More

More

Should You Worry About Blockchain?

by Hitendra R. Patil | Nov 08, 2017
blockchain graphic

Social media. Big data. Automation. Artificial intelligence. Machine learning. Just when you thought technology’s impact on the accounting profession couldn’t get any more disruptive, here comes blockchain. As a CPA, should you worry about blockchain? Let us examine.

BACKGROUND

In 2008, a mysterious person using the pseudonym Satoshi Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” If you read it, you will discover that the word blockchain was not mentioned in the paper. Despite this, many wrongly perceive Bitcoins as blockchain. Bitcoins (cryptocurrency) are just one of the 700 or so possible uses of the underlying blockchain technology. Learn more about blockchain technology here.

BLOCKCHAIN IN THE ACCOUNTING PROFESSION

Think of your current cloud accounting software. The cloud hosts your clients' accounting databases, with each client having its own database. You are a user and the application is on a centralized server (or servers) of the company that creates the accounting software. Your accounting database on that central server does NOT exchange and validate transactions with any other accounting database(s). Thus, the traditional, current way of maintaining the trusted but unconnected accounting databases is to have central administrators like banks, governments, and yes, CPAs, someone who incurs the time, effort, and cost to verify and vouch for the other leg of the transaction.

Today, You Trust Third Parties

Again, think of the accounting database (your accounting software). You enter data into it by either inputting from paper-based documents or by fetching from banks electronically. Where does that data originate from? It is from another accounting database–either maintained by you, another accountant or a business? The accounting databases are just used for recordkeeping of the transactions between transacting parties. The two accounting databases are not connected and do not exchange transaction data between themselves. The “transaction” between two contracting parties passes through a third party, in this case, the bank. Banks are heavily regulated, financially mighty and, hence, heavily invested in secure technologies. Banks are trusted to keep trustworthy records of the financial legs of the transactions between two contracting parties. You, as an accountant, trust the bank data. But even when you, the accountant, import transactions from bank data into the accounting software, you still authorize the update of the accounting software by checking those transactions yourself. You also complete bank reconciliations as an authenticity check to satisfy yourself that what you enter in the accounting database has indeed happened. The “trust” is outsourced to third parties, i.e., the bank or the central administrators and/or the accountants. It adds to cost, and requires more time to ensure trust. Even third parties need to be audited to ensure trust.

Tomorrow, You’ll Trust Immutable Technology!

In accounting blockchain, the application platform will not only be on the computers of transacting parties, but also on several computers (decentralized nodes). The users may end up using a “cloud node” instead of their own computers. These nodes will constantly interact with each other to validate the blocks of transactions. A not-so-accurate but nicely illustrative analogy would be accounting ledgers that automatically transmit blocks of transactions to other ledgers which continuously validate them, and keep a copy of each block they receive.

The simplistic explanation of blockchain in accounting can, therefore, be the “triple entry” system. Since blockchains are ledgers, technically each company can automatically “keep books” by using an accounting app to “synchronize” its books with a blockchain network. Now, imagine when millions of companies, banks, tax authorities, etc. are creating “blocks” of their transactions, how will the picture look?

Blockchain graph

Blockchain technology will automatically create a “distributed shared ledger” each time the two companies create a transaction in their private ledgers. Call it the “third entry into a common block shared by two companies,” or the “triple entry.” In public blockchain networks, since every user of the ledger needs to be able to see the transactions data, it raises privacy issues. Hence, accounting blockchains would most likely be private/permissioned networks, i.e., identities of transacting parties will be known to those with permission to access their own transaction records.

Auditors/regulators, etc. may get “time bound” temporary permissions to see the records.

Computing power of several people in the network ensures that everyone has a copy of the “time-stamped block of transactions.” It creates trust without involving banks (third parties or central administrators). How does one delete or change a transaction in ALL the chains or blocks of records existing in several computers at once?

Let’s imagine what reversing entire chains of transactions on several computers at once would entail. All the computers in the network would need to reconstruct the revised chain of transactions, which would require phenomenal computing power–more than that of all the networked computers put together. The costs of doing all of this would be exorbitant. Who would want to pay such disproportionate costs to reverse blockchain transactions? That is why blockchain records are called immutable. In the financial world, they use the word “non-repudiable.” When “trust” is built in the technology itself, why would there be any need to reconcile transactions with any third source? In other words, transaction records in a blockchain can be trusted to be entered into any accounting system without any need to re-verify itself. There won’t be a need for, say, invoices, because the transactions automatically verify themselves with each other.

What's the Impact on the Accounting Profession?

For starters, there would be no need to send out purchase orders, invoices, bills, etc. as the transactions are validated continuously on the Blockchain networks. When banks rely on Blockchain confirmation to release payments, there is no need for bill-payment processes. And since the same pre-validated transactions exist in every node, there is no need to audit them. That leads to several questions about how it can impact the future of the accounting profession and accountants. For example:

  • Why would there be a need for both the transacting parties to enter the same data separately into their own accounting software?
  • Why won’t accounting software just connect with blockchain(s) and continually update transactions data and at the same time continually keep reconciling with bank data (just to ensure payments have been made against goods/services received)?
  • Why would banks/lenders need outdated/out-timed financial statements from businesses/their accountants, if they can independently verify real-time transactional history?
  • One of auditing's aims, independently establishing trust, will be pre-fulfilled by blockchain. Imagine the colossal reduction of time, effort, and costs of data collection, organization and verification processes. What, then, happens to the revenue from your audit services?
  • Why would tax departments need to wait until the end of the year to collect taxes due if every taxable transaction can be identified while it happens in blockchain?
  • And so on...

When Is It Likely to Start Affecting Your Practice?

Nearly 36% of revenue of the top 100 firms that comes from audit—nearly $25.5 billion annually—is potentially under threat due to blockchain. No wonder the Big Four accounting firms are already investing in blockchain-readiness and ownership.

When will it impact your practice? Notice the emphasis is not on whether it will. It is “when.” It all depends on several factors, including governmental regulatory developments that can slow down or speed up the advance of blockchain technologies. The current costs of running blockchain networks (the processing capacity of nodes, electricity costs, etc.) are prohibitive to let blockchain descend onto small value day-to-day transactions.

Blockchain will affect not just your own business model, but also your clients’ business models—first those who deal with digital assets like financial services, and later those whose physical asset records are digitally maintained, like global manufacturing companies. Blockchain will redefine how entire economies work. It certainly will not be overnight, but ignoring it will put you and your clients or organization at a disadvantage. Be sure you understand what can Blockchain do—and what it can’t—at least over the short term.

What is Blockchain Technology and How Does it Work?

Read more here.

Hitendra Patil headshotHitendra R. Patil is one of Accounting Today's 2017 Top 100 Most Influential Persons in Accounting; the Author of “Accountaneur: The Enterpreneurial Accountant” and the Director of Practice Development at AccountantsWorld. You can connect with him on LinkedIn  or contact him by email.

This article appeared in the fall 2017 issue of the WashingtonCPA Magazine. Read more here.

Please log in to post a comment.

ABOUT WSCPA

The Washington Society of Certified Public Accountants is the only organization in the state of Washington dedicated to serving the professional needs of CPAs, educating consumers about CPAs and the services they provide, and encouraging students to study accounting and enter the profession.

Your Profession. Your Future. Your Advocate.

CONTACT

Washington Society of CPAs
902 140th Ave NE
Bellevue, WA 98005-3480

  • (P) 425-644-4800
  • (F) 425-562-8853

The WSCPA's business hours are 7:30 a.m. to 4:30 p.m., Monday through Friday.