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Aug 10, 2017

Is blockchain buzzworthy and business-worthy?

As seen in the Boston Business Journal 

By: Dennis Finnegan - Audit Manager


The business world has been abuzz about blockchain technology across many industries, ranging from finance to healthcare. Blockchain appears to have significant potential to add a new element to the revered double-entry accounting method on which the accounting industry is based.

There are, however, significant concerns about data integrity and security as a company’s general ledger goes digital.
 
While blockchain has its origins in the cryptography of the early 1990s, the technology was thrust into the public eye due to the rise of bitcoin during the late 2000s. As a refresher, bitcoin is a digital currency used throughout the world. Unlike traditional currency, it lacks physical form and a central regulating authority such as the U.S. dollar and U.S. Department of the Treasury.
 
One of the biggest challenges facing a currency that lacks a tangible form and central clearing house is the potential of double spending, which could lead to runaway inflation, loss in user confidence, and ultimately, collapse. Blockchain was the medium created for bitcoin as the solution to this problem.

In brief, blockchain is a decentralized and distributed ledger system made up of valid transactions that are cryptographically hash stamped and bundled into interlocking blocks. These blocks are, in theory, unmodifiable and allows for all transaction participants to verify the information.
 
Applying blockchain technology to an accounting module of a company’s core business processes is quite a significant departure from the traditional concept of a general ledger that is insulated from the outside world for validity and security purposes.
 
Instead of having an isolated ledger, transactions would be posted on a distributed, real time database that is visible to other parties in the transaction. While it is unlikely and impractical for a company to have its entire general ledger utilizing blockchain, there is great potential for streamlining transaction processes, such as the accounts receivable and payable cycle.
 
It would make it possible to have invoices that are self-recording and self-paying, similar to the Electronic Data Interchange (EDI) transactions in common practice today. The key difference being, instead of the seller’s server signaling the buyer’s server, as in the EDI, the buyer and seller, as well as other relevant parties, would communicate through the block on the blockchain.
 
While the idea of a decentralized ledger or accounting module might sound insecure and intimidating, the decentralization of the ledger is one of blockchain’s greatest security strengths, since each block is cryptographically stamped and effectively unmodifiable.

It is much easier to modify a ledger that is housed in only one location compared to a decentralized ledger in multiple locations that synchronize.

Blockchain has the potential to give rise to triple-entry accounting, which would include the traditional debits and credits with the addition of an imbedded, unmodifiable time stamp on the transaction. This is unlike the traditional general ledger system, where the time and date are merely attributes of the entry can be edited.
 
Blockchain has the potential to connect a company’s general ledger and the internet of things like never before.

Example of how blockchain works

In the graphic below, the inventory procurement process had already been completed and the only input needed was a purchase order by Company A, which is a process that could be automated through blockchain.
 
All the while, both companies’ banks were able to view and verify the entire transaction. This added visibility means that all transactions recorded to the blockchain are instantly verifiable.This, coupled with the application of artificial intelligence, has the ability to greatly reduce the scope of audits in the future.