By Cameron Hodson, CPA
The current buzz regarding Blockchain technology seems to point to certain doom for CPAs and auditors in the future. But in weighing the facts of business finance and the functionality of an auditor, the bottom line seems to be this: Blockchain has a long way to go before it disrupts financial accounting and auditing.
Blockchain is a way of creating an incorruptible and verifiable public ledger of transactions while protecting the security of its participants. However, there are some financial assurance risks it does not appear to address.
With Blockchain, the key to incorruptible transactions is that each transaction is vetted by using a system of computers, or nodes, that are in a public network which uses a specific algorithm to verify the existence of a transaction or records. The structure of each transaction allows its authenticity to be verified, but its contents to remain private and secure. To date, there have been no security breaches of the Blockchain itself, although there have been some instances where an exchange was compromised (Mt Gox, Bitfinex, Bitcoinica).
Blockchain’s most well-known usage is for Bitcoin. Users of Bitcoin access their funds with a secure method of authentication, or cryptokey. When they make a purchase, the transaction is stored to the block. Anyone can download a copy of the Blockchain using open source software, but only users with the correct key can interpret transactions meant for them.
Blockchain’s Potential Impact on Financial Transaction Cycles
How would Blockchain impact traditional financial cycles and the way they are audited? Currently auditors rely on third party information to verify transactions or balances truly exist, amounts are complete, or truly occurred at a point in time, and with the parties that are involved in a transaction. Instead of verifying through a third party’s reports, Blockchain will allow auditors to be able to use the incorruptible transaction history to verify transactions instead of the need for third-party reports and communications.
Here are some of the ways Blockchain could impact auditing of various transactions:
- Cash receipts and disbursements – Cash receipts and disbursements could be reviewed in mass amounts by auditors by accessing the Blockchain. Despite access to the Blockchain, which classification the company chooses for each transaction is still subject to judgment and manipulation and needs to be verified by auditors. Should an expense be considered administrative? A claim payment? A program expense? Etc.? Also, Skimming of physical cash could still be a problem.
- Accounts receivable and payable – with Bitcoin, transactions are added to the block very close to the date currency changes hands. In order to track amounts owed or owing, smart contracts would have to be used. This assumes a high degree of systems sophistication among vendors and customers and that transactions are completed in digital currency.
- Investments – actively traded funds would be straight forward to verify. However, the investments that require judgement in determining their values and classification would still require additional analysis.
- Inventory and fixed assets – can easily verify the original costs of inventory and fixed assets. However, as the transaction is transformed into a physical asset, the subsequent determination of its value due to obsolescence, deterioration, or threat may still be difficult. Theft of physical inventory could still be a problem.
- Payroll – actual disbursements would be easy to verify by accessing the Blockchain. Payroll fraud, such as fictitious employees, unauthorized pay increases, etc. would still be a risk.
Based on the above discussion of financial cycles, Blockchain appears to facilitate verification of a large volume of repetitive, simple transactions that are paid digitally. More complicated transactions with multiple deliverables and methods of payments would still require a degree of judgment and oversight by accountants and auditors.
Additionally, an overarching assumption is that all parties obtain sophisticated systems capabilities and transact in digital currency. Overcoming these obstacles may take the better part of the next two decades. However, the allure of a secure permanent public ledger and the dollar value of investment in innovation flowing into Blockchain may be enough motivation to do so.
If you have questions about how audit services would benefit your business, or want to know more about the potential impact of Blockchain technology in the future of finance, contact Andrew Wan.