The cryptocurrency Bitcoin started gaining media traction in 2017, which was followed closely by a surge of interest in blockchain, the technology that makes cryptocurrency possible. While financial journals and magazines have devoted columns of space to Bitcoin and other cryptocurrencies, blockchain can have more implications for accounting than enabling cashless and deregulated payment.
Blockchain technology and bookkeeping
It is important to note that blockchain is not an accounting software or finance system, but a way of conveying and verifying data. Information on this technology is stored in a cloud and can be batched or uploaded by blockchain members, or computers and servers that download and install the software.
The information added on the blockchain is customizable depending on the organization’s needs. Blocks of information may be added to previous blocks, or reorganized accordingly. It can also fight Distributed Denial of Service, or DDoS attacks. These are hacker attempts to flood a server in order to gain access to secure information. Since blockchains are decentralized, and bandwidth is spread over several members, they can absorb DDoS attacks.
A gateway to increased security
Most important to finance professionals is the ability to display data only to select groups or members. Though different organizations may be part of the same blockchain network, not all are granted automatic access to data by virtue of being connected to other members.
The differentiation between general-use and classified data is valuable for firms with multiple clients on the same network. Though accountants may view the clients’ data, the latter will not have the same reach of access, and can only see the information that pertains to their account.
Revolutionizing double entry
Modern accounting hinges upon the double-entry system, with managers collaborating with auditors to check the figures in their books. This is a costly but necessary procedure. With blockchain, accountants will have a more streamlined process of validating data.
Companies can also write transactions directly into a joint register, instead of on separate records based off of verified receipts. This way, managers and accountants have access to one enduring record. Since entries are decentralized and encrypted, it will be near impossible for officers to commit fraud through modifying, concealing, or erasing transactions from the record.
Standardized books would streamline the reviewing process on the most important data of financial statements. This would make the necessary audits less expensive and time-consuming, and auditors could focus on more complex internal control processes.
Proving the integrity of information
Blockchain proves the integrity of electronic files through generating hash strings. This is equivalent to a digital fingerprint, which is also timestamped when written into the blockchain. The file’s provenance can be checked at any time by generating a hash string and comparing it to the one in the blockchain. If the figures are identical, the file was unaltered.
With these capabilities, all documents and accounting processes performed on the blockchain may be readily documented. Entire departments or divisions and their accounting incidents can be represented, promoting financial transparency in the entire company.
Human oversight and review in the auditing process will always be needed, and there will always be a market for supervising processes. Though this may be the case, accountancy is definitely seeing a shift toward automation, augmentation, and the digitization of data.
To get the latest news in the UK, read more stories on business intelligence and insight at Accountancy Today.