Written by HWANG, Johnson and WONG, Anson
In the accountancy industry, digitization and “the internet of things” are still in its infancy. Because of regulatory requirements, the accounting process is designed for forgery to be impossible or at least very costly. To achieve this type of control integrity, most of the controls rely on manual, labor-intensive tasks and thus are not automated and lacked the innovation that some of the other industries have seen (Andersen, 2016).
Blockchain is an innovative digital technology that will change financial reporting and the accounting function, it is a type of database known as a distributed ledger that is decentralized with no central administrator. Anytime a ledger is being recorded, it is being recorded, or time stamped on a “block” and each block is linked to the previous one by cryptographic algorism and the linked blocks form a chain. Each user holds a set of copied ledgers in their own computers, and the data is replicated and synchronized across all ledgers in real-time. Because the ledger is both shared and encrypted, an attacker or someone who wants to forge the data would have to change every and single one of the data on all the computers around the world – which makes forgery impossible (Ernst & Young , 2016).
Specifically, with regards to the accounting profession, blockchain can be used to produce verifiable audit trails, such as registering digital assets like stock and bonds. As mentioned previously, blockchain updates its ledger of the block of chains on a real-time basis, this allows the finance and accounting team to provide real-time financial reporting to the management as well as the external auditors. Managers will have up-to-date report that will enable them to make informed strategic decisions without only relying on data that are a few months lagged. A collateral benefit to this real-time update will allow both accountants and auditors to have more time to focus on strategic planning and not on generating historical management reports (Ernst & Young , 2016). For financial institutions that handle a lot of transactions will see blockchain as the possibility of lowering their operating costs for clearance and settlement services by using blockchain (Cohn, 2016). For audit firms, the short-term implication is more far-reaching, as the role of audit firms is to ensure the accurate disclosure of financial and non-financial information. External stakeholders that are affected include public shareholders of listed companies, prospective investors, and regulation bodies. Although the effects of blockchain technology to the audit industry will not be felt in the short to medium term, it is not hard to imagine a future where auditors, in the traditional sense would be eliminated in this financial reporting value chain process. Instead, the role that auditors play would be mainly ensuring the integrity of the digital processes that captures and publishes financial information. It is no surprise that the Big Four accounting firms are thus expanding their digital control and audit practices and consulting practices that would be less disrupted by new technologies.
Furthermore, regulation bodies would have to bear a greater social role in formulating rules and regulations around blockchain (Cohn, 2016). For example, in the extreme case, for the world with instant data transmission, how often should companies publish financial information? This, for example, would significantly impact economies and company operations, i.e. how businesses are conducted. Another important question is how much financial information a company should publish and if not all information is published, does the current international accounting policies still do a reasonable job in providing various stakeholders with information to evaluate the said company. Regardless, there is no question that blockchain will have an enormous impact on the accounting and audit industry.
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Bibliography
Andersen, N. (2016). Blockchain Technology: a game changer in accounting? . Deloitte .
Cohn, M. (2016). Get Ready for Blockchain’s Big Impact. Accounting Today.
Ernst & Young . (2016). Blockchain and the future of audit. EY Assurance insights hub.