Question

Discuss 3 proposed impacts of blockchain technology in accounting and how it may impact your present job, a company for which you are familiar, and/or career in the field of accounting. Note: my goal here is for you to demonstrate that you understand what it is so please translate most technical terminology into practical everyday communication. Need to be 550 word.

Answer 1

Blockchain in accounting:

With more companies exploring blockchain business opportunities—including the blockchain audit trail—many accounting firms have undertaken blockchain initiatives to further understand the implications of this important and versatile technology. Audit and assurance professionals should stay abreast of developments and continue to learn more about blockchain business applications, blockchain in accounting, and blockchain audit technology.

Blockchain Basics

Blockchain is also known as distributed ledger technology (DLT) — which is, perhaps, the simplest definition of what blockchain is. In conventional accounting, records are stored in a centralized location, be it a collection of spreadsheet files or the database of an accounting software application. The accountant enters each record, and performs whatever actions are necessary to serve the client’s needs. When information about the records is needed by regulators or clients, the accountant must retrieve whatever data is needed and provide it to the requesting party. Generally, only the account and auditors have direct access to the centralized ledger.

In DLT, on the other hand, records are entered into and stored in a distributed, or shared, ledger, which is generally made accessible to all concerned parties. In this case, the accountant, regulators, auditors, and clients would each possess an identical copy of the ledger at all times. Of course, each client would have access only to the portion of the ledger that contains their own records. Public and private keys are used to authenticate users.

What is blockchain?

A blockchain is a digital ledger created to capture transactions conducted among various parties in a network. It is a peer-to-peer, internet-based distributed ledger which includes all transactions since its creation. All participants (i.e., individuals or businesses) using the shared database are "nodes" connected to the blockchain, each maintaining an identical copy of the ledger. Every entry into a blockchain is a transaction that represents an exchange of value between participants (i.e., a digital asset that represents rights, obligations or ownership). In practice, many different types of blockchain are being developed and tested. However, most blockchains follow this general framework and approach. A properly functioning blockchain is immutable despite lacking a central administrator. As a near real-time and distributed digital ledger, a blockchain has several unique and valuable characteristics that, over time, could transform a wide range of industries:

• Near real-time settlement—A blockchain enables the near real-time settlement of transactions, thus reducing the risk of non-payment by one party to the transaction.
• Distributed ledger—The peer-to-peer distributed network contains a public history of transactions. A blockchain is distributed and highly available and retains a secure record of proof that the transaction occurred.
• Irreversibility—A blockchain contains a verifiable record of every single transaction ever made on that blockchain. This prevents double spending of the item tracked by the blockchain.
• Censorship resistant—The economic rules built into a blockchain model provide monetary incentives for the independent participants to continue validating new blocks. This means a blockchain continues to grow without an “owner.” It is also costly to censor.

Three major impacts of blockchain technology on accounting:

• Blockchain technology has the potential to impact all recordkeeping processes, including the way transactions are initiated, processed, authorized, recorded, and reported.
• Changes in business models and business processes may impact back-office activities such as financial reporting and tax preparation.
• Both the role and skill sets of CPA auditors may change as new blockchain-based techniques and procedures emerge. For example, methods for obtaining sufficient appropriate audit evidence will need to consider both traditional stand-alone general ledgers as well as blockchain ledgers. Additionally, there is potential for greater standardization and transparency in reporting and accounting, which could enable more efficient data extraction and analysis.

Independent auditors will need to understand blockchain technology as it is implemented at client sites, whether clients are pursuing blockchain business opportunities, implementing blockchain business applications, or applying blockchain in accounting.

The potential impact of blockchain on the audit and assurance profession

Some publications have hinted that blockchain technology might eliminate the need for a financial statement audit by a CPA auditor altogether. If all transactions are captured in an immutable blockchain, then what is left for a CPA auditor to audit?

While verifying the occurrence of a transaction is a building block in a financial statement audit, it is just one of the important aspects. An audit involves an assessment that recorded transactions are supported by evidence that is relevant, reliable, objective, accurate, and verifiable. The acceptance of a transaction into a reliable blockchain may constitute sufficient appropriate audit evidence for certain financial statement assertions such as the occurrence of the transaction (e.g., that an asset recorded on the blockchain has transferred from a seller to a buyer). For example, in a bitcoin transaction for a product, the transfer of bitcoin is recorded on the blockchain. However, the auditor may or may not be able to determine the product that was delivered by solely evaluating information on the Bitcoin blockchain. Therefore, recording a transaction in a blockchain may or may not provide sufficient appropriate audit evidence related to the nature of the transaction. In other words, a transaction recorded in a blockchain may still be:

• Unauthorized, fraudulent, or illegal
• Executed between related parties
• Linked to a side agreement that is "off-chain"
• Incorrectly classified in the financial statements

Furthermore, many transactions recorded in the financial statements reflect estimated values that differ from historical cost. Auditors will still need to consider and perform audit procedures on management’s estimates, even if the underlying transactions are recorded in a blockchain.

Widespread blockchain adoption may enable central locations to obtain audit data, and CPA auditors may develop procedures to obtain audit evidence directly from blockchains. However, even for such transactions, the CPA auditor needs to consider the risk that the information is inaccurate due to error or fraud. This will present new challenges because a blockchain likely would not be controlled by the entity being audited. The CPA auditor will need to extract the data from the blockchain and also consider whether it is reliable. This process may include considering general information technology controls (GITCs) related to the blockchain environment. It also may require the CPA auditor to understand and assess the reliability of the consensus protocol for the specific blockchain. This assessment may need to include consideration of whether the protocol could be manipulated.

As more and more organizations explore the use of private or public blockchains, CPA auditors need to be aware of the potential impact this may have on their audits as a new source of information for the financial statements. They will also need to evaluate management’s accounting policies for digital assets and liabilities, which are currently not directly addressed in international financial reporting standards or in US generally accepted accounting principles. They will need to consider how to tailor audit procedures to take advantage of blockchain benefits as well as address incremental risks.