Blockchains are resistant to modification of data and cannot be altered retroactively. The objective of the article is to highlight the possible implications of blockchain for accounting practice, from both an accounting and an auditing perspective. As artificial intelligence, machine learning and robotics take over some functions of accountants, the way in which accounting information is captured should also change. The real time ability of a blockchain makes the integr ation of such technologies possible. The literature therefore agrees that accounting and auditing would change dramatically due to the application and integratio n of these technologies (Dai Vasarhelyi, 201 7; Cong et al., 2018; Watson Mishler, 2017). Th e application of continuous auditing is made possible through the integration of artificial intelligence (Cong et al., 2018).
It is this removal of “middlemen” by enabling trusted peer-to-peer exchange that is driving what some have come to refer to as “Web 3.0”, and the creation of $2 trillion of wealth in the last ten years. • Automating transactions with less error in data on both sides of the transaction. (2020), “Challenges when auditing cryptocurrencies”, Current Issues in Auditing, Vol. Christ and V Helliar (2021) show that blockchain also makes it possible to monitor workers’ rights, but there are some privacy concerns that must be addressed. Figure 7 shows a cooccurrence heatmap of the main authors’ keywords (more than five occurrences) in this cluster.
The view of Gomaa et al. (2019) currently holds that transactions are recorded in the blockchain system, but separately in the traditional double entry accounting system of the parties involved i n the blockchain transactions. Only in limited instances where an entity’s total recordkeeping system is on blockchain, such as new companies formed on blockchain, and integrated exists into the accounting system that directly produce t he financial statements. Yu et al. (2018) believe that through blockchain technology, accounting choices and judgements could become more transparent a nd that correspondingly this could result in increased comparability of accounting information. Therefore, there is no evidence that the financial reporting system that we currently use will move away from a double entry system to prepared financial statements. A blockchain is, in essence, only a system that securely records transactions and related information in real time. The possibility, however, as discussed further under other technologies below, is that accounting information might be analyzed and presented differently by using data analytics techniques.
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Therefore, a blockchain could be referred to as an ever-growing list or ledger of transactions (chain of blocks) that have been validated by the trusted network (users) based on a single, agreed upon verifiable historical transaction. Bitcoin came into the limelight in the global financial marketplace because it adopted blockchain technology to establish a consensus mechanism based on the evidence or proof of work (Back et al., 2014). Broadly what is the depreciation tax shield speaking, financial systems—especially accounting systems—are being pushed from the physical world to the digital world. To some, blockchain represents a “movement” rather than a technology and describes migration to blockchain technology as a form of risk mitigation to avoid technological obsolescence. To others, blockchain technology is essentially about reducing information risk and providing trust regarding accounting data.
As a result, a smooth and convenient accounting system is necessary for the efficient functioning of a business. The major advantage of blockchain is that the data is shared across the network for verification. Finally, the introduction of blockchain technology is transforming accounting to another level.
As you know, a double-entry accounting method records the credit and debit values of a transaction. However, in a triple-entry method, an additional entry is added to the blockchain. The practice of recording accounting transactions follows the double-entry system, where assets are equated with liabilities and expenses. One of the very first things that we start worrying about if a disruptive technology rises is its possibility of replacing people. With accountancy, the blockchain is expected to massively impact almost everything, ranging from auditing to cybersecurity and everything in between and to the way information is stored, accessed and interpreted.
Information will no longer need to be aggregated and stored in central databases as it will be stored everywhere at once and, if desired, under direct user control rather than the company offering the service. Digital technology has long influenced accounting, but most digital technology has involved replacing analog tools with similar digital counterparts. However, blockchain, a relatively new technology, is poised to change how accounting is done on a more fundamental level. Here are some facts about the blockchain ecosystem and how it will influence accounting in 2021 and beyond. (2019), “Establishing the representational faithfulness of financial accounting information using multiparty security, network analysis and a blockchain”, International Journal of Accounting Information Systems, Vol. Blockchain might be helpful in terms of accounting for renewable energy and carbon credits, which are intangible tradable items created to provide additional financial incentives to clean energy producers (Ashley and Johnson, 2018; Tang and Tang, 2019).
Onboarding accountants onto a blockchain system to learn ledger entry processes and process codes requires intensive training by experts. Essentially, blockchain technology is a form of accounting, but with several computers operating simultaneously in a network. Blockchains have applications that go beyond financial accounting and conventional bookkeeping. Using a blockchain ledger for managing identities makes it extremely hard for the fraudsters to intervene the system without leaving an evident digital trial. A blockchain’s immutable record empowers the accountants to take control of their data tied to their identity and make sure its accuracy with time. With blockchain decentralized identifiers (DiDs), users can regain full control over their record.
As these transactions are verified and time-stamped, the need for external audits may decrease, as auditors can directly access and analyze the immutable blockchain records. Blockchain’s ability to create a secure, shared, and synchronized digital record of transactions means that all parties involved in a financial transaction can access the same information in real-time. This transparency minimizes discrepancies and disputes, as everyone is operating from a consistent set of data. Additionally, the decentralized nature of blockchain reduces the reliance on intermediaries, which not only streamlines processes but also lowers costs. In the realm of modern finance, blockchain technology has emerged as a transformative force, redefining the landscape of accounting practices. Blockchain’s decentralized and tamper-resistant nature holds immense potential to revolutionize traditional accounting systems.
New challenges and opportunities for audit and assurance
Hence, costs and time for executing transactions are considerably reduced through blockchain technology. It’s immutability and decentralized nature make it unique, but its function of recording transactions makes it familiar to those in the accountancy profession. Developing professional knowledge and understanding of this emerging technology and its applications will be crucial to ensuring the profession’s relevance and future readiness. Blockchain’s integration into accounting heralds a transformative era for financial processes. Its tamper-proof ledger ensures data accuracy, reducing the likelihood of errors and fraudulent activities.
- Through smart contracts accountants could also implement control procedures and certain transaction verification procedures (Dai & Vasarhelyi, 2017).
- Supply chain processes seem particularly prone to benefit from this technology.
- Berentsen and Schär (2018) suggest that central banks should not create new cryptocurrencies but should allow anyone to open an account with them.
- Broadly speaking, financial systems—especially accounting systems—are being pushed from the physical world to the digital world.
Transactions are verified and added to the blockchain in near real-time, enhancing the efficiency of processes that rely on swift transactions. In industries like financial services, where rapid transaction execution is vital, blockchain ensures timely settlement, minimizes processing delays, and strengthens security. Smart contracts, a crucial feature of blockchain, automate and execute predefined actions when specific conditions are met. In accounting, this means that certain financial transactions can be programmed to trigger automatic entries or actions, reducing manual intervention and potential errors.
For instance, Bitcoin cryptocurrency depends on a cryptographic hash function known as double SHA256 hashing algorithm, with an extremely large target of 256-bit being shared by all the users of Bitcoin (Pilkington, 2015). The consummation of transactions and payments through fiat money will normally involve a third party aside from the payer and the payee. The traditional banking system usually acts as this trusted third party and has been referred to as ‘go-betweens’ among the payers and payees (Rossi, 2004). However, with the introduction of cryptocurrencies, the trusted third party is done away with because the inclusion of a transaction in a blockchain ensures its finality, as well as its verifiability by many other participants in the blockchain (Dwyer, 2014). For students pursuing a Bachelor of Science in Accounting, keeping a finger on the pulse of the industry is key to future success.
Thirdly, the decentralized public ledgers such as Bitcoin involve great efforts from miners and their computer powers, which are rewarded with coins for these efforts (Evans, 2014). Rosenfeld (2011) conducted a study on the various incentive systems that could be used to reward miners in relation to their efforts. Lastly, the most distinguishing feature of blockchain technology is immutability, which means that the data are verifiable externally and cannot be easily changed by the participants or outsiders (Coletti, 2015; Derose, 2015b). This important feature has made cryptocurrencies stand out as a means of virtual exchange of value to date. In his paper, Nakamoto did not mention the word ‘blockchain’ but implied that the ‘block’ in a blockchain is a block of transactions that has been broadcasted to the network and that the ‘chain’ refers to a string of the blocks. Once the network validates a new block of transactions, it then becomes an addition to the end of the existing chain.
Registry and inventory system for any assets, ranging from raw materials to intellectual property
The keywords were grouped into clusters, namely, sets of closely related nodes within a bibliometric network. To create this form of bibliometric network visualization, VOSviewer uses colors to indicate the cluster to which each node has been assigned considering the cooccurrence relations. The clustering technique used by VOSviewer is discussed by Waltman et al. (2010). The weight of a node is based on the number of occurrences of the corresponding keyword. In addition, the auditor can utilize the real-time data from the blockchains without searching for updated values.
- Cai (2021) cites three blockchain systems, but these cases were studied when they were within initial commercial rather than working phases.
- For example, Arrowsmith says Gilded recently released an accounting and finance platform built around blockchain that handles invoicing, payments, and accounting and tax reporting for cryptocurrency.
- Many experts argue that the blockchain is an accountancy-based technology, which seems true up to some extent.
- Blockchain is specifically poised to create enormous change in the accounting industry.
In this article, we will highlight the advantages and disadvantages of blockchain technology in accounting practices. It aggregates and authenticates every transaction from anywhere worldwide, making it nearly impossible to alter transactions through unauthorized means. These unique features of blockchain-based accounting technology promise management accountants peace of mind, safety, speed, and the much-needed functional freedom to engage in higher-value advisory roles. Many experts argue that the blockchain is an accountancy-based technology, which seems true up to some extent. After all, while the blockchain is mostly known to us as the technology underpinning bitcoin and other cryptocurrencies, it, in fact, underpins them by reconciling the accounts.
Thus, the primary function of a coin is to convey value between participants in the crypto economy. As blockchains allow recording and settlement of transactions to occur at the same time as the transaction itself, auditors can obtain data in real-time and in a consistent, recurring format. Monitoring what happens in real time rather than testing (selectively) and reconciling what happened in retrospect is a substantial departure from contemporary audit techniques. The subject of cryptocurrency is complex, and its decentralized nature means there are a number of regulatory issues accountants will eventually have to deal with. Furthermore, governments are typically reluctant to fully embrace financial and monetary changes that they can exert little control over.
Risk Factors for Companies Failing to Have Sufficient Blockchain Talent
The data requirements would be large compared to a traditional system and is a concern that needs to be addressed if blockchain is to enjoy widespread adoption. It is likely that many enterprises will try to harness this new technology and create value with it. Cons
Accountancy practitioners routinely make adjustments to financial records.
However, due to the confidentiality issue, as previously discussed, certain businesses might choose not to use public blockchains. Tiberius and Hirth (2019) confirm that auditors’ expectations align with those of academics, who believe that the role of auditors will not be filled by blockchain technology. Ferri et al. (2020) found that performance expectancy and social influence generally lead to blockchain adoption intentions. Kend and Nguyen (2020) found that auditors are skeptical of the usefulness of blockchain for auditing.
What is Blockchain Accounting? A Primer for Small Businesses
Before we get excited about the possibility of triple entry accounting, it is important to compare this develop ment with the current banking system. Currently, in the banking system an individual or entity’s transactions are recorded in their bank account, which is a record that is kept separately and independently by the bank. The bank statements received from the banks are used to do a bank reconciliation to the related accounting ledger account.