doctoral candidate in accounting and a Concordia Public Scholar at Concordia University in Montreal. |
MONTREAL – At its core, the practice of accounting involves collecting information and preparing financial reports that individuals will use to make decisions. Auditors add a layer of credibility to this function by certifying the accuracy and completeness of financial reports. But what happens when a technology emerges that, on one hand, is faster, more accurate and cheaper at preparing reports than accountants, and on the other hand, is dubbed a trust machine and can transform how trust is given and received?
Enter blockchain technology: a revolutionary system that uses advanced cryptography to create an unalterable record of transactions. A blockchain is a decentralized ledger that provides network users with an accurate record of transactions in real time and at low cost – effectively replacing the bookkeeping function of many accounting systems. Given the potential for this technology to upend the accounting function (and the accounting profession more broadly), it is no wonder that the professional accounting bodies in countries like Canada, the United States and England (among others) are trying to articulate their value proposition in light of this threat.
In this blog post, I will explore where blockchain is best and where human expertise is still paramount. I will also provide suggestions on how the accounting profession can move forward in order to reinforce and maintain the important role it plays in capital markets.
What is a blockchain and how can it replace the accounting function?
As I explain in my forthcoming paper in Accounting Perspectives (co-authored with Professor Emilio Boulianne from the John Molson School of Business), blockchain technology was created by an individual (or group of individuals) operating under the pseudonym Satoshi Nakamoto in a white paper introducing a digital currency called Bitcoin. Bitcoin proposed an innovative system that could combine cryptography with a sophisticated distributed public ledger that would track how each Bitcoin was spent, eliminating the possibility that a network user might spend the same digital coin more than once. This technology also provided the opportunity to publicly (yet pseudo‐anonymously) broadcast each transaction across a network such that each user on the network would be aware of all the transactions of any other users.
Blockchain technology has the potential to revolutionize accounting because it can replace many functions of traditional accounting systems. When each party in a transaction, say a buyer a seller, possess separate accounting records, piles of documents must be sent between parties to verify the accuracy of the transaction and exchange payments. On a blockchain, each network member possesses an identical record of all financial flows that is updated in real time. This eliminates the need for timely (and costly) reconciliations. Digital currency can be sent to a counterparty anywhere in the world in a fraction of the time (and at a fraction of the cost) that it would take to make a wire transfer payment using a traditional bank. Additionally, smart contracts can be coded into a blockchain’s architecture that would automate tax withholdings and remittances on such a transaction. This could reduce (if not eliminate, in some cases) the need to file tax returns with government authorities.
Where can accountants lead the way?
Although blockchains can replace many of the mundane (and often error-prone) bookkeeping work that traditionally has been done by accountants, I believe that this threat provides an opportunity for the accounting profession to rebrand itself. Rather than being seen as bean counters, the accounting profession can reposition itself as a community of business advisors that use their professional judgment to can help organizations make sense of financial challenges in the digital age. I propose three arenas where accountants can add value:
- Areas that require professional judgment: Although purchase and sale transactions are recorded on a blockchain in real time, many of the line items reported on financial statements are based on estimates that cannot be automated. For instance, when a company records their annual estimated tax payments or estimates their warranty liabilities that may be payable over several years, professionals with industry-specific expertise are required to make sure those numbers are reliable. Accountants can continue to support companies in preparing and verifying these figures. This is especially important in industries like banking or insurance – where a half a percentage point difference on an interest rate estimate can have an impact of millions of dollars on the bottom line.
- Technology-driven services: While blockchains provide the opportunity to automate the collection of royalty payments or withholding taxes, these functions can only be relied upon if the blockchain’s code accurately reflects the commercial purpose it was intended to serve. For instance, a blockchain may be coded to withhold the provincial and federal sales taxes on a transaction. However, it would take an accountant to provide advice on which types of transactions are taxable under the GST, QST, HST and which transactions are exempt. A tax expert could review the code’s commercial logic to make sure that the transactions are accurately being flagged for the right type of withholding tax. While software engineers may be able to verify the computing logic of a blockchain’s architecture, accountants (and especially, financial auditors) will be necessary to review the business logic of blockchain architecture.
- Business planning and advisory: The digital revolution, and fintech in particular, proposes many opportunities, but also many risks for businesses. Accountants can leverage their business acumen and industry expertise to help companies design realistic business plans, navigate complex tax laws and better understand financial reporting requirements to tackle these challenges.
How can the profession move forward?
While blockchain technology proposes many opportunities, the profession will need to do its homework in order to be ready to take it on. For one, accountants will need to reinforce their skills in information technology. In my co-authored working paper on how to best prepare future accountants for the profession, we argue that the information technology curriculum currently being taught to undergraduate and graduate accounting students need to be leveled-up if we want these students to prevail in the digital economy.
In fact, it is a lack of deep technological expertise that is currently holding many auditors back from taking on new clients in the blockchain sector. In a paper co-authored with Professor Emilio Boulianne (from the John Molson School of Business), Professor Jeremy Clark and Shayan Eskandari (both from the Concordia Institute for Information Systems Engineering), we argue that auditors do not believe they possess an adequate level of competence to take on clients in this sector.
An unintended consequence of this is that they are holding businesses in the blockchain sector back from receiving audited financial statements – a prerequisite to obtaining large-scale funding. We urge auditors (and accountants at large) to work with computer scientists in interdisciplinary teams to develop mutual expertise in audit and blockchain technology.
I’ve been a chartered professional accountant (and a chartered accountant before the merger of the three accounting designations in Canada) for close to a decade. I believe that the time is now for the profession to look to the future and develop its competencies in information technology. If accountants are unable to clearly articulate our value proposition in the digital age, we may soon face obsolescence.
Erica Pimentel, CPA, CA, is a doctoral candidate in accounting and a Concordia Public Scholar at Concordia University in Montreal. This article originally appeared on Concordia.ca as a blog post. Photo by Launchpresso on Unsplash.
