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With the financial sector poised to be one of, if not the first industry to see widespread industry adoption, the timeline is realistically expected to be within the next 3-5 years. Blockchain won’t reduce the greater need for accounting but rather it will provide a more efficient and trustless system for storing and sharing analytical data. Distributed Ledger Technology (DLT) and Blockchain is often over explained by those with the technical knowledge but to simplify its description –
“blockchain is a distributed database, otherwise known as a distributed ledger.”
To make it more relatable to the field of accounting, let’s call the ledger a ‘record book’ and instead of distributed use the word ‘shared’. To further relate the term blockchain to the field of accounting replace the term block as a ‘line item’ in that ‘shared record book’.
It is important to understand that not all DLT is a blockchain. Blockchain organizes data into ‘blocks’, which are chained together in an add only mode. Blockchains are only one form of distributed ledger, not all distributed ledgers employ a chain of blocks to provide a secure and valid distributed consensus.
Being a form of DLT, Blockchain technology enables a means of trust-less data transactions where a third party is not required to manage the information to facilitate the exchange of value between two parties, whether the data represents money, goods or services. This opens every industry to direct revenue streams for ‘business to business’ and ‘business to consumer’. The potential for widespread application across countless industries makes the requirement for adoption and understanding by the accounting industry essential for the economy going forward.
Accounting Industry
Use Cases of Blockchain and Cryptocurrency
Improving Internal Controls
Company record keeping could be transferred to a ‘living ledger’ whereby auditors and regulators can view a company’s cashflow and balance sheets in real time and can be confident of the data being accurate and free of human error and fraud.
The ledger could also be viewed at any moment in time as opposed to the current manual system of data being compiled into ‘actuals’ and verified by numerous hands for end of month reporting where errors and fraud are most likely to occur.
Thus, this brings not only efficiency, transparency and reliability but also cost savings in the management of any business record keeping system.
Reducing Overheads and Problems that Create Costs
Currently, the intermediary third party that validates whether a cost is a double spend are either a bank or, in the case of internal controls for business, an employee. Problems with this include:
- Cost to Validate: Significant employee production hours for validation of internal records.
- Human Error: A common problem for internal record keeping with old systems that have not innovated with the pace of the technology we use in every day life. Also, time pressures for end of month reconciliation and reporting of actuals. Generally these are the main contributors to human error occurrences.
- Fraud: One of the most needed innovations that comes from blockchain in the financial services industry is the significant mitigation of fraud. A common example being the constant fraud issues around Trust Accounting.
At a time where companies are under pressure to increase profits year on year by exponential revenues, has become more difficult in the current economic climate; this brings an opportunity to increase profits through significant cost savings.
Having one (1) shared ledger for a company’s cashflow and balance sheet management is a replacement to multiple manual ledgers being maintained and reconciled by human integrity. With blockchain the human integrity is replaced by mathematical integrity.
Significant cost savings would come from reduced overheads on the management of financial systems. The less people required to validate the data between the collection of data to the analytical use of data, will decrease a company’s static overhead of lower to mid level salaries and additionally production hours can be reinvested into other revenue producing activities.
Improved Fraud and Error Minimization
If implemented correctly, blockchain addresses and largely solves the widespread problem of fraud and human error in the management and reporting of business financial activities. This is done by removing the manual human validation of transactions in place of software keys that act as digital signatures and are unique to each ‘block’ on the chain.
Put simply, the key can be used once for a transaction and any attempt to use multiple times is recognized and dismissed by the ledger’s consensus mechanism. The validation is completed by a complex numerical equation that requires no human interaction and becomes as reliable as mathematics.
Blockchain also facilitates the long overlooked accounting method of ‘triple entry accounting’. Some experts tout this as being a superior methodology in theory to the widely used double entry method but it is inferior in terms of practical application.
However, developments in cryptographic technology makes the triple entry accounting method practical and able to be applied in business accounting systems.
The third entry component being the receipt of the transaction between the debit and credit is captured and permanently stored by the blockchain and does not require additional or manual record keeping, solving one of the biggest issues of this conceptual method. Having a widespread change on the methodology is likely 5+ years away (if ever) as legacy systems may struggle to change over on an industry level. Time will tell.
Real Time Cashflows
Implementing a business’s activities onto a ‘living ledger’ will facilitate real time data/transactions and remove the friction in the process of doing business, which currently experiences lag due to the delay in settlement of transaction data.
This friction applies to cross border payments but also every day local business transactions in the end-to-end cycle; from payment origination directly to reconciliation.
The immediate benefit of real time data/transactions is to the business but in theory should have a flow on effect to benefit the consumer.
Additionally, the real time accounting of cashflow provides constant reconciliation of cost at any given point in the monthly reporting cycle thereby freeing up budgets that were forecasted to be spent for the month that have not occurred.
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By facilitating cost and time savings using this rapidly developing financial technology, businesses are able to innovate and become more efficient and thus, provide a better offering for the customer. The time efficiency will also assist accounting firms with the speed of their work for their clients resulting in more time to take on additional accounts under management and/or provide extra services to existing clients such as strategic financial planning.
If this use cases above is relevant to your industry and you would like to discuss further, please reach out to us on info@digitaledger.io for a free, no commitment consultation.