Is blockchain the future of accounting and finance?

First thing first, I am not an expert on block-chain technology and neither is this post an attempt to explain the technical aspects of the technology. There are others who are more qualified to describe what Blockchain is. You can always start over at Youtube. My work/job doesn’t involve Blockchain (at least not right now). However, I am really interested in this technology, hence, I have researched and explored it to the best of my knowledge and get to grasp all the future potential that it holds.

We need to be clear though that Blockchain is different from cryptocurrencies like Bitcoin. Usually, when we read about Blockchain we associate that with Bitcoin or other crytocurrencies. Bitcoin may be the most commonly associated term and aspect of Blockchain technology, but that only represents one aspect of the technology. Over past six months or so we have heard about organizations are indeed using bitcoin for processing transactions, are accepting payment from customers in bitcoin, or the other various cryptocurrencies, this is only one potential implication for the accounting profession.

In simplest terms Blockchain is an decentralized open network which encrypts and stores data on transactions securely. All participants in the network have access to all the data and can verify the transactions. Being a decentralized network, there is no central party which verifies/authenticates the transactions. 

Accounting systems through ages

Over the years one of the biggest break through in modern financial accounting systems was the introduction of double entry systems; solving the problem of managers knowing whether they could trust their own books. However, a number of manual labor intensive controls were required to be built in to ensure integrity and validity of data. Further, to gain trust of outsiders, independent auditors were required to perform detailed test of transactions. Resulting in inefficient and intensive audit process.

Over time we have seen digitization of accounting systems, with the introduction of over the shelf book keeping systems followed by more complex and dynamic ERPs. Modern ERPs aim to integrate all business processes across an organization and attempts to automate the book keeping and financial accounting within the organization thereby automating a number if internal checks and balances. However, external checks and balances still remain manual and requires human intervention. Consequently, the integrity and validity of data is remains susceptible.

What next with Blockchain?

The recently emerged Blockchain is a trustless, distributed ledger that is openly available and has negligible costs of use. From simplifying the compliance with regulatory requirements to enhancing the prevalent double entry bookkeeping, anything is imaginable. The technology represents the next step in accounting. Instead of keeping separate records based on transaction receipts, companies can record their transactions directly into a joint ledger based on Smart Contracts, thereby creating an interlocking system of accounting records.

Since all the entries would be distributed and encrypted, the validity and integrity of data remains intact at all time. So instead of integrating the business processes across a single organization, this would integrate the whole supply chains vertically and horizontally across industries and multiple organizations and authorities. The following video shows how Maersk and IBM have partnered up to integrate using the Blockchain technology:

https://www.youtube.com/watch?v=IJFIoQ-_hLk

Any other implications?

It is not necessary to start with a joint register for all accounting entries. The Blockchain technology as a source of secure technology in itself can have great implications and can be integrated within current accounting systems.

“For instance, using Blockchain we can easily preserve the integrity of electronic files easily. One approach is to generate a hash string of the file. That hash string represents the digital fingerprint of that file. Next, that fingerprint is immutably timestamped by writing it into the Blockchain via a transaction. At any subsequent point in time, one can prove the integrity of that file by again generating the fingerprint and comparing it with the fingerprint stored in the Blockchain. In case the fingerprints are identical, the document remained unaltered since first writing the hash to the Blockchain.”

 

In addition, with Smart Contracts the whole accounts receivable and payable processes can be automated. These may be programmed to enable automatic release of funds upon completion of a specified milestone, i.e. when party A attests reception of the goods, send money to party B. This could potentially reduce the need for debt collection, removing the need for Accounts Receivables and Payables functions.

If you think that is all the possibilities are endless, since all all information in a Blockchain network adds up to one shared version of the truth it reduces the need for controlling, reconciliations etc.

Conclusion

That means that there’s no way around Blockchain and with advancing technology finance functions must understand that the redundant book keeping and controlling functions would become redundant with the introduction of Blockchain. Instead, it will pave way for more improved quality analytics and forecasting, which will allow for employees to find more value in the job they perform. This is the movement that we’ve been trying to make for many years anyway and along comes Blockchain acting as a huge enabler.

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