Blockchain Promise to Revolutionize Accounting Hits Reality Wall

Nov. 13, 2018, 12:02 PM

Blockchain a year ago seemed poised to revolutionize accounting.

Today the technology has divided the profession over how to make it work not just for accounting, but for the capital markets that demand fast, accurate financial information.

There is plenty of ground to cover before the tool could become an accounting reality.

The accounting industry has yet to reach a consensus on the structure and design of the distributed ledger systems. Who would verify corporate accounting information? Terminology? Even which specific accounting tasks should be shared to a blockchain—and which shouldn’t—is all up for debate.

Getting the technology right is critical. Accounting and the resulting financial reports are not only highly scrutinized and regulated, but misleading investors or maintaining inaccurate books and records could result in securities lawsuits and civil penalties. Careers would be on the line.

The lack of consensus took center stage at a recent blockchain accounting conference in San Francisco. Attendees grilled presenters and openly challenged their ideas.

But the shift in debate was a relief to Ashley Davis, a professor at University of Oklahoma who specializes in accounting information systems.

The sentiment at last year’s San Francisco conference was that blockchain would all but replace accounting, Davis told Bloomberg Tax.

Won’t Fit Every Case

“I think now people do realize it’s another technology option. And it’s not going to fit every use case,” Davis said.

The best use of the technology might be an internal blockchain that links different roles within accounting departments, strengthening accounting controls like segmentation of duties, she said.

“If blockchain has a future in accounting, that’s where it is. That’s a big a deal,” Davis said.

Most of the use cases for accounting, however, envision a blockchain to track and verify payments and invoices with vendors or customers.

Verifying such low-level, raw transactions with individual vendors or suppliers would be a good use of the technology, said David Deputy, president of the Accounting Blockchain Alliance and development director for tax automation for Vertex Inc.

But companies are unlikely to share the contents of their general ledgers—a combination of all transactions including tax obligations and revenue—with external parties to verify, Deputy said.

Accounts receivable and payable transactions represent just a fraction of the accounting required of U.S. corporations. Many corporate transactions don’t involve an outside party.

Capitalization schedules of assets or the value of intangible assets are estimates that companies set themselves, for example.

But the technology could play a role in verifying such estimates, said Griffin Anderson, founder of Consensys subsidiary Balanc3 and a blockchain advocate.

Stakeholders and trusted third parties with select access to the blockchain could assess and confirm that the valuation of an asset is correct, Anderson told Bloomberg Tax.

But how many stakeholders would be needed for verification in an accounting setting also isn’t clear.

A blockchain used by just a few stakeholders might not be worth the technological effort required to maintain what is essentially a slow and complex database. To get the most out of blockchain, multiple parties would be needed, said Kell Canty the co-founder of Verady, which bridges cryptocurrency assets with traditional accounting systems.

Find the Right Design

The design of the blockchain could ultimately hold the key to make the technology work for accounting.

Currently there are hundreds of different types of blockchains. They can be customized to meet the needs of specific industries, including accounting and auditing, said Sean Stein Smith, an adviser to the Wall Street Blockchain Alliance and accounting lecturer at Lehman College in New York.

The right structure may make the lives of auditors easier by allowing them to see and work with the data stored on the blockchain. But other types of blockchains that don’t store records but are just a numerical identifier would make the auditor’s job more difficult, Stein Smith said.

“All that the blockchain tells us is that those blocks of information have been verified by the other members. It has nothing to do with whether the data actually uploaded was accurate. That’s a big issue for the accountants,” he said. “We have to be able to go in there and examine the information itself.”

The structure of the blockchain could also affect how manageable the databases might be for businesses to maintain, Intuit Inc.’s chief innovation officer, Bharath Kadaba said.

Kadaba compared the technology’s development to the state of the internet in 1985—immature and lacking global standards.

Still, the technology has the potential to ease financial friction points by reducing paperwork and time for vendor transactions, Kadaba said.

A Decade Away

Despite the unknowns, blockchain advocates and accountants agree that it could be a decade before the technology matures enough to handle the demands of modern accounting.

“We’re a long way from this becoming a prevalent model within the accounting world,” said Marty Burns, chief industry operations officer for the Investment Company Institute.

Burns said the technology will develop slowly for accounting as companies determine what internal controls will be needed to ensure the accuracy and security of blockchain systems, among other regulatory and legal considerations, Burns said.

Similar conversations about how to best apply blockchain are happening throughout the financial services industry, Burns said.

Systems running today in the U.S are reliable and can handle multiple millions of transactions in minutes.

“There’s not that same level of comfort with blockchain,” Burns said.

As the debate over blockchain’s accounting use evolves, officials at the Securities and Exchange Commission will be watching. Maintaining that reliability is chief among the regulator’s concerns.

“The discussion regarding blockchain would benefit from a more comprehensive understanding of the importance of data quality and security,” Wes Bricker, chief accountant at the SEC, told Bloomberg Tax.

Even as accountants learn more about the technology, they should keep in mind that financial reporting is a mix of “data, technology and the security that is needed to maintain the integrity of the financial information system,” Bricker said.

But Stein Smith said blockchain can deliver on its promise of an accurate, trustworthy way to transfer and share information. “I am fully confident that 10 years from now, blockchain is not going to be some new radical idea. It’s going to be part of how business is conducted.”

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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