The blockchain is a distributed ledger. The best part is it is a decentralized, unchangeable record of peer-to-peer transactions built from blocks that are stored in a digital ledger. This makes for a system perfect for adding accuracy, transparency, and speed to accounting. It will help enforce the Sarbanes-Oxley act which is supposed to protect investors from the possibility of fraudulent accounting activities by corporations but hasn’t been very effective in doing so.
This industry will face a lot of disruption long term, but at the moment the technology is new and isn’t ready to replace anyone’s job…yet. Experts anticipate that the blockchain may begin to affect legacy accounting around 2023 with widespread adoption as soon as 2025. This will reduce the number of jobs in bookkeeping, reconciliation, and auditing.
The way the industry works now is about as efficient as a Rube Goldberg machine, and blockchain technology will shorten the steps that don’t add value.
Currently, the accounting period is typically one fiscal year, and that is broken into quarterly reports where teams of people review samples of past transactions to judge the integrity of past events. Wall Street stock brokerage and research is built around that data with updated projections each quarter. Mutual fund asset managers, pension funds, and hedge funds compensation also determine their portfolio performance on a quarterly basis. Even government bond traders rely on this delay of predicting quarterly information. These will all be affected once triple entry accounting through the blockchain speeds up this process, trimming the fat on these speculative jobs.
The interesting part of this shift in jobs is that the blockchain won’t be eliminating low-level jobs like factory workers. These are usually the ones threatened when a new technology disrupts an industry, but for the first time, this will affect bankers, accountants, lawyers, and other white-collar workers with degrees.
Machines will input the financial data, analyze and audit the information—all within a few minutes, if not seconds. According to the Bureau of Labor Statistics, there are 1.3 million people in the United States alone employed in accounting.
Although this isn’t good news for the people that work in accounting, this will be great for consumers that won’t have to wait as long to receive information. Auditors will still be needed in some capacity although their role will be drastically reduced as the Blockchain records all transactions but doesn’t describe them. We’re likely to see this job take on a modified role, as classifying these transactions and auditing smart contracts will still be necessary.
What is triple entry accounting?
Triple entry accounting adds a level of clarity and honesty to bookkeeping that double-entry accounting cannot offer. Double entry accounting has been the model we have used for hundreds of years.
Double entry accounting is where I write in my ledger that I exchanged a dollar for an orange and the person that sold me the orange also writes that transaction in their ledger. Double entry accounting accounts for the debit and credit side, but the other parties’ records are not checked as you do not have access to them. Triple entry accounting has address A, address B, and the third address that is the confirmation receipt. The third public ledger allows for both books to reconcile their ledgers and make sure all three records are in agreement. It shows you every transaction so you can see the debits and the credits involved.
Companies can now write their transactions directly into a joint register instead of keeping separate records based on transaction receipts. These cryptographically sealed records have the same validity to having a notary verify the transactions as records cannot be falsified or deleted.
Involvement with The Big Four Firms
Although this technology will get rid of a lot of jobs, it will create new ones around compliance, as The Big Four accounting firms are already getting involved.
Ernst and Young were the first to accept Bitcoin as payment with PricewaterhouseCoopers following behind. KPMG launched a Digital Ledger Services program in 2016 to help financial services companies investigate blockchain application. They partnered with Microsoft to create the “Blockchain Nodes” initiative to identify new applications for blockchain technology. They are also a member of the Wall Street Blockchain Alliance. In 2014 Deloitte launched Rubix, a “one-stop blockchain software platform.”
xBRL or eXtensible Business Reporting Language is an XML standard for tagging business and financial reports to increase the transparency and accessibility of business information by using a uniform format. They have already looked into ways of implementing this technology.
Credit card companies, banks, and the IRS will all be disrupted by this technology. The IRS will likely be affected by this technology the most as their entire business model revolves around auditing, which triple entry accounting can streamline.
Hive is the first cryptocurrency invoicing financing platform and claims to be your auditor, risk manager, and liquidity broker all in one. Hive buys invoices at a discount for HVN tokens to get business owners paid quicker than the standard 90 days. If a client has a $500 invoice, they would get $400 in a few days instead of the $500 waiting the 90 days. The person that bought his invoice gets paid the extra $100 because they have the liquidity to wait for the vendor to pay the invoice.
Consensys’ Balanc3 team has formed the Accounting Blockchain Coalition. Members include accounting firms, accounting associations, standards-setting bodies, regulators, law firms, investors, and blockchain innovators. The members partake in monthly calls to educate each other on best practices around blockchain for the accounting industry, focusing on topics like valuation, financial statement presentation, and legacy systems upgrades.
Know of any other projects affecting the accounting industry? Throw it in the comments, like subscribe and don’t forget to hit the bell for notifications. Thanks for watching.