The Technology That Will Change Accounting

In the realm of accounting and finance, there is a major technology often misunderstood by professionals that could dramatically change the game for the financial services industry.

That technology is blockchain.

What Is Blockchain?

Blockchain technology can be hard to understand at first. Is it a niche hobby for tech geeks? Is it the same thing as bitcoin?

Blockchain is the technology that underlies bitcoin — the cryptocurrency — but it is not synonymous with bitcoin.

At its core, blockchain is a ledger of transactions similar to a database. Everyone in the financial industry is familiar with ledgers. This is just a more high-tech kind of ledger.

A blockchain ledger is a distributed ledger, meaning no one party has control over (and therefore the ability to manipulate) the ledger. Blockchain technology is open source and decentralized. All transactions are locked in, and the “blocks” are essentially immutable.

So why does this matter, and what are the future implications of this technology on the finance and accounting world?

I’ll go through some of the biggest accounting-related implications.

Movement Of Money

Currently, the movement of money is still pretty slow given all of the technology we have available. Transactions still take a few days to process, and bank accounts rarely reflect exactly how much money is actually in the bank.

One of the biggest potential implications of blockchain technology on finance and accounting is for instantaneous movement of money, or real-time financial transactions. That means no more waiting for transactions to hit your bank account or for checks to go through before seeing your financials.

Status: Happening now. Cryptocurrencies like bitcoin allow for real-time, peer-to-peer transactions.

Property And Title Transfers

Another type of transaction that could be greatly improved by incorporating blockchain technology is property and title transfers. The ability of blockchain to lock original agreements and documents into the ledger would make disputes between parties later down the road incredibly difficult and therefore less likely to happen.

The blockchain community refers to these types of agreements, verified by the blockchain, as smart contracts. They argue that smart contracts have the potential to remove middlemen from agreement procedures entirely in some cases.

Status: Happening now. Some state, local, and even national governments, like Cook County, Chicago and the Republic of Georgia, have already begun using blockchain technology to verify and lock in property transfer documents. Real estate fraud, which can happen if someone forges a signature on a title deed and sells a home to an unsuspecting buyer, will be much more difficult when legal systems are using blockchain to verify deeds.

Financial Statement Audits

Anyone with an internet connection can download the entire history of public blockchain transactions. Transactions that are recorded in real time and can’t be altered can be audited daily, eliminating the need for the expensive audits public companies are required to have every quarter.

What bookkeeping and financial transactions come down to, in the end, is trust and transparency. The ability to go back and alter transactions, “cook the books,” or post falsified sales or profits creates an inherent lack of trust for an investor in a business. Mathematical proofs and a decentralized database can virtually eliminate the mistrust that sometimes comes with unaudited financial statements.

According to Deloitte, “At the end of the road, fully automated audits may be reality.”

Small businesses will benefit greatly from this, since most cannot afford to have their financial statements audited on a regular basis and therefore having multiple investors is difficult. Giving millions of small businesses in America reliable, accurate, trustworthy financials will empower them to do many of the things only large enterprise businesses could do previously.

Status: Not there yet. More companies will have to use a private blockchain ledger to record financial transactions before this technology becomes widely available.

Triple-Entry Accounting

Bitcoin enthusiasts have already dubbed the blockchain bookkeeping revolution “triple-entry bookkeeping,” because records of transactions between debtor/creditors would be recorded in the blockchain network as well as on the debtor/creditors’ private accounts, creating a third record instead of the traditional double-entry method of bookkeeping.

This would revolutionize bookkeeping, making it instantaneous, unchangeable and more reliable and trustworthy than it ever has been.

Status: Happening in the near future. Companies like ConsenSys are currently working on making triple-entry bookkeeping a reality.

Document Verification

Blockchain technology would allow companies to certify the accuracy and legitimacy of documents. A hash string can be created of a file, creating a unique identifier for that particular file, and then that hash string is embedded and timestamped into the blockchain. That transaction cannot be changed, so when that hash string is searched for again, you can have complete confidence that the document has remained unchanged and the timestamp is accurate.