The phenomenal growth of blockchain technology raises both concerns and excitement for the accounting industry. Will blockchain and accounting enjoy a symbiotic relationship? Or, as some suggest, do accountants need to start looking for a new line of work?
Much like blockchain technology itself, the answer is complex. In this post, we look at this and other questions every accounting firm should be asking, even if they aren’t.
What is Blockchain Anyway and Why Should Accountants Care?
Blockchain Basics
Blockchain is also known as distributed ledger technology (DLT) — which is, perhaps, the simplest definition of what blockchain is. In conventional accounting, records are stored in a centralized location, be it a collection of spreadsheet files or the database of an accounting software application. The accountant enters each record, and performs whatever actions are necessary to serve the client’s needs. When information about the records is needed by regulators or clients, the accountant must retrieve whatever data is needed and provide it to the requesting party. Generally, only the account and auditors have direct access to the centralized ledger.
In DLT, on the other hand, records are entered into and stored in a distributed, or shared, ledger, which is generally made accessible to all concerned parties. In this case, the accountant, regulators, auditors, and clients would each possess an identical copy of the ledger at all times. Of course, each client would have access only to the portion of the ledger that contains their own records. Public and private keys are used to authenticate users.
Further, each record entered into the blockchain is encrypted, and each entry is automatically date and timestamped. A collection of such records form a block—hence, the name blockchain. A unique hash string representing the content of all records is updated with each new record and the updated hash is stored in in the new data block. The hash forms a unique digital signature that can be used to verify that no records have been changed once they were entered.
What it Matters
Although blockchain technology was created to serve as the backbone for the Bitcoin cryptocurrency network, it has application across a broad spectrum of industries.
The bottom line on why accountants should care about blockchain is because it provides two advantages that are crucial to the accounting profession: transparency and immutability. It is of tremendous benefit to the integrity of an accounting firm that their records be easily accessible to authorized persons. Of course, there must be rules governing even how authorized entities can access financial records, and blockchain uses smart contracts to accommodate such rules. More on smart contracts in a moment; for now, just be aware that transparency does not mean lack of security.
Experts believe blockchain accounting is the next step for the bookkeeping industry, and for good reason. As we will see, DLT has major implications for the accounting industry, which should concern every accounting professional.
How Soon Will Blockchain Impact the Accounting Industry?
If you have read this far and hope that DLT technology will somehow leave the accounting industry untouched, think again. Transformation is already happening.
Four large accounting firms, Deloitte, Ernst & Young, KPMG and PwC, are already investing heavily in DLT technology, and Deloitte has at last 30 blockchain prototypes up and running.
With companies like Amazon and IBM offering robust, flexible, and scalable blockchain platforms, it is only a matter of time until accounting services emerge on those platforms. We can expect to see innovation in this area to be both fervent and fruitful in 2018.
What Are Smart Contracts?
Smart contracts are blocks of code written to automate certain processes, and represent one of the most exciting features of DLT. A simple application in accounting could be the automatic payout of vacation earnings upon termination of an employee on a client’s payroll.
Smart contracts can “execute” a wide variety of tasks upon certain conditions being met, making blockchains more than just places to store data.
What Advantages Does Blockchain Offer the Accountant?
The power of distributed ledger technology promises a wealth of advantages for accounting firms large and small. Here are a few of the ways DLT will benefit the industry:
1. Improved Efficiency
Well-designed blockchains are fast and powerful databases. Getting data into and out of the system can be done more efficiently than interacting with legacy accounting software applications.
2. Reduced Errors
The greatest opportunity for error using blockchain is on data entry. Once data is in the chain, smart contracts will make many accounting functions automatic, reducing human error.
3. Easier Reconciliation
By utilizing smart contracts, accountants can automate many of the tasks associated with reconciliation, making this end-of-month chore less of a burden.
4. Reduced Cost
An increase in efficiency and reduction in errors in any system translates into reduced cost. Following initial adoption cost, accounting firms can expect to see rapid cost savings over conventional accounting systems.
5. Reduced Fraud
The immutability of blockchains make it extremely difficult to perpetrate fraud using such a platform. In order to modify a record, the same change would have to be made on all copies of the distributed ledger at the same time, which is highly infeasible.
6. Improved Regulatory Compliance
The improved security offered by DLT can greatly simplify the burden of an agency to satisfy regulatory demands. As more regulatory authorities embrace blockchain technology, DLT adoption might become mandatory in certain crucial financial sectors.
7. Reduced Auditing
One aspect of DLT that accountants should be excited about is its ability to reduce audits. Through the power of smart contracts, many auditing functions can be automated, reducing the time an auditor needs to spend looking at records.
Furthermore, the inherent traceability built into blockchain makes auditing fast and easy.
What Will be the Negative Impact on Accounting?
The advantages DLT offers the accounting industry are indisputable. Even so, it would be disingenuous to say there will be no casualties, cost, or challenges during the adoption process.
The negative impacts blockchain will cause the accounting profession can be divided into two main categories: technical and non-technical.
In technical terms, most accounting software is not compatible with blockchain technology. So even if you are ready to put your accounting firm on a blockchain, your record- keeping software probably isn’t interested in playing along. Adoption will require purchase of cloud-based accounting services as they become available, and possibly hiring a blockchain developer to create custom user interfaces for your firm. As more and more blockchain accounting platforms emerge to fill this new market, cost-effective solutions will help reduce the need for custom-designed blockchains.
The non-technical impact will be reduced long-term viability for accounting firms that wait too long to embrace DLT technology. While it is true that enterprise-ready blockchain solutions for the accounting industry are not yet readily available, that excuse will soon evaporate as innovators and investors move into to satisfy this emerging market.
As for disruption, sure it will happen. The capabilities of distributed ledger technology will inevitably force accountants to change the way they work, and in ways we cannot yet foresee. Even so, whatever duties or roles accountants must abandon because of blockchain probably only add inefficiency and error to the process anyway.
How Will Cryptocurrency Affect the Accounting Industry?
An increasing number of mainstream companies now accept Bitcoin for payment, including Expedia, Microsoft, Overstock.com, Newegg.com, eGifter, Subway, Shopify, Reddit, among dozens of others. As more companies join the cryptocurrency economy, the accounting firms that serve them will be forced to include cryptocurrency transactions in their accounting processes.
Further, accountants who accept Bitcoin or Ether for payment will also open themselves up to a the sector of Millennials who seek crypto-friendly companies to do business with.
Some companies accept only Bitcoin as payment, providing an opportunity for blockchain-savvy accountants to capture their business.
How Should Accountants and Auditors Prepare for the Transformation?
The fact that blockchain technology will soon make its presence known to the accounting industry is no need for panic. Accounting firms plenty of time to prepare for adoption, just not much time to waste.
Preparation begins with building an awareness of what blockchain is all about, and keeping abreast of how the technology is evolving. As blockchain-based SaaS services emerge in 2018, accounting firms must be ready to consult with providers on how they might onboard their accounting services. Even sooner consultations with professional blockchain developers can pave the way for easy and early adoption, giving firms the competitive edge in this nascent but promising market.
As blockchain development infiltrates the accounting industry, regulators, technology providers, and accounting industry leaders must work together and seek ways to make the transition beneficial for all parties.
Should Accountants and Auditors be Excited or Concerned?
The answer ultimately comes down to how well-prepared you are to embrace blockchain technology for your accounting firm. While no one is saying that only early adopters will benefit from the technology, those who do make DLT a part of their business model in the next 12 months will enjoy the benefits sooner rather than later.
How Can Ignite Help?
The merger of distributed ledger technology with accounting services is inevitable. And it should be. The power of DLT to automate and secure accounting processes is unparalleled by any other technology.
If you are ready to explore how DLT can benefit your accounting firm, Ignite invites you contact us today for a no-cost consultation. We are experts in blockchain accounting applications, mobile applications, and cloud-based platforms. We offer blockchain outsourcing services at competitive rates, using world-class project management methodologies.
We operate six R&D labs across Western Europe, so we are well-positioned to serve your needs, regardless of your location.