The emerging blockchain technology became known through Bitcoin, the first practical application of this technology.
However, the prospects of blockchain technology do not stop at cryptocurrencies.
Around the world, companies from all industries explore how blockchain can be used to optimise key processes.
According to a recent PwC study, blockchain has the potential to boost global GDP by $1.76 trillion over the next decade.
Blockchain is a secure, decentralised, and immutable ledger distributed on a computer network that records data in chronological order, broken down into blocks, using cryptographic algorithms.
Blockchain technology has attracted a lot of interest from the accounting and auditing industry as it can transform how transactions are conducted, recorded, and therefore audited.
Based on the structure of a blockchain system, there are four types of blockchain: public, private, consortium and hybrid.
For example, Bitcoin uses a public blockchain, in which unknown users trade billions worth of cryptocurrencies securely.
In the case of Bitcoin, the idea of blockchain is generally based on building trust without the existence of a central authority.
The same stands in the case of businesses; however, some important differences exist.
When we refer to a business blockchain, we usually mean a private or consortium blockchain, for which users need a license to participate.
A business blockchain records transactions involving any assets and not just cryptocurrencies. There is no anonymity in a private or consortium blockchain, but data confidentiality is maintained by determining the companies with which specific categories of data should be shared. Also, the mechanism of validating the transactions is through selective endorsement that has been agreed between the companies of the network.
Currently, accountants and finance professionals face certain challenges, including many manual processes prone to errors, the need for endless reconciliations and the lack of timeliness of accounting information.
Blockchain provides an opportunity to streamline accounting processes and offer innovative accounting solutions.
Using blockchain technology, the traditional double-entry accounting system is enhanced.
A validated transaction recorded in the blockchain represents a third independent entry that confirms the existence and accuracy of the two opposite entries.
Additionally, blockchain provides the ability to create smart contracts, which are recorded on the blockchain as a code and executed automatically when the conditions are met.
Similarly, current auditing practices include many repetitive and time-consuming tasks such as obtaining external confirmations and verifying the authenticity of documents.
Consequently, the development of blockchain technology and its adoption by companies to transform their accounting systems creates the need to redesign the financial statement audit services.
Combined with other technologies, such as Big Data Analytics, Artificial Intelligence, and the Internet of Things, blockchain will allow auditors to perform real-time audits in the future.
It also creates the need for new assurance services, such as auditing the technical integrity of a blockchain network and the logic behind a smart contract.
Among many benefits, blockchain reduces the risk of financial fraud as it increases the transparency of transactions and reduces the risk of cyberattack since any attempt to change the data by hackers will not be validated by other users and provides auditors with direct access to business data reducing the time required for the exchange of information between businesses and auditors.
Furthermore, it eliminates the need for time-consuming reconciliations and document authentication checks, while it enhances the audit quality by enabling auditors to analyse data in real-time, focus on areas of the financial statements which are characterised by more subjectivity and a higher risk of inaccuracy and detect any errors promptly.
Blockchain can revolutionise almost every sector of the economy and similarly create new business models as the internet did in the past.
However, certain difficulties such as the lack of a legal framework and relevant accounting/auditing standards, privacy issues regarding the data stored on the blockchain, and challenges related to the adaptability, scalability, and understandability of the technology should be overcome first.
Companies that are starting to explore blockchain will be the first to take advantage of the technology and stand out from the competition or enhance their competitive advantage.
By Nikolas Kontozis Senior Associate Assurance Services PwC Cyprus
This content is for general information purposes only
