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Blockchain and Its Impact on Accounting
Blockchain technology has the potential to revolutionize many facets of the banking and financial services industries. Auditing, however, will be one of the prime areas blockchain could be utilized to speed up transaction processing, verify transactions, and even spot anomalies. Yet, blockchain technology is still a new and uncharted territory for many in the accounting world.
What is Blockchain?
The technology, which up to now, had been most widely used in developing cryptocurrencies and their markets, is being eyed for a vast array of uses. Blockchain, in its simplest description, is a transactional ledger distributed across a peer-to-peer network that uses cryptography to protect and store transactions. Computers on the network, known as nodes, verify and record those transactions in real time. This allows concerned parties to complete transactions without the use of a centralized intermediary, by creating an irreversible [MJHC1] entry.
Who Can Access Blockchain
Understanding blockchain's potential will require knowledge of its variant uses and configurations for its different users. Access to blockchain information may be limited in terms of its shared status. Currently two classifications of blockchain exist: permissionless (public) and permissioned (private).
Public blockchains permits anyone access to the ledger. This allows for the full potential of a decentralized ledger. However, accessibility is open to all. Anyone with a computer can become a node. Plus, the settings and technological limitations at the time of setup may limit the ledger's speed or size, thereby slowing transaction speeds in the future.
A private blockchain affords some organizations restricted participation in the network to already-agreed-upon participants. This would limit, of course, visibility of the ledger's activity to a select community as determined by the blockchain's administrators. The restriction however, also limits the benefits of a truly decentralized environment with wide distribution.
The Advantages of Blockchain
The promise of a decentralized, encrypted, and reliable database offers significant [MJHC2] opportunities for business transactions. The information will always be available because copies of the ledger are spread across active nodes. There is no single point of failure. If one node drops off the network, other nodes simply have the identical information already stored and copied. No single party can control the blockchain information; therefore, no individual can delete it or change it. Furthermore, blockchain technology will offer flexibility and security for businesses and operations including:
electronic ledgers will be less expensive to maintain than traditional accounting systems;
there will be fewer errors because of the automated nature of the consistency of the distributed ledger technology;
less capital will be held against the risk of a pending transaction due to reduced processing delays.
Disadvantages of Blockchain
Because of blockchain's immutability, data can only be added to a ledger and cannot, for now, be erased. Any corrections will be the result of adding a new entry to adjust for an incorrect input. Additionally, a white paper jointly released by Chartered Professional Accountants of Canada and the American Institute of CPAs, noted that "recording a transaction in a blockchain may or may not provide sufficient appropriate audit evidence related to the nature of the transaction." The concern is that a blockchain transaction might be:
• unauthorized, fraudulent or illegal;
• executed between related parties;
• linked to a side agreement that is “off-chain”; or
• incorrectly classified in the financial statements.
The CPAAC and AICPA white paper also cautioned that "---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."
While new potential applications for distributed ledger technology are still being formulated, a lot of questions and concerns remain to be answered regarding blockchain's promise. Consumers should not, however, adopt a wait-and-see attitude. Business owners and other concerned parties should contact their accounting and information technology professionals to see how blockchain services and products could potentially benefit them in the near future.
* Photo illustration by Carlos Moreno