Blockchain: The Next Step in Accounting Evolution

What the heck is the Blockchain?

Understand the Blockchain in two minutes

Blockchain is a peer-to-peer technology Bitcoin is based on. Basically, the blockchain is a public, decentralized, distributed ledger that can store and confirm transactions going through it. The moment a transaction enters the blockchain and turns into a block attached to other, previous blocks, other users using the same technology automatically confirm said transaction as true and accurate, thus it becomes confirmed and irrevocable without the involvement of an independent third party.

How does this translate to accounting?

Like we mentioned before, the current double-entry accounting is based on a trust issued by an independent third party, or in our case an auditor. In other words, no matter how creditable you are, the final word is always the auditor’s as only he/she can confirm that the financial statements you have prepared are correct. And we have no choice but to trust that the auditors have done their jobs properly which sometimes leads to such scandals like Enron, Lehman Brothers and Bernie Madoff. Ergo errors could still occur despite all precautions.

This is when blockchain comes in, creating a new, triple-entry accounting. As transactions are immediately validated by the network and they become cryptographically sealed the moment they are entered into the blockchain, or in this case a joint ledger of several independent books, tampering with them is virtually impossible. Thus auditors don’t have to confirm transactions between companies and then put them into a centralized ledger, as other participants of the network confirm the credibility of the transactions. Furthermore, despite the shared decentralized ledger, transactions between two parties are visible for them only.

Auditors: the next thylacines?

Although it is possible that auditing will disappear, chances are that auditors simply just have to adapt to the upcoming triple-entry accounting. For instance auditors can operate as liaisons by verifying the flow of information between parties and then recording said information into blockchain ledgers. But they can also end up as cyber guardians protecting financial transactions in the cloud, or testers with financial expertise of new platforms and software accommodating the need for blockchain accounting.