HOW BLOCKCHAIN CAN TRANSFORM ACCOUNTING PRACTICES
The future of accounting has arrived and it’s called the blockchain. A growing number of voices in the accountancy profession recognize that blockchain will disrupt accounting and audit and it is being perceived as a disruptor in the fintech industry. Blockchain has the potential to transform everything from digital payments to auditing and compliance.
What does it mean for the accountancy profession? How can accountants benefit from using blockchain? How can they prepare themselves for this technological challenge? In the below paragraphs, we’ll help you understand blockchain’s potential, how it could impact your accounting practice.
In this article you will read about;
What accountants do and how they do it.
The role of the accountant has always been to track and record financial transactions carried out by the business internally and with external parties like customers, suppliers, and Banks, etc. The transactions are then summarized and reported in accordance with the applicable regulations and preset standards to various stakeholders, accordingly. Traditionally, the process of accounting has been performed through a centralized ledger system. However, this system is vulnerable to corruption and human error.
Accountants can act as advisors to management on a wide range of financial appraisal issues, including cash flow projections, budgeting, and profitability. Accountants also assist with meeting legal and regulatory compliance requirements. In addition, they help with filing tax returns, providing payroll services to staff members, and ensuring that there is no embezzlement of funds
Blockchain- Mechanism and Characteristics?
Blockchain technology was introduced in 2008 to support the Bitcoin cryptocurrency. But it can be used to store any digital information as a value exchange and transactional vehicle.
Blockchain technology is based on a shared, distributed ledger. All transactions ever made on the ledger are stored as records, called “blocks.” These blocks are organized into “chains” (hence the name), which are made up of individual blocks that are cryptographically linked together. When a block is created it cannot be altered in any way by anyone, including its original creators, this is because each block is time-stamped and encrypted, making it virtually impossible to tamper with.
As an extra layer of security, Blockchain uses cryptography where each block contains a cryptographic hash of the previous block, this makes it difficult for any person to change any transaction details or records once it’s added to the blockchain network, every node in the network will be aware of these changes and will reject such changes if made. Also, every node in the blockchain network has a copy of the record so there is no single point in which data are stored which makes blockchain more secured than centralized systems like banks.
Another key feature of blockchain technology that makes it particularly interesting is its decentralized nature. The technology uses peer-to-peer networks which means that there is no central computer or server where data is stored and no single entity controls the information.
Blockchain is a revolutionary technology that is unique in multiple ways. The main advantages of Blockchain are:
Decentralization – A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol. There is no central authority controlling the Blockchain; instead, every single node has a complete copy of the entire ledger. This leads to greater efficiency, transparency, and security;
- Transparency – As No centralized database is required for the creation or maintenance of the ledgers. All transactions are visible to anyone on the network; however, each participant maintains anonymity by only being identified by an address.
- Immutability – A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Once a transaction is recorded, it cannot be altered in any way. This is achieved through strong encryption algorithms. Each block typically contains a hash pointer as a link to a previous block, timestamp, and transaction data that ensures all participants have access to the same version of the ledger.
- Durability – The Blockchain is extremely hard to corrupt due to its distributed nature. As long as a minimum number of copies exist, it can survive even if some are corrupted. By design, blockchains are inherently resistant to modification of the data.
- Speed – Once a transaction is completed, it gets added to the Blockchain almost immediately. Thus, there is no waiting period for third-party confirmations or clearance.
Applications of Blockchain
Blockchain technology has gained a lot of momentum over the last few years and is now poised to revolutionize finance. Blockchain however is more than a financial revolution, it’s having widespread applications in multiple industries and will have an impact on many other fields.
Smart Contract
A smart contract is an event-driven program, with the terms of its performance directly written into the lines of code. It is a simple set of instructions that handles the enforcement and facilitation of an agreement (contract) between two or more parties.
Smart Contracts are one of the most important applications of blockchain technology which can automatically enforce the obligations of all parties to the agreement, as well as act upon the occurrence of an event predefined in the contract.
Cryptocurrencies
Blockchain is the technology behind digital cryptocurrencies. It acts as a decentralized ledger to keep track of all the transactions.
The major problem faced while using fiat digital currencies is double-spending, it can happen when two parties try to spend the same monetary Note (Bill Note) at two different places. Therefore, traditional digital currencies are settled through a trusted intermediary.
The blockchain ensures the integrity of the exchange through Cryptocurrencies. It is a public ledger of every transaction that ever happened in the network and it has two main functions:
1. It prevents double-spending by recording all transactions in a public ledger; and
2. It allows market participants to verify new transactions for themselves without an intermediary.
Decentralized Financial Institutions (Defi)
Decentralized Financial Institutions (Defi) are financial entities that interact with users to form a complete, decentralized financial ecosystem. Defi is a complex arrangement of Etherum based contracts containing the rules governing its behavior and performance, which any user may audit.
With the virtue of trustless blockchain technology, Defis enables lenders and investors to directly interact with borrowers having investment opportunities.
NON-FUNGIBLE Tokens (NFTs)
NFTs represent unique digital assets that can be owned by one or more individuals at any given time. The token is unique in the sense that it cannot be substituted by another token with the same characteristics without changing its identity completely. This ensures that no one else can claim ownership over your token and allows you to retain complete ownership rights over your digital asset, even if it represents something physical like a ticket or a piece of art.
Blockchain is a game-changing technology that has the potential to change the way businesses operate. It’s already being used for a variety of applications, but there are many more possibilities for its use.
Some examples of the blockchain applications are provided as below:
a) Supply chain management
b) Payments
c) Remittances
d) Identity management
e) Property records and title transfers
f) electronic voting
g) Crowdfunding
h) Cyber security
i) Journalism
How Blockchain can transform Accounting?
Blockchain technology has the potential to disrupt and transform the accounting sector. It can improve the capabilities of accounting professionals by providing them with tools and services to streamline their work, while also improving audit quality and reducing fraud.
Decentralization of a blockchain system means that no one entity has control of the network. It is also immutable, so once a transaction has been validated, it cannot be altered in any way. The unique characteristics make it ideal for accounting tasks such as bookkeeping, auditing, and tax preparation. The introduction of blockchain into the accounting realm could lead to significant changes in how information is stored and accessed.
Today, accounting professionals rely on centralized systems to store their financial data and make it available to users as needed. This can create problems with data integrity since a central location is vulnerable to hacking or physical destruction by fire or flood. Blockchain also eliminates the need for reconciliation by providing an open ledger that is accessible to everyone with access rights. In this way, all parties can view the same information and compare their records with those of the other parties involved in the transaction.
The Emerging Role of Accountants in Blockchain
Accountants have a lot to gain from blockchain, as this technology allows them to save time, effort, and resources.
- Blockchain technology has a big potential for accounting because it allows more efficient management of data. The method is decentralized so that information is not stored in just one place and only those who have special access are able to view it. This eliminates the need for third parties that verify the transaction. This makes the process much faster and easier while increasing its transparency and reliability.
- If we look at the current accounting system, we can see how inefficient it is. If you have multiple parties involved in a transaction such as buying/selling a property or sending money from one bank to another bank, there is always a need for reconciliation of accounts. This process takes time and may even cost you money if someone has to travel back and forth between your locations.
- Every transaction made with blockchain technology will be recorded on the database immediately once it is made. Automated Basic audit tasks will be possible with blockchain as well without having to use time-consuming manual audits.
- Moreover, combining blockchain with artificial intelligence will allow them to automate many processes thus reducing time spent on routine tasks.
- The traditional way of issuing invoices and paying bills involves a huge amount of paperwork and manual processes, which can be eliminated by using Smart Contracts.
-Increased reliability on the financial information will reduce the scope of third-party audits thus reducing the cost incurred on independent assurances on Financial Information. Blockchain technology has the potential to increase the reliability of accounting records in the following ways
Blockchain technology could be used to create immutable accounts, which would make it impossible for records to be altered, deleted, or manipulated. This would eliminate any doubts regarding the accuracy of financial statements and provide transparency to stakeholders.
Blockchain uses cryptography that makes it impossible to hack into because each block of data is protected by a digital signature that can only be released by authorized people.
Automated reliable record-keeping accounting transactions will reduce the significant amount of time and cost
- Accounting is considered as the language of business and accountants being masters of this language are well versed with the business model of their employers. Because of their thorough knowledge of business processes, accountants are naturally the most suitable candidates to advise the management and lead the implementation potential implementation of Blockchain solutions.
- Blockchain technology is still in early stages and yet lacks standardization and proper regulations. Due to the rapid popularity of Blockchain Technology, Government bodies and authorities are actively engaged to develop regulations and standards so the newly developed applications cannot be served to harm the public interest. As the Accountants are mandated to ensure compliance with the regulatory requirements while reporting financial information, they have a vital role to play in the development of regulations and reporting standards.
- Blockchain technology has the power to transform business practices around the world. The potential change in business methodologies and procedures will result in the emergence of new skill areas where advice and consultation will be required by qualified accountants.
Disruptions, Blockchain may cause to accountancy.
Blockchain technology is a disruptive innovation with the potential to transform business operating models in the long term. Blockchain will take away some of the tasks accountants do today, especially in the internal auditing, reconciliations, and administration of a company’s accounts.
- The transparency and immutability of blockchain make it an ideal solution for recording and tracking sensitive data and assets, such as financial transactions and medical records which will reduce the need to maintain the accounting ledger on a secure central database and data entry operators in the accounting industry.
- Blockchain technology can provide a way to track every transaction, every step of the way, with instant verification and a permanent record that can’t be changed. This is done by a computer network that relies on consensus, not on trust, as a result eliminating the need for bookkeeping and mundane audit services.
- With blockchain, the need for centralized authorities like banks or governments disappears because there is no “single” institution controlling the information stored on the network. Instead, the peer-to-peer network collectively verifies each transaction on the blockchain and shares every new entry with everyone involved in the chain. The abolished need for intermediaries may result in hundreds of thousand redundancies in the field of Banking and Financial institutions around the globe.
- For accountants, auditors, and tax consultants, the blockchain is a real game-changer. It can simplify automated audits and even automate tax filings. Tax filing: With an immutable record of every transaction, you won’t have to worry about the human error when filing taxes. If you’re audited by the government, all they’ll need is a copy of your blockchain ledger to double-check your figures.
- The blockchain is decentralized, so many transactions are recorded there. This makes it possible to carry out a check on the consistency of accounts with just one click. This ease of recording reliable accounting data will vanish the need for many back-office accounting and auditing staff required to perform various tedious accounting and bookkeeping tasks.
Blockchain technology has already made waves in both business and everyday life with its innovative use of cryptography. Blockchain technology has a lot of potential for accounting and many individuals are forecasting that blockchain technology will revolutionize the accounting industry. While finance experts may still argue about whether blockchain technology can be properly utilized or not, only time will tell if this technology will truly deliver on its promise.
The world is moving from paper-based accounting systems to automated digital ledgers on blockchains, which means accountants need to adapt their skillset before they’re left behind. They needed to adapt to these changes, in order to stay competitive in what may become a very different landscape. Looking at how technologies like artificial intelligence and machine learning can be used by accountants will allow them to keep an eye on what’s happening in their industry and plan for any upcoming shifts. In fact, it’s not just accounting practices where technology is shaping things: Accountants also need to understand how regulators and lawmakers think about technology, especially as cryptocurrency becomes more commonplace and challenges certain aspects of current legislation.
