July 18, 2017

While associated with digital currencies such as Bitcoin, the potential applications for blockchains are practically unlimited. Also known as distributed ledger technology (DLT), a blockchain records and verifies digital transactions without any central authority. Every transaction (aka block) is recorded on thousands of ledgers in a network of replicated databases. Before a block is recorded, it must be validated by a consensus of participants in the blockchain.

Cryptography is used to keep transactions secure and each block has a timestamp and permanently linked (like a chain) back to a previous record. Users can only edit records that they “own” by using their unique and private keys necessary to access and write to the file. All participants in a blockchain have an identical copy that can be viewed at any time. Once blocks are entered, they cannot be modified because every record must always match all others. Any attempts to even alter blocks can be easily traced and why blockchains are used for cryptocurrencies.

Blockchain’s open and secure nature allow people to transact directly with each other, removing the need for intermediaries. Hacking the blockchain is virtually impossible. If a hacker wanted to access a particular block in a blockchain, they would not only need to hack into that specific block, but all of the proceeding blocks going back into the entire history of that blockchain. And they would need to do it on every ledger in the entire network, which could be millions, simultaneously.

Blockchains have many applications beyond payment transactions. Blockchains can help ensure valid vote counts, property transactions, and privacy of healthcare records, just to name a few. Blockchains can also be used to create “smart contracts” that are automatically triggered when certain conditions are met.

For CFO’s and accountants, blockchains offer enormous opportunities and challenges.

The good:

  • a shared single source of the truth
  • make audits more efficient, reliable and easier to:
    • find traceable audit trails
    • verify transactions
    • track ownership of assets
  • opportunity for additional billable hours for consulting and training
  • payment transactions occur in real-time for instant settlement and reconciliation
  • budgeting can be locked in so only authorized spending occurs
  • inventory planning and management is more efficient
  • reduced potential for fraud

The bad:

  • significant cost of investing in training and technology
  • reduction in billable audit hours as blockchains may remove the need for independent validation by a third party
  • integration challenges of implementing a large new system
  • blockchains require enormous amounts of electrical and computing power
  • Uncertainty:
    • Privacy – will competitors be able to see your confidential financial data?
    • Security – are blockchains truly unhackable?
    • How well will blockchains work in high volume transaction environments?
    • Will blockchains signal the end of double-entry bookkeeping?

Blockchains have garnered the interest of the largest public accounting firms. Deloitte announced that it will be hiring 50 blockchain developers in Dublin, Ireland, over the next year. The Big 4 firm will examine blockchain possibilities specific to accounting and trust-based services.

Based on the amount of interest and investment worldwide, blockchains could be a major gamechanger. Time will tell whether blockchains are good or bad for financial reporting. Meanwhile, CFO’s, accountants, analysts and financial executives will need to stay ahead of game by keeping up to date on the latest blockchain reporting developments. Stay tuned.

 

Related articles:

https://www.accountingtoday.com/opinion/blockchain-accounting-and-audit-what-accountants-need-to-know

https://www.linkedin.com/pulse/blockchain-explanation-your-mum-could-understand-jamie-skella?trk=v-feed&lipi=urn%3Ali%3Apage%3Ad_flagship3_feed%3BUFHF3QDock5DQ0oiVPJ%2FeA%3D%3D

http://economia.icaew.com/features/july-2016/how-blockchain-will-impact-accountants-and-auditors

https://hbr.org/2017/01/the-truth-about-blockchain