interpretation of blockchain records, merging the record to economic reality and valuation. For example, blockchain might make the presence of a debtor certain, but its recoverable value and economic worth are still debatable. And an asset’s ownership might be verifiable by blockchain records, but its condition, location, and true worth will still need to be assured.

By eliminating reconciliations and providing certainty over transaction history, blockchain could also allow for increases in the scope of accounting, bringing more areas into consideration that are presently deemed too difficult or unreliable to measure, such as the value of the data that a company holds. Blockchain is a replacement for bookkeeping and reconciliation work. This could threaten the work of accountants in those areas while adding strength to those focused on providing value elsewhere. For example, in due diligence in mergers and acquisitions, distributed consensus over key figures allows more time to be spent on judgmental areas and advice and an overall faster process.

The Impact of Blockchain Accounting Technology

Some publications have hinted that blockchain technology might eliminate the need for a financial statement audit by a CPA auditor altogether. If all transactions are captured in an immutable blockchain, then what is left for a CPA auditor to audit? While verifying the occurrence of a transaction is a building block in a financial statement audit, it is just one of the important aspects (Dai and Vasarhelyi, 2017). An audit involves an assessment that recorded transactions are supported by evidence that is relevant, reliable, objective, accurate, and verifiable. The acceptance of a transaction into a reliable blockchain may constitute sufficient appropriate audit evidence for certain financial statement assertions such as the occurrence of the transaction (e.g., that an asset recorded on the blockchain has transferred from a seller to a buyer). For example, in a bitcoin transaction for a product, the transfer of bitcoin is recorded on the blockchain. However, the auditor may or may not be able to determine the product that was delivered by solely evaluating the information on the Bitcoin blockchain. Therefore, recording a transaction in a blockchain may or may not provide sufficient appropriate audit evidence related to the nature of the transaction.

Blockchain has applications in external audit. Performing confirmations of a company’s financial status would be less necessary if some or all of the transactions that underlie that status are visible on blockchains. This proposal would mean a profound change in the way that audits work (Dai and Vasarhelyi, 2017). A blockchain solution, when combined with appropriate data analytics, could help with the transactional level assertions involved in an audit, and the auditor’s skills would be better spent considering higher-level questions. For example, auditing is not just checking the detail of whom a transaction was between and the monetary amount, but also how it is recorded and classified. If a transaction credits cash, is this outflow due to cost of sales or expenses, or is it paying a creditor, or creating an asset?

These judgmental elements often require context that is not available to the general public but instead requires knowledge of the business, and with blockchain in place, the auditor will have more time to focus on these questions. Widespread blockchain adoption may enable central locations to obtain audit data, and CPA auditors may develop procedures to obtain audit evidence directly from blockchains. However, even for such transactions, the CPA auditor needs to consider the risk that the information is inaccurate due to error or fraud. This will present new challenges because a blockchain likely would not be controlled by the entity being audited (Dai and Vasarhelyi, 2017). The CPA auditor will need to extract the data from the blockchain and also consider whether it is reliable. This process may include considering general information technology controls (GITCs) related to the blockchain environment. It also may require the CPA auditor to understand and assess the reliability of the consensus protocol for the specific Blockchain (Kokina et al.). This assessment may need to include consideration of whether the protocol could be manipulated. As more and more organizations explore the use of private or public blockchains, CPA auditors need to be aware of the potential impact this may have on their audits as a new source of information for the financial statements. They will also need to evaluate management’s accounting policies for digital assets and liabilities, which are currently not directly addressed in international financial reporting standards or in the US generally accepted accounting principles(Kokina et al.). They will need to consider how to tailor audit procedures to take advantage of blockchain benefits as well as address incremental risks.

Advantages and Disadvantages of Blockchain Accounting Technology

Despite the fact that blockchain technology is a new idea, it has proven its worth and significance in a very short period of time. Here’s a list of some key advantages of the blockchain technology.

1. Zero Percentage of Fraud

Since blockchain is an open-source ledger, each and every transaction will be made public, and hence there will be no chance of fraud taking place. The virtue of the blockchain system will be constantly monitored by miners who keep an eye on all kinds of transactions around the clock. As a matter of fact, there are thousands of miners who validate every single transaction all day all night (Kokina et al.). Therefore, the virtual currencies based on blockchain will get a hell of a lot of supervision, and this makes them almost impenetrable to fraud.

2. No Government Interference

The government or any financial institution has absolutely zero control on virtual currencies that are based on the blockchain technology whatsoever. Hence there will be no meddling with the governments. Government interference has often led to the devaluation of various currencies.

Regardless of the nation and currency, one of the top problems, when governments meddle too much with the currencies, is that they end up either with inflation or hyperinflation by degrading and/or printing too much currency in a short period of time (Rückeshäuser, 2017).

3. Instant Transactions

The virtual currencies/digital currencies that are based on blockchain offer transaction times that are 10 X faster than the usual bank ones. For instance, if a transaction has made to some person who has a different bank account, then it will take a minimum of two days for the transaction to complete (Rückeshäuser, 2017). However, blockchain transactions will usually be completed in just a few minutes.

4. Improved Financial Efficiency

The blockchain technology lets individuals and companies make transactions directly to the end-user without involving any 3rd-parties. This greatly enhances the financial efficiency in every nation and lets people be less dependent on financial institutions and/or banks (Rückeshäuser, 2017). Not only will this save a lot of money for people in terms of fees but also other related expenses with utilizing banks.

Disadvantages of Blockchain Technology

1. Extremely Volatile

The virtual currencies that are based on blockchain technology are highly subjected to extreme volatility. Of course, one good example of that is the fluctuating prices of Bitcoin that vary from day to day. One of the reasons behind that extreme volatility is that both the decentralized blockchain technology and the virtual currencies are extremely new to the market. This means that the companies, investors, governments, and other groups adopting or not adopting them will greatly affect the volatility (Rückeshäuser, 2017). The bitcoin price dropped by $ 200 on the day when China decided to ban companies from raising ICOs in 2017 (Rückeshäuser, 2017). This is a huge drop, and this kind of volatility is bothering people who are thinking of investing in Bitcoin or any other cryptocurrency for that matter.

2. Crime

Because of the anonymity that exists in decentralized blockchain and virtual currencies which rely on them, they have become a second home for all illicit transactions. One good instance a digital black market known as ‘Silk road.’ People utilized this platform for things like illicit transactions using blockchain-based virtual currencies. Nonetheless, the FBI closed the place after learning its existence.  Even it was shut down, many people still think that this decentralized technology is too attractive to lawbreakers.

3. The problem for Not Tech Savvy

Storing virtual currencies that are blockchain-based is a big headache for people who are not-so-tech-savvy. Usually, secured storage is easy for users who are familiar with the technology. As a matter of fact, it can be accomplished simply via buying “Cold storage” wallets like Trezor (Talha et al., 2010). Nevertheless, people who cannot handle technology might face a problem with creating a Bitcoin or Ethereum wallet and then transferring coins from a digital wallet to a cold storage wallet.

How it works

All participants (i.e., individuals or businesses) using the shared database are “nodes” connected to the blockchain, each maintaining an identical copy of the ledger, according to Talha et al. (2017). Every entry into a blockchain is a transaction that represents an exchange of value between participants (i.e., a digital asset that represents rights, obligations, or ownership). In practice, many different types of blockchain are being developed and tested. However, most blockchains follow this general framework and approach. A properly functioning blockchain is immutable despite lacking a central administrator (Talha et al., 2017). A properly functioning blockchain is immutable despite lacking a central administrator. As a near real-time and distributed digital ledger, a blockchain has several unique and valuable characteristics that, over time, could transform a wide range of industries:

• Near real-time settlement—A blockchain enables the near real-time settlement of transactions, thus reducing the risk of non-payment by one party to the transaction.
• Distributed ledger—The peer-to-peer distributed network contains a public history of transactions. A blockchain is distributed and highly available and retains a secure record of proof that the transaction occurred.
• Irreversibility—A blockchain contains a verifiable record of every single transaction ever made on that blockchain. This prevents double spending of the item tracked by the Blockchain (Talha et al., 2017).
• Censorship resistant—The economic rules built into a blockchain model provide monetary incentives for the independent participants to continue validating new blocks. This means a blockchain continues to grow without an “owner.” It is also costly to censor.

References

Dai, J., & Vasarhelyi, M. A. (2017). Toward blockchain-based accounting and assurance. Journal of Information Systems, 31(3), 5-21.

Kokina, J., Mancha, R., & Pachamanova, D. (2017). Blockchain: Emergent industry adoption and implications for accounting. Journal of Emerging Technologies in Accounting, 14(2), 91-100.

Rückeshäuser, N. (2017). Do we really want blockchain-based accounting? Decentralized consensus as an enabler of management override of internal controls.

Talha, M., Raja, J. B., & Seetharaman, A. (2010). A new look at management accounting. Journal of Applied Business Research (JABR), 26(4).