Blockchain technology proposes an alternative accounting information system that mitigates the challenges faced by the current double-entry system and transforms the technological skill set and focus of the profession. It promises to provide better data quality, increase financial reporting transparency, and provide real-time reporting in an environment that increases trust and lessens the opportunity for fraud. CPAs will need to acquire a working knowledge of the blockchain and smart contracts to navigate in this new triple-entry accounting environment. This emerging and disruptive technology also promises to alter the accounting professional’s perspective, from transaction-focused to analytical. Accounting With BlockchainUsing blockchain technology allows users to integrate accounting into business activities rather than separate accounting from business activities. This is achieved via a triple entry accounting system that, essentially, maintains three ledgers, one each by the seller, the buyer and a public set of (cryptographically authorized) records.
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- And I think as they understand how to meet the compliance needs related to cryptotax, they’re going to get a better understanding of cryptoassets, the blockchain category.
- You know, I think in the early stages of blockchain we said this was going to really be massively disruptive because everybody was going to start doing transactions in blockchains.
- Deloitte COINIA is an extension of Deloitte’s award-winning Cortex platform, a cloud-based data platform that harnesses the power of data by securely and seamlessly integrating data acquisition with data preparation and analytics.
Recent accounting scandals and financial restatements, however, indicate that no system is impervious to collusion. Still, blockchain technology offers a promising platform that is more secure and transparent than the technology we use today. To illustrate this in practice, say that company X wants to send money to company Y to pay an outstanding invoice related to the purchase of software (Exhibit 1).
Here are some facts about the blockchain ecosystem and how it will influence accounting in 2021 and beyond. Deloitte celebrates its cash flow from financing activities 175th anniversary in 2020, and audit has undergone multiple sea changes in those years. At each inflection point, it has re-established its vital role in building trust and confidence in the capital markets and in the investing public. Today, we are racing toward yet another inflection point that holds tremendous promise and potential for the future of audit.
Blockchain negates this ability, making substantiation less beneficial than promoters claim. Additionally, just because a transaction cannot be modified, that provides no assurance that it was entered properly in the first place. Addressing blockchain technology with respect to accountancy (accounting and auditing) will eliminate misconceptions, answer questions and, most importantly, look for the true value that blockchain technology can bring to the accounting world. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities.
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But it’s maturing, and it may be changing very quickly what you hear, thanks in part to a decision or a release recently by the IRS. CPA.com, the AICPA’s technology and business subsidiary, put out an accounting technology version of the Gartner Hype Cycle with blockchain having nearly completed a precipitous fall from the height of inflated expectations into the trough of disillusionment. The blockchain enables the implementation of a system of accounting that requires transaction verification from a neutral third party. A total of three entries will be created, because each party (the two parties involved in the transaction and the intermediary) creates a record for the transaction (Grigg 2005).
And when you begin to watch produce and different industry verticals leveraging blockchain technology in production today, all those firms leverage participants in the accounting profession. Alternatively, a firm may adopt a distributed private network, which is more like a traditional transaction ledger. Members will be independent, third-party (e.g., vendors, customers, lenders, external auditor) stakeholders that have no direct interest in colluding with other members.
How Will Blockchain Technology Affect the Accounting Industry?
It’s not clear how long organizations will take to adopt block-chain and alternative accounting information systems due to the numerous aforementioned challenges. In the interim, CPAs should commit to learn about the technology, experiment with it and participate in its innovation. Even so, a wide range of approaches have emerged that may lead to block-chain accounting systems (see Exhibit 3). These approaches range from IT services that use a build-on-request approach to special application programming interfaces (API) that permit an institution’s ERP system to communicate with a blockchain application. One start-up is developing an accounting-specific system using blockchain technology, while another develops workflow solutions using distributed ledger technology that can be employed to develop a blockchain accounting system. Each account in the double-entry system will have a corresponding blockchain account.
The tool is compatible with multiple public blockchains and digital assets, including Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Ripple, Dash, and all ERC20 tokens, with more being added on demand. Blockchain in accounting will help accountancy firms and accounting professionals, particularly auditors, with business audits. Since a large part of audits is verifying the occurrence and accuracy of financial records, this would free up a lot of time for the accounting professional to focus on other things. New technologies have traditionally faced adoption challenges (e.g., EDP and ERP systems). Therefore, it is not surprising that organizations have not yet embraced blockchain technology in general, and distributed ledger technology specifically.