Blockchain Technology Will it be a game-changer in Accounting and Auditing? by Lyndon Magsino, CIA CPA, CFSA, CRMA
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Introduction When Blockchain technology was introduced to the market, it was only useful for Bitcoin or cryptocurrency. In my conversations with some Internal Audit clients who are in the Banking industry, I realized that most people have the same understanding on the limited utility of Blockchain for Bitcoin. Last year, the hype of Bitcoin had caused Blockchain to be a disruptive technology in various forms of business, financial, accounting and Internal Auditing. Overview on Blockchain So, what is Blockchain? Blockchain is the technology that reinforces the digital currency such as Bitcoin, Litecoin, Ethereum, etc. This technology allows digital data to be distributed in a decentralized ledger. The record / information in the ledger cannot be copied which means that each individual piece of data can only have one owner. A “block” is record of a new transaction and when a “block” is completed, it is added to the chain – that is why it is called “Blockchain”. In my 17 years of experience in the audit profession, I know that technology and various financial systems have revolutionized the work of Finance and Audit professionals and really add value in terms of efficiency, accuracy and completeness of their records. Now, with the Blockchain technology, it is expected to align with the Accounting and Internal Audit processes in all industries as it can create a new type of accounting ledger that can be continuously updated and verified without the risk of being altered or corrupted. It can also track the source of the assets acquired as well as the funds used at which they were bought and sold which is very crucial in the authenticity of the transactions, particularly in the financial services industry where Blockchain technology can give a huge disruption.
Implications of Blockchain in Accounting Accounting is the process of analyzing, recording and reporting of financial and non-financial information about economic entities such as businesses and corporations. Looking at how Bitcoin is being recorded or “accounted”, the Blockchain technology is developed as an “accounting technology”. It was designed mainly for recording the transfer of crypto-assets and settlements to maintain an accurate and reliable financial information. The Accountants are generally concerned with the measurement of accounting transactions and communication of financial information to various users. For many Accountants, the Blockchain can provide more clarity over the ownership of assets, existence of the obligations and availability of resources which can improve accuracy and efficiency, particularly in budgeting, valuation and financial reporting. The elimination or reduction of the time being spent in recording, reconciliations and dispute management can provide greater focus on how to account the transactions. Many routine accounting processes can be optimized through Blockchain and other modern technologies, such as data analytics or machine learning. This can increase the efficiency, accuracy and value of the Accountants.
Moreover, while Blockchain can ensure the existence of an asset (e.g. receivables), its recoverability and economic value are still need to be assessed. Consequently, the spectrum of skills of Accountants will be disrupted. Certain routine works such as reconciliations and bookkeeping will be reduced or eliminated, while other areas such as technology, advisory and other value-adding activities will expand.
Implications of Blockchain in Internal Audit Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Similar to Accounting, the Blockchain technology can be have a huge disruption in Internal Audit approach and methodology, particularly in auditing internal controls, risk management and operations. For example, the verifications and confirmations of the company’s transactions can be performed online (or automated) if most or all of the transactions are recorded in Blockchain. When the Blockchain solution is implemented together with automated data analytics, it can provide an assertion at the detailed and transaction level, hence the Internal Auditor can focus more on important substantive testing of corroborative evidences. This can really change the way audit works. Moreover, since Internal Auditing is not just checking the details of transactions between parties, importantly, Internal Auditors are also concerned on reasonableness of controls. Meaning, auditors apply professional judgments in auditing, particularly in assessing the risk and potential fraud. The auditors can focus more on these areas when the Blockchain technology is embedded in the auditing process.
To audit a company with significant Blockchain-based transactions, the focus of the Internal Auditor should change. The need for confirmation of the accuracy or existence of Blockchain transactions with external sources would be less-critical, rather, the Internal Auditor should focus on how the transactions have occurred, potential risk that can emerge from the transactions and the adequacy of the controls. In the long term, more accounting records will be based on Blockchain; hence, the Internal Auditors and Regulators should have access and be able to review the transactions in real time and with higher certainty on the background of those transactions.
Responsibility and Sustainability With the Blockchain technology, all recurring transactions can be automated using AI and machine learning, hence Accountants can help more on business development and strategy. By automating certain transactions, it can provide full transaction history and eliminate or reduce the reconciliations. Once Blockchain technology matures, it can replace bookkeeping and reconciliation works. This could threaten the jobs of more accountants in those areas while it can add more value to business owners and those in charge in due diligence for mergers and acquisitions.
Accountants and Auditors should continue to sharpen their skills and competencies so that technology cannot make them obsolete and retain their job security. To date, it is still uncertain as to the impact of Blockchain with the jobs of Accountants and Auditors. Further, they do not need to be program engineers with detailed knowledge on how the Blockchain works. But they should have fundamental knowledge on how Blockchain works as well as the impact of Blockchain on recording, financial reporting and overall business growth and sustainability. They also need to be able to act as the “bridge”, between different stakeholders such as programmers, software engineers and business front-liners. In my view, the skills of Accountants and Internal Auditors are important in advancing the Blockchain technology and the principle features and functions of Blockchain.
Conclusion For Blockchain to become truly an integral part of the accounting and internal audit process, the Blockchain technology must be developed, optimized and stabilized for this purpose. This process can take many years similar to Bitcoin that took almost 10 years to be really utilized by the public and yet, there is still much work to be done. Will Blockchain Technology be a disruptor or game-changer in accounting and conducting internal audit engagement? It is not a matter of “if” but just a matter of “when”. Once it matures, Blockchain Technology will surely disrupt the accounting and auditing profession and will be a game-changer. Having said this, it is “not yet” ready as it needs to overcome three main blockades:
1. Blockchain technology is still under-developed and still need to mature with a clear proof-of-concept. 2. The cost involved in implementing Blockchain and replacing the existing accounting system (e.g. SAP, Oracle) is too high. 3. Regulations are not yet prepared to embrace the Blockchain technology, particularly in changing the landscape of the Accounting and Internal Audit process, approach and methodology.
Currently, there are many startups that focus on Blockchain technology and applications but as per my research, there are only few who are able to reach the initial pilot-study stage or beyond the proof of concept. Many Accountants and Internal Auditors are already engaged in this research and study.
The project cost in implementing Blockchain technology is approximately USD 20 million to USD 50 million depending on the size of the company and complexities of its transactions. This cost sounds unjustifiable from an investor’s perspective without clear benefits and value add in the business, risk management or profitability. Further, the existing accounting standards (e.g. IFRS and US GAAP) and the International Professional Practices Framework (IPPF) are yet to be revisited to really embrace the change brought by Blockchain. Without changing the standards, it would be challenging for Accountants and Internal Auditors to change the process and the way they work. Disclaimer: The author studied blockchain and fintech in San Francisco California but he does not assume to be a subject-matter expert in blockchain technology and hereby disclaim any liability to any party for any loss, damage or disruption caused by his personal opinion and insights about blockchain technology.
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About the Author
Lyndon Magsino is a CIA and CPA with extensive experience in auditing, risk management, corporate governance of financial services industry. Currently, he is working in the Audit Department of a Bank in the UAE. Prior to this, he worked as the Head of Audit of an investment firm in DIFC Dubai.
In addition, Lyndon previously worked in the Risk Advisory Services of a Big-4 consulting firm and headed the Banking and Financial Services portfolios in the UAE. As part of his role, he headed various projects on Internal Audit, Risk Management, Corporate Governance, Compliance and AML for global and regional banks, Central Banks and other financial services companies. He is a recipient of Hult Global Professional Scholarship Program for the Global Executive MBA at Hult International Business School, based in Cambridge Massachusetts USA. He is highly qualified as a Certified Public Accountant (USA and Philippines), Certified in Risk Management Assurance (USA), Certified Financial Services Auditor, specialized in Banking (USA) and Certified Internal Auditor (USA).
Blockchain Technology: Will it be a disruptor or game-changer in Accounting and Internal Audit? Lyndon Magsino, CIA, CPA, CFSA, CRMA