Question

Would the adoption of a technology such as blockchain mean that accountants would no longer need to use professional judgement in determining how to account for or report transactions and events?

Answer 1

Blockchain technology is in an advanced stage of adoption in agriculture, international trade, healthcare, digital content, transportation and government, to name a few. In fact, blockchain is seen as a solution in every situation where there is need for a trustworthy record. And that is where blockchain’s next big disruption is: its potential application in inter-organizational records, including accounts management.

When it comes to business contracts and transaction execution, another add-on to blockchain is the technology of smart contracts. Smart contracts are a kind of blockchain application that enable automatic exchange of anything of value at agreed upon terms that are implemented automatically in a trustworthy, transparent and secure manner without the need of any inter-mediating parties. Smart contracts help define and configure the rules and the penalties relating to a contract or agreement and automatically enforce them when due. This would remove the need for maintaining separate books of account, reconciliations, confirmations and the like.

When it comes to external audits, investors look to auditors, as trusted third parties, for their opinion to assure that the financials an audited entity presents are a true and fair view. This the auditor achieves based on performance of audit procedures, as ordained in the relevant auditing framework. In the current framework, auditors are required to assert that:

- the financial statements are free from material misstatement, whether due to fraud or error;

- are prepared in accordance with the requirements of the applicable financial reporting framework;

- effective internal control over financial reporting was maintained in all material respects;

- the accounting estimates made by management are reasonable;

- the information presented in the financial statements is relevant, reliable, comparable, and understandable; and

- effect of material transactions and events on the information conveyed in the financial statements that achieve fair presentation.

If we play this out in the context of a blockchain-driven world where trust and transparency are built-in, audit trails become inherent to transaction execution and recording across the ecosystem:

- financial statements would inherently be free from material misstatements, errors and potential for fraud.

- smart contracts could ensure compliance with transaction recording and disclosures in compliance with stipulated financial reporting framework.

- the combination of blockchain and artificial intelligence solutions will enable near-accurate accounting estimates.

- by inherent design, blockchain technology has the potential to ensure internal controls relating to financial reporting.

Hence, in a mature blockchain and an artificial intelligence-driven world, investors could—in real-time—have a true and fair view of financials that are inherently trustworthy. This would eliminate the need for external audits in its current form, including all the associated audit procedures surrounding examination of records, assessing compliance with accounting principles, accuracy of accounting estimates, etc.