Breaking the Chain

How blockchain, the very legitimate technology behind cryptocurrencies, might change accounting and finance forever—in a good way. By Lisa Wilder | Fall 2017



Consider a technology that could make traditional reconciliation obsolete—a cloud-based, crowdsourced digital ledger where every transaction is recorded and verified by users in real time based on an honor system between all participants.

Now, consider this technology is rooted in the alternate currency movement—aka cryptocurrency—with all the requisite concerns about security, access, and trust that go with it. Could the accounting and finance industry possibly adopt such a technology?

Welcome to the blockchain discussion.

Blockchain or Bust

In case you haven’t heard, and you wouldn’t be the only one—a recent Deloitte survey indicated that about 40 percent of senior U.S. executives haven’t—blockchain technology is sparking an operations revolution in practically every industry on the planet. The race is on to adapt the open-source, live entry-and-verification technology behind the soaring cryptocurrencies Bitcoin and Ether to streamline recordkeeping and business transactions in disciplines spanning from cross-border financial transactions to supply chain management.

But what is blockchain?

In the simplest terms, a blockchain is a distributed digital ledger that records and executes transactions without the need of a middleman. And it’s all based in what many in the accounting and finance profession still consider the ultimate cultural and operational challenge—“accounting in the cloud,” explains Lamont Black, assistant professor of finance at DePaul University - Chicago. “Blockchain is really good at recording a value and putting a timestamp on it. Instead of everyone having their own files, they can go to one location where everyone can agree on that shared information, allowing it to be used centrally.”

Deloitte’s definition goes deeper: “[Blockchain] is a distributed ledger that provides a way for information to be recorded and shared by a community.” Every member of this community maintains their own records, but “all members must validate any updates collectively.” And we’re not just talking about numbers. “The information could represent transactions, contracts, assets, identities, or practically anything else that can be described in digital form. Entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction histories in their entirety,” the firm explains.

And here’s where the name comes in. According to Deloitte’s explanation, each update is a new “block” added to the end of the “chain.” A central protocol is established to determine how “new edits or entries are initiated, validated, recorded, and distributed. With blockchain, cryptology replaces third-party intermediaries as the keeper of trust, with all blockchain participants running complex algorithms to certify the integrity of the whole.”

Who knows what the future holds for this technology, but today, a blockchain looks like a conventional database—just one that moves and changes in real time. “It records all processes, tasks, and payments and digitally stamps them. It basically does what human intermediaries do now, but without the potential for human error or tampering,” explains W. Brooke Elliott, professor of accountancy and department head at the University of Illinois at Urbana-Champaign. “It’s protected from any type of tampering or revision.”

Building a Chain

Deloitte is just one of many organizations exploring and developing new ways to implement blockchain technology. Another Big Four member, PwC, is investing heavily in resources to develop blockchain applications and services. Powerhouse names like Goldman Sachs, IBM, Intel, J.P. Morgan Chase, Morgan Stanley, and Wal-Mart are just a few others forming their own blockchain R&D collaborations.

Deloitte recently opened a global blockchain lab to develop applications for the technology. According to Deloitte’s New Jersey-based audit partner Will Bible, the development of blockchain technology benefits from a vibrant global, opensource community. “We’re seeing small groups of entrepreneurs building their own solutions, with software communities putting out their own platforms,” Bible explains. This open-source collaboration means blockchain’s development won’t necessarily be led by the computer and software industry—though how it’s commercialized remains to be seen.

The decentralized computing network Ethereum, for instance, has emerged as the latest platform of choice for commercial blockchain development, with some calling it “a more flexible and developer-friendly alternative to Bitcoin with its native cryptocurrency, Ether.”

Regardless of the platform, “blockchain is the real innovation of Bitcoin,” Black says. “This technology can be applied.”

The CPA Chain

There’s no clear answer as to how widely blockchain technology will be applied, or how it will impact accounting, finance, and tax professionals—yet. For now, blockchain awareness is simply “important for CPAs at all levels,” says Len Steinmetz, director, Financial Services Advisory at Grant Thornton.

“It’s not generally expected that blockchain will become the de-facto transactional standard at all levels of the economy,” Steinmetz says, pointing to current predictions that the early adopters will be “top-tier financial corporations, asset managers, and other large economic enterprises,” including “retail banking transactors, payment system processors (SWIFT already has a blockchain product in beta), swap and other trading platforms.”

He adds, “For mid-tier firms, we’re probably looking at a three-to-five-year horizon where small businesses will likely be the last to adopt or may not adopt outright, instead using platforms that use blockchain technology ‘under the covers.’”

This means CPAs and other finance professionals have some time to immerse themselves in the technology and learn about its best implementations— especially if they want to stay relevant to their organizations and clients.

In other words, accountants and auditors won’t be tossed out on the street, but now is a good time to educate. Deloitte’s Bible says traditional accounting support roles are likely to switch from reconciliation to analysis. This technology will automate many job functions, but also “create opportunities for analytics,” Bible notes, and firms will obviously be looking for job candidates with the latest technical skills.

Take traditional double-entry bookkeeping, for instance. According to Steinmetz, accounting reconciliation typically depends on independent auditors to verify entries and validate financial information. Depending on the design of the blockchain system, once data is entered, it’s subject to an immediate verification process that refines or completely eliminates this manual job function.

“Blockchain addresses these concerns by, first, distributing identical copies of the ledger to each member in the network (so everyone has the same view into the transaction at the same time); second, identifying ownership and transfer of ownership; and third, cryptographically securing the ledger and each transaction in a managed and immutable way,” Steinmetz explains.

Then consider triple-entry bookkeeping and momentum accounting. Blockchain is seen as a potential modern driver of these proposed alternative accountancy systems, which not only focus on the traditional process of recording debits and credits, but also monitor and note real-time changes in balances.

The blockchain future means “the accountant and auditor function would deal less with the mundane and more with truly complex transactions. [It’s a future] where today’s CPAs will make significant value-add contributions,” Steinmetz adds.

The blockchain future can also potentially change accounting coursework worldwide. Steinmetz thinks training will have to change in two key ways: Accounting majors will need a “firm grounding” in “distributed ledger technology, cryptography, security, and operation of trusted and trustless networks.” Plus, they’ll need to build “a good understanding of the coming world of blockchain or ‘triple-entry’ accounting.”

DePaul University and the University of Illinois are among many institutions responding to these developing technologies with increasing levels of computer science coursework.

“When I moved to Chicago in 2013, I was teaching money and banking—I was talking about how technology is changing the [finance] space. Even then, my students wanted to know about Bitcoin and the technology behind it,” Black says. “Today, the school is developing a blockchain curriculum that involves more conversation with faculty in computer science.”

At the University of Illinois, Elliott just led a major undergraduate curriculum revision in the College of Business to build analytics and other technology-related courses into its core. “We’ve always produced accounting professionals with a solid understanding of accounting fundamentals and an ability to communicate well with colleagues and clients, but now we’re investing to produce accounting professionals who also have a competency in data analytics and emerging technologies,” she says. “In our masters programs in accountancy, we’re launching a data analytics concentration where students will have the ability to build a core competency in analytics and apply these skills to develop solutions to problems identified in the accounting discipline.”

As for what the future holds for these students and the profession, Elliott says don’t believe everything you read.

“I don’t believe it’s the end of the audit industry by any means, as has been referenced in several popular press articles,” she says. “As long as there’s estimation in financial reports, and there always will be, then technology alone cannot substitute the value [we] provide.”