Accounting gets to grips with blockchain
Blockchain technology evolved from the murky world of online currencies, but a lot of influential accountants are now considering its implications for accounting. John Stokdyk rounds up some of the latest thinking.
A quick skim of AccountingWEB for references to “blockchain” during 2016 turns up a parade of impressive characters, from Sage vice president Jennifer Warawa to government chief scientific advisor Sir Mark Walport and Big Four accountancy firms Deloitte and PwC.
The point at which the penny dropped after hearing the buzzphrase for the fifth time occurred in July at an ICAEW AuditFutures salon meeting in June, where interested parties gathered to try and unravel the implications for the profession as a whole, and auditors in particular.
The event drew a large, well informed crowd and some knowledgeable panellists, including Brett Scott, author of a recent book on the subject. His perspective was useful because of the way it took blockchain back to its subversive, disruptive roots in the cryptocurrency market. Bitcoin and blockchain, the technology that made it possible, were not digital cash, but a distributed version of what happens in financial systems.
“Banks edit databases and have elaborate process where they change the databases to alter the score of your money,” he explained. “It’s almost an oligarchy of private institutions controlling your cash.”
Blockchain sought to replace those private bank databases with a single public database that many people could share and alter. Each additional update created a data chain that could not be unwritten once a transaction was concluded.
In the view of Imperial College fellow Cathy Mulligan, blockchain represents “the disruption of value” and could be just as disruptive as the internet. The rhetoric is dramatic, but few people in the know are willing to argue with it.
PwC recruited former Financial Services Authority divisional head Patrick Spens in February to lead its blockchain efforts. Rather than quashing the transformative hyperbole, he added to it. He was convinced that the technology would be mainstream within 3-5 years and said no CFO or CEO could afford to ignore it.
“Blockchain replaces business processes,” he explained. “If a centralised database will answer your question, use a centralised database. It could be on the blockchain or it could be centralised. It is for you and your business to determine whether your process is painful, costly and takes time.”
It took a while for the conversation to work its way around to the audit implications, but PwC is already examining elements of the financial reporting and audit process to see how they could adapt.
When auditors visit a large client, they will typically go in and ask for confirmation of every order placed on a particular day, he explained. “In a blockchain enabled world, they don’t have to do it. You could do real time audit, real time collections, and real time tax collection,” Spens said, adding that PwC already has blockchain audit mechanisms in place.
It strips out the need to go and get the documentation and would be readable by the regulators - right down to the transaction level. Since distributed central databases wouldn’t stop people writing the wrong things off or making other mistakes. Spens was certain there was going to be “need for assurance around any blockchain solution.”
Less politely, Cathy Mulligan added, “I’m sure there will always be a role for people who want to compile reports.”
The ICAEW session wrestled with the implications of blockchain for the audit profession. But if transactional data is contained in a single, shared repository, what is the technology likely to do to suppliers of general ledger accounting systems?
It’s a question that has been circulating for some time in developer circles. Sage chief technology officer Klaus-Michael Vogelberg thinks that the application programming interfaces that allow blockchain to work will underpin a business transaction processing model in the future where you set up system that are largely self-maintaining and merely monitor the exceptions.
“Things being captured in the bookkeeping are where the accounting infrastructure interfaces with the real world,” he told AccountingWEB.
The dataflow could well extend to compliance requirements, as Spens suggested. “If you take the nirvana of a shared ledger, your accounts payable are my accounts receivable and connect to the banking cloud and ultimately the taxman. If they want a standard audit file, you have an equivalent final record of what you report,” said Vogelberg.
In that scenario, the accounting ledger we know today would sit on top of that transactional system and “super effective reporting system”, he predicted.
“You pull all the information out of the [blockchain] and use the systems you have to correlate that in a particular context.”
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AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.