Blockchain uses in accountancy

Many are aware of blockchain in the context of cryptocurrency, but it has practical applications for accountancy, too.

From automated smart contracts to decentralized ledgers, blockchain technology is revolutionizing the field of accountancy by providing accountants with tools that can enhance transparency, efficiency, security and accuracy in financial processes.

Introduced as the underlying technology for the cryptocurrency Bitcoin, blockchain’s applications have since expanded beyond digital currencies. Within accounting, it has the potential to assist regulatory compliance and enhance the system of double-entry bookkeeping which has served the profession for centuries.

What is blockchain, and how will it impact accounting systems?

Blockchain is a decentralized and distributed digital ledger technology that enables secure, transparent and tamper-resistant record-keeping of transactions across a network of computers. Each transaction is recorded in a block, and these blocks are linked together in a chronological chain.

Unlike traditional centralized databases, the ledger is distributed across all participants in the network. Each participant, or node, in the network has a copy of the entire blockchain, and no single entity has control over the entire system.

So, rather than maintaining distinct records relying on transaction receipts, businesses can input their transactions directly into a shared register, establishing a connected network of permanent accounting entries.

Because entries are dispersed and securely sealed through cryptography, attempting to manipulate or eradicate them to hide activities becomes nearly impossible.

The presence of a decentralized and transparent ledger ensures that all parties involved in a transaction have access to the same set of records. This shared accountability reduces the risk of errors, fraud and disputes, as all participants can independently verify the transactions.

How can blockchain be used in accountancy?

Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They are like digital vending machines; once you input the correct payment and make a selection, it automatically executes the agreed-upon transaction without the need for intermediaries.

Smart contracts can automate various accounting processes and streamline tasks such as invoicing, payment processing and reconciliation, reducing the need for intermediaries, the likelihood of human errors and associated costs.

Once predefined conditions are met, such as the completion of a service or delivery of goods, the smart contract can automatically generate an invoice and initiate the payment process, reducing manual intervention and the risk of delays.

For business expenses, smart contracts can be programmed to track expenditures automatically. When an employee submits an eligible expense, the smart contract can verify the information and trigger the reimbursement process, ensuring accurate and timely reimbursements without the need for manual approval.

Smart contracts can also automate payroll processes by automatically calculating and distributing salaries based on predefined rules, such as hours worked or performance metrics. This reduces the manual effort involved in payroll management and ensures timely and accurate payments.

Audit

Blockchain provides a comprehensive and easily traceable audit trail where every transaction and modification made to financial records can be tracked, creating a detailed history of changes that can allow for a more accurate and efficient examination of the data behind financial statements.

Since all transactions are recorded in a secure and transparent manner, auditors can access a real-time and comprehensive view of financial data. This can potentially reduce the time and resources required for audits, leading to more efficient and cost-effective auditing practices.

For example, a series of smart contracts could automatically verify compliance with regulatory requirements, and automatically confirm the existence of certain assets or liabilities based on predefined criteria. This reduces the need for manual confirmation procedures, saving time and resources.

With the saved resources, auditors could redirect their efforts towards areas where they can contribute more value, such as handling intricate transactions, focusing on internal control mechanisms, or providing strategic insights.

Supply Chain

Blockchain enhances supply chain transparency by recording every step of the production and distribution process.

Accountants can use this data to track costs, validate transactions and ensure compliance with financial regulations. This level of transparency also helps in identifying inefficiencies and optimizing the supply chain for cost-effectiveness.

Smart contracts can automate payment processes based on predefined criteria, such as the successful delivery of goods. This streamlines the reconciliation of transactions between different parties in the supply chain, providing real-time visibility into financial transactions.

And by recording every step in the supply chain, including adherence to quality standards and regulatory requirements, accountants can more easily generate accurate and compliant reports for regulators.

What are the challenges of blockchain in accountancy?

Technical Complexity

Blockchain technology is inherently complex, requiring deep understanding of cryptography, distributed systems, and consensus mechanism.

Accountants, traditionally focused on financial analysis and reporting, would need to upskill in areas such as programming languages and blockchain architecture to effectively navigate and leverage this technology.

And while accountants will not be required to become computer programmers themselves, they will need to be able to translate complex blockchain concepts into understandable terms for clients and stakeholders.

Integration Issues

Many businesses still operate on legacy accounting systems that were not designed with blockchain in mind and may use proprietary data formats and standards that are not easily compatible with blockchain.

Blockchain platforms and legacy accounting systems often operate on different technologies and protocols and may require the development of standardized interfaces or middleware to facilitate communication and data exchange.

Ensuring data consistency, accuracy and integrity during migration is crucial. Legacy data may need to be converted into a format compatible with blockchain, and this process can be time-consuming and error-prone.

Data Privacy

The immutability of blockchain, which ensures that once data is recorded, it cannot be altered, can be a double-edged sword for data privacy.

If sensitive information is inadvertently or maliciously recorded on the blockchain, it becomes challenging to erase or rectify. This can raise concerns about the permanence of certain data elements, especially if they contain personal or confidential information.

Smart contracts, while automated and efficient, can pose privacy risks if not implemented securely. If personal or confidential data is included in a smart contract without proper encryption or obfuscation, it may be exposed to unauthorized parties. 

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.