The current accounting is based on the double-entry system with which companies record what they own and owe, and what they earned and spent over a given period of time; this way business owners could always trust their own books. However, those books still have to be audited by an independent third party to gain the trust of other business owners, not only slowing down the business process, but also creating an infinite loophole full of countless records of countless companies. This is about to disappear forever and in this article you can read about the reason behind the upcoming accounting revolution: blockchain.
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.
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.
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.
At the moment not all online accounting software support integration with blockchain-based solutions, but that doesn’t mean you cannot already use such software. Such examples are the Avalara tax automation software – with Xero, FreshBooks, QuickBooks and Zoho Books integration. Another one is Factom, which simplifies records management, records business processes, and Tierion that helps you issue digital receipts, create audit trails and keep immutable records.
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