ACCOUNTING

The Death of Accounting and Auditing and What to Do About It

At the 4th CFO Innovation Indonesia Forum in Jakarta last week, the Asia Managing Director of a workflow management consulting company was in a pensive mood.

“One might think that as long as humans trade with one another, we’ll have something like the invoice,” he said. “But in reality this is not going to be the case. It is very likely that technologies like blockchain would take away the need to send an invoice.”

But surely this will happen in the far-off future? It will be sooner rather than later, said the MD. “Obviously I don’t know the future, but it is likely going to happen in less than ten years.” His business will be seriously affected. Helping companies and shared services centers digitize and automate the invoicing process accounts for a significant portion of revenues.

The seriousness with which his company views blockchain is an indication of how close we are to adopting the technology for a variety of commercial transactions.

Invoicing is only one of numerous applications. In this particular case, there would be no need to issue paper or digital invoices because the transfer and receipt of goods and services will appear on a digital ledger. The company will be prompted to pay the vendor – or a smart contract will self-execute payment after checking the ledger to confirm that the goods have been received and funds are available.

What blockchain can potentially do is make obsolete the double entry system that allows companies to trust that their books are in order

Proofs of concept

The most high profile application of blockchain currently is in virtual currencies such as Bitcoin. But there are many other ongoing proof-of-concept projects, including one by start-up Everledger to track the movement of diamonds from mines to stores. Last year, Dutch bank ING worked on 27 proofs of concept around lending, payments, financial markets, bank treasury, compliance and identity, and trade finance and working capital.

For its part, the Monetary Authority of Singapore is partnering with blockchain technology company R3 and a group of international banks on a proof-of-concept project around inter-bank payments. And the Hong Kong Monetary Authority (HKMA) and the Hong Kong Applied Science and Technology Research Institute are doing proof-of-concept work around mortgage loan applications, trade finance, and digital identity management.

The Big Four accounting firms and the American Institute of Certified Public Accountants have met to discuss forming a consortium to explore how blockchain can be used in accounting and auditing. “It can be gradually integrated with typical accounting procedures: starting from securing the integrity of records, to completely traceable audit trails,” suggested Deloitte in a recent article. “At the end of the road, fully automated audits may be reality.” 

Ending double entry

In simple terms, blockchain allows numerous parties to record their transactions in a digital ledger in their computers. Every transaction is time-stamped and linked to the previous transaction by a cryptographic algorithm known as a “hash”. Every user’s ledger is replicated and synchronized across the network of users regardless of where their computers are in the world.

“It is essentially technology that supports networks of databases that enable participants to create, disseminate and store information in a secure and efficient manner,” explains the HKMA in a white paper.

“What makes [blockchain] special is that these networks of databases can operate smoothly and securely without necessarily being controlled and administered by a central party that is known and trusted by every participant.”

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