Terms like “Bitcoin” and “cryptocurrency” turned the financial world upside down in 2017, but few people appreciate that blockchain technology, the software underlying bitcoin and other cryptos, is fundamentally a system of accounting. The methods behind blockchain accounting are so revolutionary that some believe it could end the 700-year reign of double-entry accounting.
Accountants and auditors can adapt to stay competitive alongside blockchain. Thanks to the security and trust built into blockchain ledgers, accounting firms may end up streamlining their services to compete in a world of increasing data volume.
What a Blockchain Does
There are many types of blockchain, but they each share a unique feature: the ability to efficiently stack nonfalsifiable accounting records. Each system is made of “blocks” of electronic transactions, verified independently and stacked together chronologically in a “chain.” Every new transaction gets added to a new block, and each new block is added to the system and updated across every single computer, or “node,” with the blockchain software. Everyone’s ledger has a record of everyone’s transactions in perpetuity.
The ways that blocks are verified and added to the chain vary across different protocols (proof of work vs. proof of stake, etc.). Some blockchain software can be designed so other applications attach to them, such as smart contracts. These contracts can be written so that certain events, such as the result of a hockey match or filling of a production quota, automatically trigger payments between parties.
Open-Source Distributed Ledger
Many blockchain protocols exist on “open-source software,” which means the source code is available publicly and open to improvement from anyone. An open-source accounting system could potentially enable multiple companies to write their transactions directly into a joint, shared ledger. This could mean simplified regulatory proceedings, public verification, and an interwoven register, all held together by an everlasting set of accounting records.
Take, for example, the popular Bitcoin network. The blockchain supporting the Bitcoin cryptocurrency is available for free download into anyone’s computer. Any Bitcoin user can operate as a node and work to validate the most recent transactions, a process called “mining,” and every single node gets updated in real time with the result of every Bitcoin transaction. Once a block is mined and its transactions verified, no more auditing work is required.
The Future of Accounting
Some accounting and auditing firms already embrace blockchain technology. Blockchain transactions are simpler, more visible, and more transparent. Improvements in operational efficiency mean that much of the work accountants do, such as collecting and inputting data, sampling, and proving provenance, takes place automatically. This leaves accountants more time to provide valuable services to their clients.
Already, companies use the blockchain to improve enterprise resource planning (ERP), especially in areas such as supplier management and procurement. Some even dabble in cybersecurity and sustainable database planning.
Accounting education will also change. Traditional training for auditors and accountants may prove redundant or suboptimal. Old and new accountants may no longer need to memorize best practices pertaining to extensive documents and periodical controls. It may be that accounting education is blockchain education.
It is those contemporary accountants who work to understand blockchain that will be best positioned to succeed in a blockchain-recorded world.