How will blockchain transform accounting?
Benson Ng, Greater China Digital Advisory Partner, EY
Blockchain is a distributed database that records all transactions or digital events that have been executed and shared among participating parties. Transactions are stored in a digital ledger, which is distributed over the network, and incorruptible.
In the context of accounting, blockchain will enhance the transparency of records, and in doing so, will make it easier for auditors to trace and verify them. With all transactions stored on a ledger, and the tokenization of assets and inventory, this will lead to a decrease in human error when auditors work on inventory management for each financial year. And since blockchain enhances the immutability and transparency of transactions, it has the potential to increase the efficiency of a business and play a role in its digital transformation.
By utilizing the digitalization of blockchain, companies could reduce the cost of maintaining technical equipment and increase their reliability on its distributed system. Auditors will be able to obtain real-time transactional records through a secure platform to improve their working efficiency. The secure nature of blockchain can also help auditors in the financial reporting and audit process, and by providing them with reliable information for account reconciliation, trial balances and spreadsheet files support. By reducing manual tasks such as data preparation and extraction, teams can focus on the supply chain areas including unusual transactions and stock-taking, for example.
Blockchain may also enhance trust between enterprises and related parties as it allows the tracing of records in real-time. Cross-enterprise collaboration will be made easier with seamless reconciliations and secured encryption. Using blockchain to enhance business process management will drive business automation with a clearly defined workflow and increase transparency. It will also help multinational corporations to continue working on cross-border projects with fewer limitations.
Beyond accounting, blockchain could also help content creators to establish a reliable and secure connection in creating digital content and collaborating with businesses. For instance, content creators can utilize blockchain’s decentralized system for contractual agreements, such as digital contracts and advertising payments. Blockchain could help to authenticate and encrypt any digital identities and wallets across the network.
Since blockchain is reliable and essential to verify transactional records, it can further support different areas within a company’s supply chain such as how they interact with suppliers, retailers and customers.
It is crucial for us to leverage the many benefits of blockchain to streamline digital transformation across businesses, stakeholders, and for enterprises to use it to strengthen trust among clients and customers.
“Auditors will be able to obtain real-time transactional records through a secure platform to improve their working efficiency.”
Michael Teh CPA, Head of Finance, Algorand Foundation
Due to its unique features, blockchain has led to innovative possibilities such as cryptocurrency, smart contracts, decentralized finance (DeFi), non-fungible tokens, with certainly more in the pipeline yet to be revealed. Many believe blockchain is the technological evolution after the Internet, which is why I believe that blockchain will transform accounting similar to how the Internet has transformed our profession.
Blockchain will support but not replace accountants. Similar to how the Internet has helped accountants to perform accounting tasks more efficiently, such as by allowing accountants to access accounting systems from any location through the cloud, blockchain will support the work of accountants without replacing them. With immutable records stored on a distributed ledger, this means that accountants and auditors will be able to obtain irreversible transaction data from the blockchain in a real-time manner. It may also eliminate the need for the reconciliation and verification of transactions that are recorded on a blockchain.
New accounting specialists will be developed. Since accounting is the language of business, stakeholders will rely on accountants to interpret and translate the complex transactions executed on a blockchain into an accessible language for the purpose of financial reports and statements, for example. New specialized areas will be developed. Business leaders will be seeking professional accountants for advice on blockchain adoption, and accountants with knowledge on blockchain will become trusted advisors.
Emerging new business models may revolutionize accounting treatments. Similar to how the Internet incubated e-commerce, social media and other online businesses, blockchain will promote another wave of business innovation. Accountants may be faced with unprecedented business transactions with little or no preceding cases to follow. In fact, cryptocurrency, “stable coins” or cryptocurrencies where the market value is designed to be pegged to an external factor such as the United States dollar or a commodity such as gold, and many DeFi-related activities, have already spurred debate on the selection of appropriate accounting standards and treatments.
The role of tomorrow’s accountants – who will play an even bigger role in business consulting – will become more vital than ever, both internally and externally, to translate ideas from a wide spectrum of counterparties such as cryptographers, developers, IT specialists, marketing leads, community leads, auditors, lawyers, bankers, etc. into a business language that everyone can understand and communicate.
“Blockchain will transform accounting similar to how the Internet has transformed our profession.”
Scarlett Xiao, Research Analyst, HashKey Capital
When it comes to how blockchain will improve or transform the accounting practice today, it may be able to solve the issue of reliability, and chain-based digital ledgers will be able to provide the audited transaction records automatically. Below are a few examples of how blockchain can transform accounting:
- For in-house accounting, managers do not have to be concerned about reliability of their accounting books. Instead, they can leverage the records directly on the blockchain to facilitate their decision-making.
- Blockchain will effectively make auditing procedures less costly. From the perspective of external auditing, auditors can save the cost of preparing and sending a ton of confirmations to the company’s counterparties, like suppliers, to confirm the transactions or balances. Auditors only need to query the verified on-chain data to locate the transactions.
- Regarding future accounting methods under blockchain technology, entities can keep joint ledgers together with their counterparties rather than retaining separate accounting books.
- All financial instruments could be minted as non-fungible tokens and transacted among parties rather than physical files.
- Smart contracts could be utilized to avoid manual errors during operations.
In short, blockchain has the potential to reinvent the storage, circulation, and auditing of data or records in the accounting space.
However, there are still challenges in the large-scale adoption of blockchain in accounting. Companies may face high costs of onboarding or running a chain-based platform, and staff have to be trained how to do so. With blockchain still relatively new, there may be obstacles when it comes to replacing a company’s original accounting systems, and the current lack of application examples may present challenges in justifying its usefulness.
Businesses must nonetheless keep in mind that more firms are already engaged in blockchain and cryptocurrency projects. For instance, Deloitte established Rubix in 2015, a blockchain software platform that allows teams and clients to build their own customized blockchain and smart contract applications for any use case. EY also supports clients who want to use blockchain in their businesses and offer tax and auditing services for blockchain-based companies. The profession has to proactively embrace and utilize blockchain to better adapt to the evolving global business environment.
“Chain-based digital ledgers will be able to provide the audited transaction records automatically.”