Audit reimagined with Blockchain technology

June 7, 2021

Published: The Accountant

By Verdict Staff

Alexis Nicolaou, Managing Director, Grant Thornton Blockchain, Cyprus discusses the merits of Blockchain technology for the accounting profession and you can listen to him speak about its impact on audit’s future at DAF 2021 (The Digital Accountancy Forum) on 17 June, 2021.

I often get asked whether Blockchain is here to stay or just another buzz word. It is true that when you hear of a word so frequently and in most cases with so much conviction, it is only a natural reaction for many people to take a step back and consider whether they should look deeper into this or simply ignore it in the hope that it will go away.

In the case of Blockchain, it is certainly not then latter. It is here to stay and in my humble opinion at some point we will not even be referring to Blockchain, but just like we no longer refer to https, we will simply be calling it the internet. It will become a standard just like https has.

Having said that, until then, certain things need to happen.

First and foremost, like anything new, people need to appreciate the benefits that this nascent technology will bring about. When corporates and customers really learn and begin to use the technology for practical, useful purposes that will change how companies, applications and users interact, that is when Blockchain will become mainstream.

Blockchain is not a panacea. In most cases, a good old database could do the job and perhaps do it better. However, where there is need for decentralisation, for saving on costs by cutting out the middle party, where the interacting parties do not necessarily trust each other, where transactions created by different participants depend on each other, where multiple parties need to record and update the information, then Blockchain should be the technology of choice.

In relation to the accounting and audit professions, how can Blockchain not have an impact, as it is in fact itself a ledger that is distributed across a number of computers or nodes.

Because all entries in a Blockchain are distributed and cryptographically sealed, it is virtually impossible to destroy or manipulate information, preventing people from being able to ‘cook the books’, or conduct other forms of financial fraud.

Blockchain would be accessible to all relevant parties by employing the so-called triple-entry bookkeeping model. Triple entry adds a third layer of entry, a cryptographic seal, with all transactions written on the blockchain shared with everyone involved.

This means all stakeholders – accountant, auditor, client, regulator – will always have an identical copy of the ledger, shared across a peer-to-peer network of nodes spread across multiple sites. To alter information in the ledger requires the permission of everyone involved, which means information on the blockchain can be accurately relied upon.

Accounting will become more continuous. Imagine a world where the books are always ready for reporting, where you always have real-time, complete, up-to-date information about the performance of your business.

Another much needed development, specifically for the accounting and audit professions, has to do with the first ever application of blockchain technology, that of cryptocurrencies.

Currently, no guidance exists from the profession’s regulatory body, the IASB, as to how to account for these so-called digital assets, in a company’s financial statements. The absence of central guidelines has forced several national accounting standards bodies to publish discussion papers.

As these assets feature more frequently on company Balance Sheets, the need for guidance as to their accounting treatment is becoming more imminent.

Guidance is also required by the auditor on how to prove that these assets are shown at a true and fair value.  They need to collect evidence of digital asset ownership, existence, accuracy, and valuation, as well as transaction occurrence.

Finally, for general adoption to take place, the necessary regulatory framework with regards to cryptocurrencies needs to be put in place. As things stand now, some countries have done so (UK), others are working on it (US) and others have banned them altogether (China).

The existence of legislation will have a positive effect on peoples’ confidence and increase adoption, both of crypto assets but also of the technology behind them, Blockchain.

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