Block Chain Technology: The Future Toolkit for Chartered Accountants

-“‘Blockchain’ has emerged to become a potentially transformative force in multiple aspects of government and private sector operations. Its potential has been recognized globally, with a variety of international organizations and technology companies highlighting the benefits of its application in reducing costs of operation and compliance, as well as in improving efficiencies.” Dr. Rajiv Kumar Former Vice Chairman, NITI Aayog Blockchains can broadly be defined as a new type of network infrastructure (a way to organize how information and value moves around on the internet) that create ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus.Blockchains create trust by acting as a shared database, distributed across vast peer-to-peer networks that have no single point of failure and no single source of truth, implying that no individual entity can own a blockchain network, and no single entity can modify the data stored on it unilaterally without the consensus of its peers.

Blockchain is seen as a technology with the potential to transform almost all industries and economies. It is estimated that blockchain could generate USD3 trillion per year in business value by 2030. The World Economic Forum (WEF) anticipates that 10% of the global GDP will be stored on blockchain by 2025 and lists blockchain as one of 7 technologies that are anticipated to revolutionize various aspects of our lives. 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 including the individuals or businessesusing the shared database are “nodes” connected to the blockchain,each maintaining an identical copy of the ledger. Every entry into a blockchain 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.

A blockchain is a type of distributed ledger, which enables records to be stored and sorted into blocks. This might be as simple as using the same open source code as Bitcoin to create a new ledger, or more complex, such as swapping alternative implementations or algorithms.

Blockchain can create trust, which may remove the need for third parties, consequently reducing costs and friction in processes. A transaction that is not validated by all members of the database is not added to the database. Every transaction is attached to the previous transaction in sequential order, creating a chain of transactions (or blocks). A transaction cannot be deleted or edited, thereby creating an immutable audit trial. A transaction can only be changed by adding another transaction to the chain.

In 2022 the Institute of Chartered Accountants of India (ICAI), Chartered accountants’ apex body has announced its decision to explore the use of blockchain technology in auditing.Blockchain technology is the concept behind the running of the blockchain – a blockchain is an unchangeable, distributed digital ledger.

The transactions or records on the ledger which are stored individually is referred to as a “block” and the information in a block is usually linked to the information in a previous block. This, over time, forms a chain of transactions, which is what the word blockchain refers to. Characteristics A blockchain enables the near real-time settlement of transactions, thus reducing risk of non-payment by one party to the transaction. The peer-to-peer distributed network contains a public history of transactions. A blockchain is distributed, highly available and retains a secure record of proof that the transaction occurred.

A blockchain contains a verifiable record of every single transaction ever made on that blockchain. This prevents double spending of the item tracked by the blockchain. The economic rules built into a blockchain model provide monetary incentives for the independent participants to continue validating new blocks.

This means a blockchain continues to grow without an “owner”. It is also costly to censor. Blockchain technology has the power to improve trust and increase automation. As blockchain becomes more integrated with society, accountants will focus on analysing data and checking for accuracy. Blockchain expertise will be in high demand, so accountants need to begin learning. Advantages of Block Chain Technology Efficiency: With blockchain pushing data into and out of the system will be much faster than traditional accounting software. Reliability: With the automation of transactions, forming a chain, smart accounting function will drastically reduce human error. Cost-effectiveness: Improved efficiency and error reduction with consequently reduce the cost.

Firms will have to bear a cost upfront for initial adoption. Fraud reduction: With blockchain implementation, it is difficult to manipulate the records. Since blockchain is a distributed ledger, making a chain to record means the same change needs to be made on all the copies, which is almost impossible to do simultaneously. Blockchain-based accounting software is more efficient as compared to traditional accounting systems. The robust database of blockchain enables you to maintain data integrity seamlessly. Additionally, it can help you get a competitive edge in the market allowing you to serve your client with accuracy & speed. Blockchain technology gets the accounting data recorded in distributed ledger authenticated by multiple parties.

It continually updates the data stored in distributed ledgers authenticated by numerous parties. It continuously updates data and enables the accounting team to work swiftly. Impact on Accounting Professionals Industry analysis revealed blockchain-based accounting can help improve efficiency and transparency in global monetary landscape. As stated by Institute of Chartered Accountants in England and Wales (ICAEW), a global chartered accountants corporation, blockchain in accounting can help reduce costs of maintaining and reconciling ledgers, and ensure certainty over the ownership and history of assets.

It is believed that blockchain-based data analytics can help benefit external auditing. The blockchain enables the implementation of a system of accounting that requires transaction verification from a neutral third party. A total of three entries will be created, because each party (the two parties involved in the transaction and the intermediary) creates a record for the transaction. Such a system is referred to as a “triple-entry” accounting information system. Smart contracts (also called digital contracts) are contracts written into lines of computer code used to program the blockchain.

They facilitate the autonomous execution of pre-specified terms based on future conditions and activities. Smart contracts encoded with accounting and business rules could efficiently control the recording process.  With a company using the Blockchain to post every transaction on the Blockchain in real-time, the nature of financial audit will change completely. Instead of having quarterly or annual audits, the company could look to audit its financials on a daily basis.

Financial audits on a Blockchain may eliminate the need for third party validators, reduce audit expense and costs for books maintenance, and provide better governance and transparency. The record keeping and transaction management features of Blockchain, it can easily hold the financial transactions for the group companies and aid consolidation of the financials for the group and eliminating inter-company entries. The Blockchain does not work on the double entry book keeping system, instead, it maintains a single records ledger for all transactions. The immutable nature and the historical record maintenance will facilitate the accurate consolidation of financials, enforce documentation of intercompany transactions, and promote intercompany synergies.

Successful accountants will be those that work on assessing the real economic interpretation of blockchain records, marrying the record to economic reality and valuation. For example, blockchain might make the existence of a debtor certain, but its recoverable value and economic worth are still debateable and an asset’s ownership might be verifiable by blockchain records, but its condition, location and true worth will still need to be assured. Similar to the possible changes in the audit industry, the real-time recording of all financial transactions on a blockchain could completely change the way tax returns are prepared.

At any point in time, a company’s taxable income and tax liability could be known. In a blockchain environment, a company’s transactions would be verified and confirmed as they occur. Not only would auditors be able to verify most financial information automatically just by going to the blockchain, but real-time audits would be possible.

Because the costs and time committed to audits would drastically decrease, audit teams would be able to expend additional resources on complex transactions, internal controls and IT audits. The focus of audits could shift from the financial transactions to an audit of the blockchain.  With blockchain, the recording of transactions will occur in real time during the course of everyday business. As items and/or services are purchased or sold, they will be recorded in a ledger that is shared between the buyer and seller. The recorded entry will be the exact same for both parties, thus eliminating the likelihood of human error on either side.

Over time, as the shared ledgers become more robust and can handle all types of transactions, the need for bookkeepers may be greatly reduced or eliminated altogether.   The Future Recently Reserve Bank of India (RBI) has published a white paper on the potential use of Blockchain in India, based on a proof of concept testing the end to end technology play in the interbank remittance process. The white paper concluded that the overall proof of concept provided a good demonstration of the use-cases and helped broaden the understanding of the technology and its potential to other real-life applications.

The Whitepaper concluded that the proof of concept provided an overall good demonstration of the use cases and helped broaden the understanding of the technology and potential end uses. It is expected that RBI will stay in step with the global adoption of Blockchain for accepted mainstream usage by monetary authorities around the world and this technology will gain credence and usage soon. For the finance leaders, this is a profound transformation in the horizon upending the traditional double entry accounting protocols and driving significant efficiencies and economies.

To become truly an integral part of the financial system, blockchain must be developed, standardised and optimised. This process is likely to take many years – it has already been nine years since bitcoin began operating and there is much work still to be done. There are many blockchain applications and start-ups in this field, but there are very few that are beyond the proof of concept or pilot study stage. Accountants are already participating in the research, but there is more for the profession to do. Crafting regulation and standards to cover blockchain will be no small challenge, and leading accountancy firms and bodies can bring their expertise to that work.

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