Blockchain and the future of accounting and external audit

In 2017, the value of bitcoin, a decentralized cryptocurrency, skyrocketed to levels that it caught the attention of executives worldwide. While the majority of us have focused on the currency aspect, blockchain, critical technology that power cryptocurrencies, is finding popular applications in various industries globally, especially in financial services.

What is blockchain technology?
A blockchain basically captures transactions between various parties in a verifiable and permanent way. The technology, also known as a distributed ledger, maintains a ledger of accurate financial information since its creation.

At its most basic level, blockchain is all about blocks strung together to form a chain, but not in the literal terms. When we say, ‘block’ or ‘chain’ in this context, we refer to digital information (the block) being recorded in an online directory (the chain). Upon entry of each transaction into a blockchain, an exchange of value takes place between participants. The information is then checked, approved, and accepted by the network, updating the ledger accordingly.

Implications of blockchain for accountants
Blockchain technology can greatly impact a wide range of industries. Blockchain, being the most promising application, is highly demanded in setups where transferring value or assets between various parties is currently difficult and expensive.

Since nowadays, all businesses face challenges of recording and reconciling data with counterparties, blockchain technology is seen as a solution to create a trustworthy set of records. With its unalterable ledger benefits, professions like accounting and auditing have greatly taken advantage of the technology.

In its simpler terms, accounting is a process of data entry, and blockchain operates in a similar fashion but in an ‘advanced’ and ‘accurate’ way. The remarkable technology has the potential to reduce the costs of maintaining and reconciling ledgers and provides absolute certainty over the transaction’s ownership and trail. As a result, accountants will gain in-depth clarity over the company’s available resources, allowing them to concentrate on the more crucial aspects of planning and valuation.

As blockchain eliminates the need for reconciliations, it increases the level of certainty over transaction history, making it easier for accountants to measure the accuracy of data. As companies adopt the use of accounting systems supported by blockchain technology, accountants will be able to shift their time and energy on areas that are presently difficult to measure, such as the value of data an organization holds.

Replacing bookkeeping and reconciliation work may definitely pose a threat to accountants specialized in such areas. With lesser time spent on mundane tasks of bookkeeping, areas providing more value can be further explored with a greater focus on analysis and decision-making areas.

How does blockchain affect the audit and financial statements?
According to some experts, blockchain technology might eradicate the need for the audit of financial statements. If transactions are captured efficiently and are verifiable, do we need auditors to audit in the future?

Verifying the occurrence of a transaction is just one of the aspects of a financial statement audit and there is more to it. An audit involves an independent examination of recorded transactions to determine if they are accurate, reliable, and verifiable. Accepting a value into blockchain confirms the occurrence of a transaction; however, it fails to provide sufficient audit evidence considering the nature of the arrangement. Take an example of a transaction of transfer of bitcoin for a product; the auditor will not be able to determine what was delivered based on the information available. In other words, the transaction may still be unauthorized, fraudulent, incorrect, or executed between related parties.

Many transactions recorded in the financial statements are based on estimates and assumptions. The intervention of auditors will still be required to perform audit procedures on management’s estimates, even if the underlying value has been processed through blockchain.

As more and more businesses are exploring the use of blockchains, auditors need to adapt themselves and know the potential impact this could have on the financial statements. They will have to upgrade their knowledge and tailor audit procedures in ways that reap the maximum advantages of blockchain technology and address the possible risks.

Transformation of external audit
Blockchain can greatly improve and accelerate audit processes. Today, auditors use data such as account reconciliations, ledgers, journal entries, trial balances, and supporting files to plan an audit. However, since blockchain technology allows real-time access to data, auditors will be able to perform audits in a consistent, recurring format. The technology will also allow auditors to shift from random sampling to a more detailed review of transactions during the audit procedure.

Furthermore, auditor’s skills would be diverted to the higher-level inspection. For instance, auditing is not all about examining who processed the transaction and the monetary value it holds, but also how it has been recorded and classified. These judgmental elements require extensive knowledge of the business, and when processes are supported by blockchain, the auditor will be able to focus on such aspects of the audit procedure.

More cost-effective audits will likely be carried out in such an environment, along with faster corporate reporting. Shareholders, management, and other stakeholders will also have greater comfort on the financial statements backed by blockchain technology.

Accounting systems supported by blockchain would deploy more automation. Going a stage further, auditors will be able to identify unusual transactions on a real-time basis through automatic alerts by simply using the machine learning capabilities and analytics. Moreover, agreements, contracts, and purchase orders can be encrypted securely and linked to a blockchain. The reliability of financial reporting and auditing will improve drastically by having access to such unalterable audit evidence.

What opportunities does the blockchain offer?
The move to a blockchain accounting system can offer vast opportunities for the accountancy profession. Accountants are experts in record keeping, applying business logic and complex rules, and measuring financial information. Using the knowledge, they can guide and influence how blockchain is implemented, adopted, and develop blockchain-led solutions in the future.

The need for reconciliation would reduce with more trust being placed on the accuracy of the transaction. Accounting systems can be optimized using blockchain and other advanced technologies for enhanced efficiency in the performance of accounting function.

Auditors will need to monitor the developments brought about by blockchain technology and learn skills to audit the complex technical risks associated with the new change. The need to create an automated audit routine and improved data gathering could also be explored.

As a result of the above, accountants and auditors will need to upgrade their skills to stay on the cutting edge. Tasks such as reconciliations and sampling will be reduced or eliminated from the process, while more focus will be shifted to other value-adding activities, technology, analysis, and advisory.

Parting words
It can certainly be expected that blockchain will spark a massive revolution in the corporate world. Many companies around the globe have acknowledged and adopted the incredible technology, while some are still in the early stages of exploring. Given the opportunities, the blockchain will likely reshape accountants’ and external auditors’ professions and reduce the need to perform existing tasks.

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Simon Northampton
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