Podcast: Blockchain and the Future of Accounting
"Auditing will become continuous and real-time, allowing financial decisions to be made with present knowledge rather than past knowledge."
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This article contains the script of Episode 9 of the Tela Network Podcast.
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Podcast Script
Welcome to the Tela Network Podcast. My name is Jan Kleczkowski, and I'm an Audit Senior at Ernst and Young and about to become a Chartered Accountant.
The topic of this short episode is "Blockchain and the Future of Accounting". It explores some of the changes that blockchain technology will have on accounting, how the work that accountants do will change, and some of the new opportunities that will emerge. I draw heavily on an article published in 2017 by the Institute of Chartered Accountants in England and Wales. There will be a link to it in the Sources section of the companion article to this podcast.
If you have any questions, comments, or suggestions, you can contact me on Tela. My contact link will be in the description below.
A Quick Overview
1) Blockchain is transforming the recording, processing, and storing of financial transactions and information.
2) Blockchain provides certainty over transaction history. This means that accountants will do much less manual reconciliation - this task will become much more automated. Accountants will instead spend much more time on analysis, categorization, and advice.
3) Auditing will become continuous and real-time, allowing financial decisions to be made with present knowledge rather than past knowledge.
4) Accountancy often involves tracing the ownership of assets. As more data moves onto blockchain systems, verifying the ownership of an asset will become easier.
5) New types of ventures, products, and services may become possible, which previously required so much record-keeping work that they were not really feasible. A quick example: Take one of today's self-service city bicycle rental services, and now imagine that it could pay its users to return their bicycles to areas that need more bicycles.
Blockchain from an Accounting Perspective
I'm going to read an excerpt from an article called "Blockchain and the future of accountancy", published in 2017 by the Institute of Chartered Accountants in England and Wales. I can't really put it better than they already have.
"""
Blockchain is an accounting technology. It is concerned with the transfer of ownership of assets, and maintaining a ledger of accurate financial information. The accounting profession is broadly concerned with the measurement and communication of financial information, and the analysis of said information. Much of the profession is concerned with ascertaining or measuring rights and obligations over property, or planning how to best allocate financial resources. For accountants, using blockchain provides clarity over ownership of assets and existence of obligations, and could dramatically improve efficiency.
Blockchain has the potential to enhance the accounting profession by reducing the costs of maintaining and reconciling ledgers, and providing absolute certainty over the ownership and history of assets. Blockchain could help accountants gain clarity over the available resources and obligations of their organisations, and also free up resources to concentrate on planning and valuation, rather than recordkeeping.
"""
The Emergence of Triple-Entry Bookkeeping
Traditional accounting maintains and stores records in a centralized location. Usually this is the database of an accounting software application, which will most often use a double-entry bookkeeping system.
Blockchain uses a triple-entry bookkeeping model. This means that all stakeholders – accountant, auditor, client, and regulator – will have an identical copy of the ledger, constantly synchronized across a peer-to-peer network. The fact that the ledger is copied to other stakeholders is, in a sense, a "third entry" for each transaction.
Many companies will have internal data that should not be shared on a public ledger. However, in a large enough company, there may be enough internal stakeholders that an internal blockchain may be the best way to allow them to synchronize this internal data between themselves.
I'm going to briefly describe single-entry and double-entry bookkeeping, so that you'll be able to see that triple-entry bookkeeping is the logical next step. Each stage has more built-in error checking, which permits more complex and efficient accounting.
In single-entry bookkeeping, there is only one entry made per business transaction; most entries record incoming or outgoing funds.
The advantage of the single-entry bookkeeping system is that it's simple and straightforward. However, a significant problem with single-entry bookkeeping is that it's harder to spot fraud or errors in your accounting.
In double-entry bookkeeping, every entry to an account requires a corresponding and opposite entry to a different account. So: We have two entries per business transaction - a debit and a credit. This means that many types of error will be detected when the accounts are totaled up.
Additionally, a double-entry bookkeeping system assists a business to track its assets and liabilities more accurately, because entries are categorized.
This brings us to triple-entry bookkeeping: Triple-entry adds a third layer or entry – all the transactions and involved parties are written on a shared blockchain and all stakeholders have access to the financial record.
As new transactions are entered into a blockchain-based system, they are immediately validated by all the other computers in the system. This means that fraud or errors that would be missed in a double-entry bookkeeping system will be detected immediately by the other stakeholders in a triple-entry bookkeeping system.
The Accountant of the Future
The article that I mentioned earlier is excellent. I'm going to read another excerpt from it, that describes how blockchain technology will change the nature of accountancy.
"""
The spectrum of skills represented in accounting will change. Some work such as reconciliations and provenance assurance will be reduced or eliminated, while other areas such as technology, advisory, and other value-adding activities will expand.
To properly audit a company with significant blockchain-based transactions, the focus of the auditor will shift. There is little need to confirm the accuracy or existence of blockchain transactions with external sources, but there is still plenty of attention to pay to how those transactions are recorded and recognised in the financial statements, and how judgemental elements such as valuations are decided. In the long term, more and more records could move onto blockchains, and auditors and regulators with access would be able to check transactions in real time and with certainty over the provenance of those transactions.
Accountants will not need to be engineers with detailed knowledge of how blockchain works. But they will need to know how to advise on blockchain adoption and consider the impact of blockchain on their businesses and clients. They also need to be able to act as the bridge, having informed conversations with both technologists and business stakeholders.
"""
To the best of my knowledge, this is a good summary of the changes that blockchain technology is likely to bring to the field of accounting. I think it's going to be a very interesting period, and I'm excited to see the new opportunities and capabilities that will emerge.
That's the end of this episode. I hope you enjoyed it. Thank you for listening.
Again, if you have any questions, comments, or suggestions, you can contact me on Tela. My contact link will be in the description below.
Sources
https://www.accaglobal.com/gb/en/student/sa/features/blockchain.html
https://www.freshbooks.com/hub/accounting/single-entry-bookkeeping
Podcast Description
"Auditing will become continuous and real-time, allowing financial decisions to be made with present knowledge rather than past knowledge."
This is Episode 9 of the Tela Network Podcast, hosted by Jan Kleczkowski.
If you have any questions, comments, or suggestions - please contact Jan Kleczkowski on Tela:
https://www.tela.app/id/jan_kleczkowski
Add Jan Kleczkowski on LinkedIn:
https://www.linkedin.com/in/jan-kleczkowski-0b5b84120
Read this content as an article:
https://telablog.com/podcast-blockchain-and-the-future-of-accounting
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Listen on Spotify:
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