How Bitcoin Could Transform Accounting As We Know It

We’re not there yet, but in less than 10 years, I believe that the technology behind the virtual currency bitcoin will transform the accounting profession entirely.

What is this technology? The blockchain, one of the most sophisticated concepts since the invention of the internet.

Let me set the scene by going over a few bitcoin-related concepts before explaining why I think that the accounting profession will undergo a major disruption in the coming years.

What is the blockchain?

BitCoin ledger

When most people think about bitcoin they think about it as a currency. But there’s a much more powerful technology that allows the currency to exist in the first place and it’s called the blockchain. Many people in the bitcoin space are unfazed by the recent crash in price (a bitcoin was worth more than A$1,000 in 2013 and is worth A$385 today). They realise that the blockchain as a technology is far more powerful and exciting than bitcoin as a currency.

The blockchain is a public, decentralised, distributed ledger that is capable of storing and confirming the transactions that pass through it. This means that the ledger is not owned or controlled by any one party.

The blockchain ledger can never be altered and records can never be destroyed. Information can only be added to the ledger, never removed. Before anything can be added to the ledger, however, it needs to be validated and confirmed by the network’s users, called miners, who secure the legitimacy of the network and the transactions passing through it.

If you see a transaction on the blockchain, the transaction has been confirmed and it cannot be reversed. If you sent me a bitcoin today, the bitcoin will transfer from your wallet to mine via the blockchain and before I receive that bitcoin, miners on the network will confirm its validity.

Miners are users who run computers all day to solve complex mathematical equations issued by the network. As these problems are solved, they are rewarded for their efforts by receiving a predetermined amount of bitcoins. To understand more about how transactions are confirmed you would need to read up on how mining works. It’s fairly technical.

If you think about it, it’s pretty brilliant. There can be upwards of US$50 million worth of bitcoin running through the blockchain on any given day. This network is not owned nor governed by any central authority. It pretty much runs on autopilot thanks to the amazing code behind it.

The element of trust

Bitcoin trust

Just as the music-sharing app Napster disrupted the music industry, I would expect the blockchain to do the same to many other industries, only on a larger scale.

When we are dealing with the blockchain we are not going through any intermediary except the user on the other end of the transaction. If I receive a bitcoin from you, it is sent directly from you and into my bitcoin wallet. If a bitcoin is in my wallet, it’s not held by anyone other than me.

Your bank balance is at the other end of the spectrum. The balance in your account is simply an IOU from your bank, a promise to pay you back. We put our trust that this institution will honour this IOU, but why? It’s the same with your insurance policy. We “trust” that the insurance company will honour the policy if ever the conditions were met. Why do we trust this third party without thinking?

The blockchain is capable of eliminating this trust factor. When you have a bitcoin in your wallet you do not need to trust any third party to hold their end of the bargain. One of the hotter topics in cryptocurrency at the moment has to do with “smart contracts”. Contracts can be placed on the blockchain and as conditions are met the terms of the contract are executed. This isn’t something that’s way off in the future – it’s already happening.

I am not trying to argue that centralised is better than decentralised and that unregulated is better than regulated; I am simply saying that the blockchain allows us to remove trust from the equation.

The blockchain can hold more than bitcoins

BitCoin transfer assets

You can transfer the ownership of just about any asset you want using blockchain technology. There are many reasons why one would want to use the blockchain to transfer ownership of one’s assets other than bitcoins on the blockchain. Reasons include efficiency, effectiveness, removal of third party trust and cost.

Remember that when you sell your home you aren’t physically transferring the asset. You’re simply using a piece of paper signed by you, the purchaser and the notary in order to transfer ownership. The blockchain is simply a digital way to transfer ownership of assets in a more efficient and a more effective way.

“Coloured coins” can attach assets to the blockchain and can be used to distinguish between different properties, for example. If you wanted to transfer the title of your house you would attach the deed of sale to a coin with a unique “colour” or cryptographic property which would then identify this coin as your home on the blockchain.

Other projects are popping up to allow for the transfer of anything of value over blockchain technology. Montreal’s Blockstream, which raised US$21 million dollars in funding in November, has been working on a project that will enhance the utility of the blockchain via what they call sidechains. The project will create an ecosystem that speaks to the blockchain and will enable for the transfer of anything of value in a 100 percent “trust-free” manner.

The innovation that is currently taking place on the blockchain is really just in the early stages. As the technology evolves, more and more businesses will transfer ownership of assets using the blockchain. This financial data will now be contained in the blockchain’s ledger.

The role of an accountant

accountant

The blockchain has enormous implications for auditors, who act as an independent third party to verify the accuracy of a company’s financial statements. Auditors struggle with an inherent bias because they collect fees from their client to conduct the audit. Auditors can be tempted to protect the client and therefore protect the firm’s revenues at the expense of the public. While we take our code of ethics, our training and our professionalism very seriously, this bias cannot be ignored.

There is also the risk that the company’s management “cooks the books” in a way that isn’t detected by the auditors and as such, the financial statements it presents to external parties may be inaccurate.

This is where we circle back to the concept of trust. When an auditor issues their opinion we trust that they have done a proper job and we therefore trust the financial statements. We trust that all self-interest has been put aside for the proper protection of the public. But this isn’t always the case. Sometimes this bias does get in the way and sometimes the public is affected by scandals like Enron.

This is where I think the blockchain can play an integral role in how an audit could be conducted.

All audit procedures entail confirming transactions and balances that are stated on a company’s accounting ledger. As we have seen above, the blockchain can do this without the use of a third party. Theoretically, everything that is on the books of the company could occur on the blockchain.

Employing an auditor to re-confirm these transactions would no longer be necessary.

Our profession is changing at a dramatic pace. Bookkeeping is already being massively transformed by scanning technology. The code behind the blockchain is way more sophisticated. The possibilities of what it can do are pretty much endless.

Some say this can never happen. They’ll say that technology cannot eliminate what a well trained professional can do.

But look at where we are now. Our accounting firm, for instance, doesn’t meet clients face to face, we don’t touch paper and engage in zero manual data entry when preparing a client’s books. Five years ago accountants would have thought this was crazy. Thanks to technology we’ve been able to advance to a point where this is not only possible but is massively disrupting the profession.

The blockchain, in my opinion, is the next level of disruption for the profession due to the parallels it has with accounting.

No doubt, my peers will probably give me a bit of flack on this one. After all I am a CPA who trained as an auditor.

Image creditsBitcoin.org

Source: digital first.com

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