TechTalk Blog- Blockchain Technology leads to the next generation in Accounting with broad implications for Auditing

By Pradeep Raju Bhupathiraju posted 11 days ago

  

Current Accounting:

Double Entry Bookkeeping has been the gold standard for accounting since the 14th century. It allowed management to trust books since every transaction would require an entry in one account (like Debits) and the reason in another account (like Credits). But to authenticate company’s financial statements for investors/shareholders, external auditors were required to verify these account entries. Since many of these account entries relate to a company’s interaction with other companies-suppliers, distributors, clients, banks etc, verifying them can be a complex and time consuming process. External Audits also leads to other questions.
  • Do external auditors vow their allegiance to the company who pays them or to the public investors who rely on them?
  • Would an external auditor time be better spent on other aspects like internal controls rather than on verification?

Future Accounting:

Blockchain technology takes accounting to the next generation- Triple Entry Bookkeeping. Named Triple because it includes in addition to the Double Entry Bookkeeping, an additional component- Cryptographically produced key or commonly known as hash numbers.

The basic premise of Blockchain for accounting is that each transaction between two companies- Seller and Buyer, instead of just existing in different account books within these entities, will be recorded in a public ledger (visible to both companies) that is cryptographically protected at the time of transaction.

The process workflow would look something like the below:

Record Transaction-> Validate Transaction-> Update Public Ledger

Therefore, the Debits and Credits of the transaction along with a third component- a hash number (through cryptographic hash functions), is recorded in a globally distributed decentralized ledger that is verifiable in real time. Any change to this transaction record (legal or illegal) by a company will apply a different hash number to the transaction within the company books. Auditors ( or possibly software/AI in the future) can verify whether the audited record of the company is identical to the original record stored in the public ledger by a simple check between the hash numbers which should be identical. Thus, auditors can spend less time on verification and more time on internal controls advisement.

Benefits:

How much do external audits cost for companies?

Company Classification

Average Audit Hrs

Average Audit Fees Per hr

Public

17,525

$249

Private

2,927

$179

Non-Profit

935

$149

 

By utilizing Blockchain technology, companies can reduce the required audit hrs and hence generate meaningful cost savings.

To summarize, Blockchain has the potential to radically change the accounting world leading to:

  1. Automated processes
  2. Increased transparency and fraud protection
  3. Reduced costs, and
  4. Better compliance with regulatory standards.

The technology can be applied for both inter-company and intra-company transactions leading to audit trails both within and outside the organization.

For additional information, please refer to the below article from Deloitte:
https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/Blockchain_A%20game-changer%20in%20accounting.pdf

 

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