client accounting services

that oncoming train is blockchain accounting

old steam train pulling into a tunnel belching steam and smokebut you can ride it to the new destiny of your practice.

by hitendra patil

warning: this is not fiction. this is not sci-fi.

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when the best brains in the payments systems and regulatory organizations across the world sit and take serious note of the possible impact of blockchain on the entire financial sector, the accounting and tax profession cannot afford to ignore blockchain.

“finance in flux: the technological transformation of the financial sector.” that was the central theme of the sixteenth annual international conference on policy challenges for the financial sector, cohosted by the world bank group, the international monetary fund, and the board of governors of the federal reserve system, which took place on june 1-3, 2016 in washington, d.c. the representatives of the major central banks from across the world attended the conference.

one of the topics that generated the most keen interest at the conference was “block chain – the surge and potential transformational nature of distributed ledger technology.”

what is blockchain?

according to wikipedia, “the blockchain is the main technical innovation of bitcoin, where it serves as the public ledger for bitcoin transactions. every user is allowed to connect to the network, send new transactions to it, verify transactions and create new blocks, making it permissionless.”

hold on. this is not an article about bitcoin. it is about what is already happening in accounting, on the very same concepts that go into bitcoin blockchain, and what can happen when it takes complete root in the accounting profession.

how will blockchain work in accounting?

it is not whether or why will it impact accounting. it is about when and how.

a blockchain can be considered a digital, distributed, shared ledger of transactions that have already been completed. new transaction data will continuously get added through the completed “blocks of data” that are authorized to be shared among the computers on the network.

the blockchain network participants use cryptography to edit the shared ledger online without the involvement of a central clearing authority (like a central bank or a clearinghouse of a stock/commodity exchange etc.).

a simplistic explanation of blockchain in accounting is the “triple entry” system.

diagram of triple entry system

 

 

 

 

 

 

 

 

 

 

 

now, imagine when millions of companies, banks, tax authorities etc. are creating “blocks” of their transactions. how will the picture look?

  • double entries in individual books of two companies that do business with each other create “private ledgers” at each of these two companies.
  • today, even on the cloud, these two private ledgers do not electronically “talk” with each other. hence these private ledgers do not auto-reconcile.
  • hence the need to create those individual private ledgers and to audit them – which is what the traditional “work” in accounting is all about.
  • blockchain technology will automatically create a distributed shared ledger each time the two companies create a transaction in their private ledgers. call it the “third entry into a common block shared by two companies” or the “triple entry.”
  • these common transactions in the shared ledger form the so called blocks and millions of such blocks will form an interlinked chain, hence the blockchain.
  • and because it is a shared ledger, each transaction will be irreversibly authorized and auto-reconciled, i.e. audited in real time as and when the transactions are taking place.
  • this shared ledger can be public to those who have authorized access to it, e.g. bankers, lenders, tax authorities, government, courts, auditors and so on. in other words, the accounting ecosystem can and will participate in the blockchain, not just to consume information contained in the blocks but also to create their own blocks when needed.

19 responses to “that oncoming train is blockchain accounting”

  1. william carman

    many many thanks hitendra for sharing with us this. your article really so informative and help me a lot. i’ve been working so hard to find on this, today just get your web and your tips. i found some good information on your blog. i hope it will be helpful for too many people that are searching for this topic.

  2. kerry christofanelli cpa

    having spent a lot of my career as a cfo and a cpa i think the “end of audit” is highly unlikely. first of all, i can’t imagine too many companies that will want to put a lot of transactions out in the world where they would be visible to “bankers, regulators etc.” the initial implementations will most likely be in private chains. my guess is that companies will engage in transactions though many chains. audits won’t end but auditors will need to learn how to audit transactions that occur using block chains, just as they learned how to audit transactions that took place by checks instead of cash.

    • hitendra r. patil | author: accountaneur: the entrepreneurial accountant

      thanks for sharing your thoughts, kerry. you are right – i envisage multiple, private – “permissioned” blockchain networks in the profession. as blockchain is essentially a “trust technology”, the purpose of an audit should change from “establishing trust” to something else. would be interesting to see how the profession evolves.

  3. patrick haddon

    interesting, looking forward to more information/explanation.

  4. hitendra r. patil

    read part iii of the series of posts on this subject i.e. blockchain and the accounting profession here: “is blockchain a cloud killer?”: https://goo.gl/hp71fl

    stay tuned for the next parts that will bring more actionable insights….

  5. hitendra r. patil

    this is part i of the series of posts on this subject i.e. blockchain and the accounting profession. read part ii here: 22 ways blockchain will impact the accounting profession. will you be ready? https://goo.gl/rryfqe

    stay tuned for the next parts that will bring more actionable insights….

  6. paul partridge

    finally, an understandable explanation of blockchain… thanks, hitendra

  7. tiffany crosby

    we have a session on this at our upcoming financial institutions conference on august 18th. i’d love to connect and discuss this topic further.

  8. david kupferman, cpa

    hold on folks – don’t slurp your koolaide too quickly.
    the end of audit? preposterous.
    people will always find a way to defeat, distort or twist systems.
    there shall always be exceptions to exceptions which hadn’t and couldn’t have been foreseen.

    • mario costanz

      hi david,

      take some time to understand the technology. it is immutable, transparent and secure. it cannot be defeated, distorted or twisted. it is the future, now.

      it will massively change our world in ways most have never thought of. jobs will be lost, jobs will be created. relationships will still be key to maintaining clients. however, the world of tax and accounting will never be the same.

      i am building a patent pending tax preparation blockchain solution. our alpha version will be done later this year. we are super excited to shake things up and transform tax prep.

  9. ed kless

    great piece. tom hood and i are talking about this later this week at the maryland cpa event.

    perhaps you will deal with this is a future part of this series. the most incredible thing about blockchain is that it could be the end of the audit. why? because trust is fully baked into the system. fraud is not possible unless one of the parties is willing to lose.

    the tagline of block chain is “in math we trust.”

    • hitendra r. patil

      thanks, ed! i will dive deeper into more aspects and the “impacts” in the next posts in this series. would love to know your and tom’s thoughts from macpa event.

      • bruce holloway

        hitendra –
        we are already concerned about gov’t intrusion into our lives. blockchain seems to make it easier for them.

  10. hitendra r. patil

    this is part i of the series of posts on this subject i.e. blockchain and the accounting profession. stay tuned for more actionable insights….

    • lafonda merrick

      as a 60 something accountant with 2 children following in the firm, this is fascinating. i’ve gone from hand prepared to 5 1/2 inch floppy program to cloud computing. we, as a company, are looking forward to changes in the industry. it will only get better. it’s interesting and fun and we are ready to get ready.