Question

What's the blockchain technology and how it may affect the profession?

Answer 1

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 blockchains are being developed and tested. However, most blockchains follow this general framework and approach.

When one participant wants to send value to another, all the other nodes in the network communicate with each other using a pre-determined mechanism to check that the new transaction is valid. This mechanism is referred to as a consensus algorithm. Once a transaction has been accepted by the network, all copies of the ledger are updated with the new information. Multiple transactions are usually combined into a “block” that is added to the ledger. Each block contains information that refers back to previous blocks and thus all blocks in the chain link together in the distributed identical copies. Participating nodes can add new, time-stamped transactions, but participants cannot delete or alter the entries once they have been validated and accepted by the network. If a node modified a previous block, it would not sync with the rest of the network and would be excluded from the blockchain. A properly functioning blockchain is thus immutable despite lacking a central administrator.

Despite these complexities, blockchain technology offers an opportunity to streamline financial reporting and audit processes. Today, account reconciliations, trial balances, journal entries, sub-ledger extracts, and supporting spreadsheet files are provided to a CPA auditor in a variety of electronic and manual formats. Each audit begins with different information and schedules that require a CPA auditor to invest significant time when planning an audit. In a blockchain world, the CPA auditor could have near real-time data access via read-only nodes on blockchains. This may allow an auditor to obtain information required for the audit in a consistent, recurring format.

As more and more entities and processes migrate to blockchain solutions, accessing information in the blockchain will likely become more efficient. For example, if a significant class of transactions for an industry is recorded in a blockchain, it might be possible for a CPA auditor to develop software to continuously audit organizations using the blockchain. This could eliminate many of the manual data extraction and audit preparation activities that are labour intensive and time consuming for an entity’s management and staff. Speeding up audit preparation activities could help reduce the lag between the transaction and verification dates — one of the major criticisms of financial reporting. Reducing lag time could offer the opportunity to increase the efficiency and effectiveness of financial reporting and auditing by enabling management and auditors to focus on riskier and more complex transactions while conducting routine auditing in near real time.

With blockchain-enabled digitization, auditors could deploy more automation, analytics and machine-learning capabilities such as automatically alerting relevant parties about unusual transactions on a near real-time basis. Supporting documentation, such as contracts, agreements, purchase orders, and invoices could be encrypted and securely stored or linked to a blockchain. By giving CPA auditors access to unalterable audit evidence, the pace of financial reporting and auditing could be improved. While the audit process may become more continuous, auditors will still have to apply professional judgment when analyzing accounting estimates and other judgments made by management in the preparation of financial statements. In addition, for areas that become automated, they will also need to evaluate and test internal controls over the data integrity of all sources of relevant financial information.