14 Mar 2021 12:48 IST

Blockchain to change accounting and auditing

Accountants will not need to fuss over reconciliation; instead they can focus on productive work

Accountants and auditors spend a lot of time getting confirmation of balances from debtors and creditors. The moment these don’t match with the books — as should be the practice when two good accountants work — the customer and the supplier sit together to carry out reconciliation.

Goods received notes (GRN) that document the receipt of materials inside a factory — the first source paper for a vendor to make a payment claim — can get altered by unscrupulous elements. Multiple copies of GRN are prepared in a manual environment, and various authentications are needed in a computerised environment to ensure authenticity.

What if I said all this is passé? What if I said that the accountant does not have to bother about confirmations, reconciliations, and tampering, and the auditor can spend time on more productive work? In the next 10 years, this will become the standard operating practice, thanks to blockchain technology.

A blockchain is a decentralised ledger technology (DLT) that can share information with parties to the transaction on the same network. It records all transactions within the network and broadcasts updates to each blockchain member in real-time.

Simultaneously, it ensures the integrity of the transaction and renders it tamper-proof.

While those with access to the network can choose to be anonymous, every transaction is recorded on the ledger and seen by everyone just as you can see transactions in the general ledger in real life. If anyone tries to modify data, everyone in the chain gets alerted.

Tracing a history of entries

A clumsy parallel is where you broadcast your message in a WhatsApp group. But on WA, anyone can pass off anything as fact. This is not possible in a blockchain because a stakeholder can flag misrepresentations, and the technology enables tracing the history of any entry.

By recording transactions and their details in multiple locations simultaneously, blockchain adds a new dimension to the double-entry system of Luca Pacioli — the Italian mathematician referred to as the father of accounting and bookkeeping. Now, these will also sit in the distributed ledger, picking a triple-entry system! Unlike earlier, when only the accountant and auditor could access records and pull out information, it will now be available to every stakeholder, including the client and regulator. All will have access to an identical copy of the ledger shared across a network of computers.

You cannot alter data without the consent of everyone, which means information is 100 per cent reliable. The security is bulletproof as blockchain uses cryptography to secure data and private and public keys to authenticate users. Cooking books may become a challenge.

Is the accountant going away?

Accounting has always relied on digital records and paper trails risking unauthorised alteration of documents. Since blockchain can guarantee to be tamper-proof, we can be assured of no fudging.

As I said, reconciliations are passé, and there is certainty over ownership of assets as these can be traced and tracked. So, accountants will not spend time maintaining those records. Smart contracts, an add-on feature on the blockchain, can process payments when a few specified rules are met. This will relieve the strain on accounts receivable and accounts payable. Hence, many accounting-based jobs will go up in smoke. But, hold on, new ones will come up.

For instance: while transactions may not need checking, the accountant will have to value and predict future outcomes. Yes, there will be no need to confirm debtors, but the human mind must assess whether the debtor is good. While there is no need to certify ownership of fixed assets and stocks, accountants must determine fair value. Accountants will be required to design blockchain transactions and smart contracts. And, finally, the men in suits may value the data a company owns.

Is the auditor going away?

A prying third eye is required to provide assurance over the validity of transactions. The auditor will validate systems of governance and controls, data security and integrity, and confirm whether applications are working as intended. The time to perform an audit will come down drastically, and so will the bench strength. To audit a company that’s wedded to blockchain-based transactions, the auditor’s focus will change from transactions to judgments.

Blockchain is still in its embryonic stage. Also, it costs a bomb. But like ‘work-from-home,’ it will hit us one morning, and we should be awake at that time.

 

(The author is a CA, an author, teacher, and public speaker)