One of the initial innovations in accounting technology was the simple spreadsheet program. In 1978, VisiCalc introduced the first spreadsheet that allowed accountants to go from entering journal data on paper to maintaining it digitally. In the early 1990s, few accountants had heard of the internet, let alone had any inkling of how much it would disrupt the accounting profession and business models. Evolving technology has caused the accounting profession to become fast-paced and dynamic. Now another emerging technology is about to change everything: blockchain.
WHAT EXACTLY IS BLOCKCHAIN?
A blockchain is a secure ledger of all data transfer activity that eliminates the need for the involvement of third parties. It functions as a constantly growing distributed network of computers, and each block is recorded and stored in the network. The original concept of blockchain was published via a cryptography mailing list in November 2008 by someone under the alias Satoshi Nakamoto. The first commercial application built on blockchain technology emerged in 2009 as a digital cryptocurrency called Bitcoin, a peer-to-peer payment system enabling users to transact without trusted third parties. This had the potential to radically change transaction-based industries.
Since 2009, Bitcoin has gained global importance. Merchants are increasingly accepting Bitcoins. For example, people can even use Bitcoin to get pizza delivered or a pay for a manicure. Small businesses especially like them because they avoid credit card fees. Bitcoins are bought as an investment on the hope that they will go up in value. In fact, in 2015, the Bitcoin currency outperformed all others, gaining a staggering 35% across a 12-month period.
Blockchain’s ability to send, receive, and store information has the power to disrupt the way businesses process digital transactions; hence, accountants need a basic understanding of the underpinning technology and its potential impact on our profession. Even though blockchain was initially a means to create a global cryptocurrency, it’s now a software protocol itself and a hot topic across a number of industries.
MORE THAN JUST INNOVATION
Compared to tech revolutions such as spreadsheets and PCs, the use of blockchain technology is being explored in more areas, including stock trading, intellectual property, contracts, and accounting records. Management accountants often struggle to manage and understand the data of the ever-growing volume of transactions, prepare trial balances and financial reports, and analyze results in a timely manner. We have to do more with less and are required to report an increasing amount of disparate information to many regulators and other stakeholders, straining organizations’ ability to produce consistent data and reports from several legacy accounting systems.
Underlying these challenges is the need to account for all of the related transactions and business activities in an automated, secure, auditable, trustworthy, and transparent manner. The stakes for the management accounting profession are high: Reporting incorrect, incomplete, or untimely information increases the risks of poor decision making, legal liability, reputational damage, and a weakened competitive position.
DISTRIBUTED LEDGER DISRUPTION
The general ledger has been the heart of commerce since ancient times and commonly has been used to record assets such as money and property. The ledger has moved from clay tablets to papyrus, vellum, paper, and now the internet. In all this time, however, the only notable innovation has been computerization, which initially was simply a transfer of the same process from paper to bytes.
A blockchain distributed ledger is essentially an asset database shared across a network (private or public) of multiple sites, geographies, or institutions where the underlying transactions are collected in digital blocks. All that’s needed is an internet connection and computer. As transactions transfer ownership of balances, each block represents an update of all users’ balances on that network such that all participants will have their own discrete identical ledger. The underlying blockchain algorithms enable the collaborative creation of a digital ecosystem with properties and capabilities going far beyond traditional ledgers.
TRIPLE-ENTRY ACCOUNTING
Some have coined the term “triple-entry accounting” for the new distributed ledger to describe its enhancement of the traditional double-entry general ledger system in which all accounting entries involving outside parties are cryptographically sealed by a third entry, the chain of validated prior transactions. The digital blocks are placed side by side; both parties’ bookkeeping entries for a given transaction are congruent. In separate, unique sets of accounting records, the seller books a debit to account for cash received while a buyer books a credit for cash spent in the same transaction. This feature alone could solve many data integration issues. It could be used not just to prepare accurate financial statements and business analytics in real time but also to enhance productivity through a wide range of applications.
For example, virtually every large globally systemically important financial institution (G-SIFI) is experimenting with blockchain technology. Barclays and more than 40 other participants set out to create a new transaction processing, “smart-contract,” accounting, and payment system for OTC derivatives. The Ethereum.org initiative currently lists almost 300 decentralized applications (Dapps) for a wide variety of solutions to problems we didn’t even know we had using a version of blockchain. Consider Democratic Autonomous Corporations (DACs) in which a virtual robot runs a business, sparking innovations in crowdfunding and crowdsourcing, dynamic assignment of renewable energy consumption tokens, identity management, and much more. Some forward-thinking leaders like Don Tapscott say that blockchain technology creates a paradigm shift, as computer and spreadsheets and accounting software changed the very nature of accounting.
In Israel: A Hotspot for Blockchain Innovation from February 2016, Deloitte Israel stated, “Accounting, auditing and compliance are a massive cost for business globally. (Fines alone have cost banking $200 billion since 2009.) Blockchain accounting could help cut those costs.” Blockchain promises that all transactions can be logged, viewed, and monitored in real time.
There are potential implications for a wide variety of sectors and professions, especially management accounting. Management accountants won’t need to learn the underlying technology, but we should start understanding its impact on our work. The IMA Technology Solutions & Practices Committee recommends that IMA members add blockchain to their professional vocabulary.
January 2017
