What are the characteristics of blockchain technology? What is the relationship between blockchain technology and accounting? Although blockchain technology has experienced ups and downs in the past decade, blockchain and the wider distributed ledger technology (DLT) field are injecting new vitality into the financial field, intellectual property and sustainable development. So, what does this have to do with the accounting profession? Now let's get to know.

What is blockchain?

Blockchain is a technology that effectively connects people or companies in a direct or point-to-point manner. In the past 20 years, people have shared information through the Internet. They send email, post to social media, and share documents. Blockchain, as a technology, makes the connection of the Internet further. Blockchain provides users with the Internet of Value.

Instead of just exchanging information, participants can now exchange value on a point-to-point basis. Although most often associated with Bitcoin and other cryptographic assets, blockchain technology supports both applications (such as decentralized applications or dAPPs) and complex programming (such as smart contracts). It is through these smart contracts that the blockchain provides the potential to easily and efficiently conduct a wide range of transactions and transfer rights and property.

Smart contracts can easily and cost effectively transfer car ownership or company shares without the need for a third party (such as a bank or stockbroker) and settle immediately. It is this practice of eliminating "middlemen" by enabling reliable point-to-point exchange that is promoting the development of what some people call "Web 3.0" and has created $2 trillion in wealth in the past decade.

Main characteristics of blockchain: immutability and decentralization

The key feature of the blockchain is that anything stored on the blockchain will always exist, and the information is immutable and cannot be erased. The information stored on the blockchain provides us with unprecedented transparency. This means that if A owns something and transfers its ownership or value to B, there will always be a record of A owning it in the blockchain. It also ensures that records cannot be manipulated - no one can change records. This level of invariance is the reason why blockchain technology is often called "trust machine".

Another key feature of this technology is its dispersion. No person, entity or government owns or controls this information. This actually means that both A and B and the next person have copies of all their information. In a decentralized environment, all participants can access the same information, and then users can choose whether to share it. The information will no longer need to be aggregated and stored in a central database, because it will be stored anywhere immediately, and if needed, it can also be directly controlled by users, rather than by the company providing the service.

Through this shift to decentralization, the incidence of information abuse, network attacks and hacker attacks may decrease even if they cannot be completely eliminated.

What does this have to do with accounting?

Due to time lag, reconciliation and accounting entries, the audit needs to confirm the transactions and balances of the Company's accounting ledger at the end of the reporting period. Each party to the transaction has its own record.

Blockchain and its nearly instantaneous immutable transaction records provide shared transaction information, which is automatically synchronized at each location. This information provision eliminates transaction level reconciliations and facilitates the development of continuous auditing. For auditors, this provides the potential to transition from regular or annual activities to continuing events, which can now cover both parties.

Since the blockchain allows the recording and settlement of transactions to occur simultaneously with the transaction itself, auditors can obtain data in a consistent and repeated format in real time. Monitoring what happens in real time, rather than (selectively) testing and coordinating what happens in retrospect, is very different from contemporary auditing techniques.

Due to distributed ledger technology, blockchain technology eliminates the need to input accounting information into multiple databases, and may eliminate the need for auditors to check different ledgers. This can save a lot of time and greatly reduce the risk of human error.

The reconciliation of accounting data will not be fully automated through blockchain technology, because the auditor's professional knowledge and experience are required to evaluate the accuracy of complex accounting transactions. However, if we can believe that both parties are recording the same basic transaction information, and the real-time availability of the accounting data provides great benefits for the efficiency of accounting data verification and analysis.

Imagine the power of the combination of this technology and artificial intelligence (AI). In this case, the difference test can be conducted in real time through analysis and review, and there is no risk of losing transactions, nor the risk of blind spots when auditors analyze information.

summary

The core of blockchain technology is a ledger system. Its invariance and dispersion make it unique, but its function of recording transactions makes it familiar to people in the accounting industry. In order to support the accounting industry to understand blockchain technology, the Accounting Blockchain Alliance (ABC), a global alliance composed of representatives of blockchain industry leaders in the fields of accounting, law, tax, technology and higher education, has prepared a digital asset and currency accounting guide based on blockchain technology. IFAC member organizations, including the Institute of Chartered Accountants in Singapore, the Institute of Chartered Accountants in India, the Institute of Chartered Accountants in England and Wales, the Canadian Institute of Certified Public Accountants, the American Institute of Certified Public Accountants and the Institute of Chartered Accountants in South Africa, are establishing technology and digital assets for blockchain awareness, educating their members and stakeholders, and providing insights or guidance in the accounting and auditing of blockchain and digital assets.