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Blockchain: Disrupting the Accounting Industry

Monday, April 15, 2019

In the 20th Century, the distribution of generally accepted knowledge was handled by Brittannica and a handful of other reference book publishers, and we bought it for a not insubstantial fee. Today, that much knowledge and exponentially more is managed by Wikipedia, the nonprofit wiki that’s free and open to anyone (and, it is said, trustworthy as much as we can trust anything).

Medicine, music sales, efficiently stocking a grocery store — there is virtually no profession the Digital Age hasn’t shoved, and recently a new model has emerged that could transform several at once: blockchain.

As Tax Day approaches, information systems and accounting professionals may be wondering if blockchain accounting may one day bear on the per annum reexamination of old receipts, outstanding debts and our year’s worth of work.

Blockchain Basics

Blockchain is a distributed ledger, an ever-evolving tally of transactions developed by many interested parties but unalterable by any of them. It was developed for the digital cryptocurrency Bitcoin. Blockchain offers high Byzantine fault tolerance without the appetite or encumbrance of a central authority or dedicated accountancy, and immunity to counterfeiting and fraud.

A blockchain record is comprised of transactions (blocks) and their relationship (chain). A block may contain information (transaction data), a timestamp and a cryptographic hash of the previous block that links the chain back to the value.

The tally isn’t proprietary — each interested party may access the blockchain. There is no delay — blockchain additions are made in real time in the cloud. Blockchain’s evolution is permanent — a blockchain writes an unalterable history of a value. Most importantly, blockchain’s peer-to-peer network underpinning the ledger ensures its validity; it is collaborative, collective self-interest that “polices” the blockchain.

What began with Bitcoin is now being reimagined or already repurposed by any industry for which value may be lost in transit between producer or seller and a buyer.

Blockchain and Big Business

Before we discuss disruption in the accounting profession precisely, let’s consider its broader market potential across sectors.

Blockchain technology accounting may be a novel approach for musicians. Long beset by free file transfers of songs and licensing disputes, the music “industry” could be remade so that fans (consumers) interact with artists’ blockchains, even paying artists directly for each listen. What file sharing did to the record labels, and streaming services did to direct sales, blockchain may do to big digital merchants (Apple, Spotify), bringing full circle the one-on-one commerce of artists, and fans willing to buy entertainment.

Here are some other facets of American life poised for blockchain accounting.

  • SHOPPING: Grocery stores, and specifically bringing perishables to market, will benefit from blockchain accounting systems. Recently, Walmart began employing an IBM-built blockchain program for tracking the delivery of fresh foods from farm to store in real time.
  • ELECTIONS: The advantage of paper balloting is the pursuant paper trail. Blockchain accounting could assure officials and voters alike of an election’s veracity without the counting, and the human error, of paper balloting.
  • HEALTH CARE: Patient health records are already undergoing massive transformation. The advantages of digitization (immediacy, intentionality) outweigh the traps (health data breaches). With blockchain, cyberattacks are discouraged by permission-restricted code. Those that get through are brightly and instantly highlighted.
  • SHARING ECONOMY: Ride sharing and lodging platforms have disrupted traditional taxi and limousine services and hotels — a blockchain accounting system may disrupt the sharing economy. As a distributed ledger, it could move sellers (drivers, rentors) and consumers closer together and add value for individual service providers.

These are examples of blockchain accounting as a logistics solution, but its genesis, and its substantial influence, lies in finance.

Blockchain and Tax Filing

Blockchain may be the Digital Age disruptor nonpareil of the longstanding recordkeeping and assurance services provided by the accounting profession. A Reuters news report concluded “the accounting industry is likely to experience the most disruption as the result of blockchain technology.”

As one accounting CGMA executive put it, accountants are deeply interested (wary) of this advancement in automation that overlays accountancy so intuitively: “A new type of accounting ledger — one that can be continuously updated and verified without the threat of being altered or corrupted.”

Blockchain technology also has the potential to reduce government spending on tax collection as well as administrative work.

Blockchain and Audits

A report from PriceWaterhouseCoopers found that blockchain accounting will likely not overhaul tax filing but could be targeted at administration and tax collection and help narrow the tax gap.

  • Blockchain may cut costs and add value within a business, between businesses, between businesses and consumers, and between businesses and governments.
  • Blockchain may make restitution faster and/or more painless for taxpayers and taxed industries.
  • Blockchain may help multinational companies provide a consistent data set for multiple tax authorities and reducing value-added tax fraud.
  • The last of these speaks to what most experts agree is the imminent advantage of blockchain for accounting — financial auditing.

Blockchain accounting prefigures a streamlined financial reporting and audit process. Today, an audit may contain account reconciliations, trial balances, supporting spreadsheets, sub-ledger extracts and other variables — each produced in different formats from various sources. It constitutes a substantial task quotient. In blockchain technology accounting, an auditor has real-time access. The American Institute of CPAs predicts the rote work of auditing may be off-loaded to software; put another way, audits may be continuous.

With more time and resources, auditors could specialize in analytics and efficiencies. Fraud might be prosecuted more frequently as unusual transactions are flagged immediately. Resources diverted to tax reconciliation may be shifted to enterprise programs — new efforts that require higher level accountancy — or to hedging against cyberattacks.

At minimum, paper records will grow rarer with the adoption of blockchain for accounting. A 2017 PayStream Advisors report revealed that more than 50 percent of invoices began the processing cycle as a paper document or fax. These, and an additional one-third that were email attachments, had to be converted into enterprise resource planning (ERP) system formats, a resource sink.

Industry experts remain hopeful the disruption in the accounting profession will result in more evolution than extinction. As one industry analyst put it, blockchain’s “transparent and durable” framework creates new ambitions for accountants and auditors even as it automates entry-level work. “It could make it easier than ever to understand what assets are available in real-time, along with their values and any other commitments that could affect cash flow in the future.”

Blockchain is yet another piece of the digital transformation puzzle, a piece in its early stages. Business, especially SMBs, still have a lot of basic digital adoption in front of them before they are ready to take advantage of the benefits of blockchain technologies. How far along is your business in its digital transformation? Kinetic Business can help advance your efforts through our cloud-based communications and networking solutions. Let us help you tackle the digital workplace.