Experts acknowledge blockchain technology is going through its exploratory phase. As such, we explore the various ways in which blockchain can influence different industries and processes. One of the many, yet ignored, aspects of possible blockchain integration is its application in the accounting and finance industries. Modern financial accounting can be transformed by blockchain distributed ledger technology. Some of the biggest challenges facing the current accounting model, such as data privacy, power and storage usage, and other more complex issues such as tax fraud, can be solved using blockchain technology. In this article, we review the possible impact of blockchain technology on financial and ethical accounting.
Decentralized distributed ledger; the storage of the future.
For centuries, the fundamentals of accounting and information flow have remained unchanged. An economic organization conducts transactions, records them, and then keeps these records, reporting on these activities as needed. However, as new technology such as distributed ledger technology (also known as blockchain technology) arises, much of the process of capturing, recording, and reporting transactions will change.
DLT (Distributed Ledger Technology) is a system that allows for the secure operation of a decentralized digital database. Distributed networks eliminate the need for a centralized authority to avoid manipulation. Using cryptography, DLT ensures secure and accurate storage and management of any information. This information becomes accessible using “keys” and cryptographic signatures. When information is saved, it becomes an immutable database that is governed by network regulations
The future of accountability, both financially and otherwise, has always been distributed ledgers. Historical patterns indicate that it is easier to copy and distribute information, which can lead to information being damaged and do significant harm to the information being conveyed. Blockchain technology provides an essential solution to this issue by making multiple copies of the records, encrypting those copies, and dispersing those copies among various locations and devices controlled by multiple individuals.
Blockchain ledgers are simply the next step in the history of data storage, which began over 3000 years ago with parchments and has progressed to printing presses and computer storage systems, which, contrary to popular belief, have a higher risk of information loss than paper. Millions of dollars are spent each year on data storage and management for security and privacy. Modern storage solutions are typically vulnerable to large-scale attacks like hacking, EMP strikes, most of which can be addressed utilizing DLT (distributed ledger technology).
Implications of integrating a decentralized distributed ledger in accounting and finance
The application of blockchain technology in accounting for itineraries such as payment processing, contracts and documentation, and invoicing is only the tip of the iceberg. By tracing and automating audit procedures, authenticating transactions, and using smart contracts to track assets and their ownership in much less time with zero inaccuracy, blockchain ledgers can help assure the integrity of data records. Blockchain ledgers provide a complete and thorough audit of financial transactions. Utilizing blockchain technology and machine learning, errors can be detected automatically. Blockchain-distributed ledgers have the potential to dramatically transform financial auditing and reporting operations.
The management of an economic institution is frequently required to record transactions, manage and maintain these records, compile financial statements using this data, and report to an auditor in the case of conventional undisturbed ledgers. This procedure does, however, allow the possibility of erroneous or malicious record alteration or deletion. In special cases, the data may be skewed to benefit the institution.
The incorporation of distributed ledger technology means that the majority of these operations will become automated and substantially more secure. As a result, the process changes. When management registers information on a blockchain network, these records are dispersed to other network nodes, which now own digital copies. Management is no longer required to generate financial statements because all information is now available to auditors, who can immediately conduct their analyses. Because information saved on the blockchain network cannot be tampered with once it has been delivered, this method offers a far better level of transparency and security.
Significant advancements have resulted from blockchain-distributed ledgers, such as smart contracts, which can allow for the automation of several processes, such as creating a financial statement without the interference of management and disseminating it to relevant parties. It can also play an important role in asset management by automating asset depreciation and automatically inspecting and testing assets for deterioration. In this regard, other smart contract use cases include payment automation, insurance contracts based on established criteria, and so forth.
Distributed ledger technology can upgrade financial reporting systems that have existed for hundreds of years. Blockchain technology enables a level of transparency that has long eluded financial organizations. The storage of information is secure and immutable, ensuring its authenticity. All that is required is to allow interested parties, such as auditors and financial specialists, to extract appropriate information from any blockchain node. Distributed ledgers considerably simplify data storage and sharing. Blockchain accounting will have an impact on the auditing industry by providing financial institutions with access to various low-cost audits by multiple auditors, which are currently extremely expensive.
The financial accounting system has become so sophisticated that navigating through the myriad of information is becoming increasingly difficult for governments, institutions, and individuals. As more information becomes available, the level of complexity rises, leaving room for complacency, lack of transparency, and fraud in most cases. Blockchain technology can handle back-end complexities by implementing smart contacts, resulting in more streamlined and straightforward data. In reality, the complexity of financial records such as taxes, insurance, and other financial data will not be reduced.
Blockchain technology, on the other hand, gives security, transparency, and the ability to filter this information for simpler comprehension and application. One of the several blockchain networks that are positioning itself for large-scale adoption is the Ethereum network. With the recently completed Ethereum Merge, this blockchain network is positioned for significant adoption, with concerns such as energy consumption now put to rest. As earlier stated, blockchain technology is very much in its exploratory phase, but there is no doubt we will begin to see more and more integrated into these industries eventually.