Blockchain Accounting

Ivan Mikhaylov

Chain 1: What is accounting?

Accounting is a process of recording and analysing a business's financial information to advise it about future growth strategy and to ensure that it complies with the set tax regulations. Accountants compile this information about businesses assets, transactions etc., into various report documents. The main three are the income statement, the balance sheet, and the statement of (projected) cash flow.

Currently, accounting is a complex industry. Accountants must verify their clients' transaction information by following long paper trails (a series of documents recording the company's activities) to record the transactions in the required manner.

Chain 2: How can blockchain improve accounting?

Firstly, blockchain will make accounting more secure. All firm's financial information will be recorded on the blockchain. This will help accountants know for sure the ownership and history of assets. The decentralised ledger (collection of financial accounts) will verify every transaction once it has been inputted into the blockchain. Afterwards, the blockchain will generate an identical hash for both the 'buyer' and the 'seller'. If one unauthorised party decides to change transaction information, their hash will change, so when an auditor examines the transaction, he will see that the hashes don't match up. This will protect both sides of the exchange from fraud and prevent online money laundering.

Consequently, accountants won't have to spend much time reconciling and verifying the legitimacy of financial records. This will be particularly useful in mergers. Since both companies will be confident of unmodified key figures, accountants could focus on more judgemental areas such as projected cash flows (how much the company is expected to earn in the future) when discussing valuation.

Chain 3: What are the limitations of blockchain accounting?

Blockchain will help verify and speed up information processing. However, without AI or humans, it will never be able to analyse the economic implications of the subjective worth of an asset or an obligation. These higher-thinking tasks will still have to be performed by human accountants. Blockchain will only remove tedious and repetitive tasks.

Additionally, the blockchain's anonymous design will only show the accountants the quantitative value of a transaction (how much money is exchanged). It will not show the purpose of that transaction (whether it was a purchase of an asset or a wage payout). These options have different tax requirements and must be recorded differently. So, it will be the accountant's job to use his business knowledge to find this inaccessible information.

Chain 4: What are the future opportunities in blockchain accounting?

There is a strong possibility that blockchain and accounting will have a two-way relationship. Before blockchain becomes a core part of the current financial system, it must be 'developed, standardised and optimised'(1). This includes introducing regulation of the blockchain. Accounting firms can help governments and other financial regulators create new rules to regulate this technology. This will speed up the adoption and development process of blockchain, which will pay handsome dividends to the accounting firm (as described above).

From the big names, the Institute of Chartered Accountants in England and Wales is well aware of possible blockchain impacts on the accounting profession. It has compiled its prediction in a report (linked below) which was particularly useful in writing this article. The Big 4 accounting firms in the USA have all started blockchain-related projects. Deloitte invested in 2 blockchain hubs in Dublin and New York, while EY has worked with several blockchain start-ups and created an 'Ops Chain' platform to allow the use of blockchain for business.

The key takeaway from this article is that the accounting profession will change massively when current students start working. Hopefully, blockchain technology will transform the stigma against boring and repetitive accounting profession. Like AI and robots, blockchain will improve efficiency and leave more time and resources for analysing and critical thinking skills.

 Sources

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