You may have heard about blockchain in the context of cryptocurrency. But this isn’t the only way you can use the blockchain. Users can complete rights, obligations and ownership interactions and transactions. Coupled with the use of AI, blockchain could save accounting professionals heaps of time on manual data inputting, auditing and fraud prevention.
This beginner's guide will help you get to grips with the blockchain basics.
Understanding blockchain in accounting: What is it and how does it work?
Blockchain offers an alternative way to record and transfer value. Think of it as a series of Lego bricks, all fitted together in a neat structure. Every brick contains transaction information (a bit like a shoebox full of receipts). A new Lego brick is added to the structure every time someone completes a transaction.
A blockchain is a decentralised, distributed ledger. Blockchain ‘blocks’ are made up of transactions and interactions forming a ‘chain’. Those blocks can record a variety of digital things – like supply chain data, international payments, property deeds, and personal information.
Unlike a traditional ledger, blockchain isn’t owned by a single person or organisation (nor does it exist on a single computer). Instead, the ledger exists across multiple computers, and can’t be controlled by a single entity. Blockchain accounting provides full transparency – an accountant, auditor and client can access an identical ledger to verify the information on it.
Records stored on the blockchain are permanent and transparent, and the information cannot be erased or tampered with. Once there, it would be incredibly hard for a fraudster to manipulate an existing transaction – without this getting spotted in the chain.
The impact of blockchain on the accounting profession could be significant. Blockchains contain a complete, public record of transactions (including digital signatures and time stamps) – so proof that transactions have occurred is virtually indisputable.
The ledger is transparent, so auditors can quickly establish whether a transaction is legitimate. And the use of cryptographic keys – which lock and unlock data – helps to keep blockchain records safe and secure.
Using blockchain in accounting: An overview of benefits and challenges
Blockchain has existed for over a decade. But when it comes to applying blockchain in accounting, we’re only just getting started. Let’s review some of the advantages and disadvantages of blockchain.
Advantages of blockchain for accounting
Advantages include increased efficiency, security and privacy. Here are some of those benefits in detail:
- Increased efficiency: When transactions occur on the blockchain, they’re automatically recorded on the secure ledger – removing the need for manual data entry and reducing the chance of manual error. This can also help with the auditing process since transactions can be traced and verified on the blockchain – giving auditors more time to focus on the complex details of fraud.
- Enhanced security: Blockchains use a combination of tools, such as encryption, digital signatures, and cryptographic keys to keep data safe. Once a transaction is recorded on the blockchain, it’s virtually impossible to tamper with or remove. This makes it harder for fraudulent transactions to slip through the net, and for cybercriminals to corrupt the data.
- Improved transparency: Blockchain in accounting means a client, accountant and auditor can all access an identical ledger. This helps when it comes to verifying transaction data and keeping track of what is spent and earned.
Disadvantages of blockchain for accounting
The same complexity that makes blockchain technology so powerful can also present challenges. Here are some disadvantages of blockchain in accounting to note:
- Requires upskilling: Because blockchain technology is complex, accountants and bookkeepers will need to acquire new skills to adopt it. In the future, accounting professionals could see their skill sets shift further towards technology and IT.
- Regulatory uncertainty: Blockchain regulations are still in development around the world. In 2023, the UK government set out plans to regulate cryptocurrency and conducted a consultation, but details are yet to be confirmed.
- Lacks standardisation: There’s no industry standard or consensus for how to use blockchain in accounting. This makes it difficult for practices of all sizes to know where to start with the technology.
- Issues with scalability: Blockchain can become slow when lots of transactions flood the network, and competition for processing those transactions is high. Block sizes are limited, and blockchain requires a network of ‘miners’ – blockchain users who verify transactions in a new block – to complete complex mathematical problems for a space on new blocks.
- Resistance to change: Blockchain could demand a significant change in mindset and approach for accounting professionals. This could feel overwhelming, and some accounting professionals may be more resistant to change than others.
How blockchain is used in accounting today
Blockchain accounting is a relatively new concept – so research and use cases are still in their infancy. However, we already have a clear idea of how the technology could impact the accounting industry.
For starters, tracking the supply chain could become much easier. Like a trail of breadcrumbs, each product has a unique identifier and can be traced every step of the way. Blockchain facilitates a reliable and permanent record that can be traced in real time. And because blockchain is decentralised, there’s no risk that practices would lose the information should a single organisation or operator fail.
Storing financial data safely and securely has always been of vital importance in the accounting industry. With layers of encryption and cryptographic keys, blockchains offer a fortress of high security. Blockchain could bring about an era of triple-entry accounting – where a third entry is made on the blockchain, providing a secure and permanent set of records on the distributed ledger.
The use of smart contracts – self-executing contracts where, once all conditions are met, payment, goods, or services are automatically released – could make it easier to settle the bill. Firms could do away with complex invoicing procedures by using smart contracts on the blockchain to facilitate payment. This could reduce the occurrence of late payments, unpaid invoices, and disputes.
The blockchain provides a secure and decentralised ledger that auditors can use to validate the legitimacy of a transaction. Once they’re on the blockchain, transactions can’t be altered or removed – which means auditors can trace them back.
What’s more, transactions can be reviewed and verified in real-time, so there’s generally no delay between a transaction occurring and auditing it. In some cases, transactions on a blockchain may be sufficient evidence for auditors to complete their assessments.
Examples of blockchain in accounting
Let’s look at Deloitte’s blockchain accounting examples. The firm now offers strategic advisory, training and assisted prototyping for enterprise-ready blockchain solutions. These include a cross-border payment tool that facilitates payments without intermediaries, and a fraud detection solution that uses machine learning to spot anomalies and assign risk scores to transactions.
What’s the future for blockchain in accounting?
The future of blockchain accounting is still in development.
We’ll likely see the technology streamlining transactions; through a combination of blockchain and smart contracts, payments will be settled faster, and will be easier to verify by auditors.
Blockchain makes transaction-level accounting possible. Accountants and bookkeepers will no longer need to do reconciliations, but will still need to verify details about the assets and transactions (like the location and recoverable value).
Audit trails are likely to become more secure and reliable. With transactions permanently recorded on the blockchain, auditors can spend more time investigating the transaction details that aren’t captured there (e.g. whether a transaction is classified properly in the financial statements).
Asset ownership will likely be recorded on the blockchain – think: art, property and land. This will likely have implications for asset management, valuation and financial reporting.
And finally, blockchain could lead to automated regulatory compliance. Imagine a world where reconciliation was a thing of the past – and regulators could access and verify all accounting records by reviewing transactions on the blockchain. Or, a world where taxes can be automatically deducted from transactions based on smart contracts between businesses and HMRC.
Leverage the power of cloud-based accounting software
If this sounds overwhelming – don’t fret – many of these applications are a long way off. But before these imagined futures become reality, accountants and bookkeepers should spend some time researching and learning the fundamental industry applications of blockchain. Look out for industry reports, webinars and talks on blockchain, and invite your peers for conversations about the technology.
It’s important to approach technology with an open mind. Since the introduction of Making Tax Digital, accounting professionals have done an incredible job of adapting to cloud-based software and new technology. Blockchain accounting will demand a similar commitment but could deliver unprecedented value for practices that embrace it.