Will blockchain technology replace accountants?

There is an ongoing debate about the future of the profession: Should accountants be worried? He asks Erica Pimentel, CPA, CA, PhD student in accounting and a Concordia Public Scholar from Concordia University in Montreal.

MONTREAL – Basically, the practice of bookkeeping involves gathering information and preparing financial reports that people will use to make decisions. Auditors add a level of credibility to this function by certifying the accuracy and completeness of financial reports. But what happens when a technology emerges that, on the one hand, is faster, more accurate and cheaper in preparing reports than accountants, and on the other hand, is dubbed a trust machine and can transform the way trust is date and receipt?

Enter blockchain technology – a revolutionary system that uses advanced cryptography to create an unalterable record of transactions. A blockchain is a decentralized ledger that provides network users with accurate, real-time, low-cost transaction record, effectively replacing the accounting function of many accounting systems. Given the potential for this technology to overturn the accounting function (and the accounting profession more generally), it is no wonder that professional accounting bodies in countries such as Canada, the United States and England (among others) are trying to articulate their value proposition in light of this threat.

In this blog post, I’ll explore where blockchain is best and where human experience is still key. I will also provide suggestions on how the accounting profession can move forward in order to strengthen and maintain the important role it plays in the capital markets.

What is a blockchain and how can it replace the accounting function?

As I explain in my next article in Accounting Perspectives (written in collaboration with Professor Emilio Boulianne of the John Molson School of Business), blockchain technology was created by an individual (or group of individuals) operating under the pseudonym of Satoshi Nakamoto in a white paper introducing a digital currency called Bitcoin. Bitcoin proposed an innovative system that could combine cryptography with a sophisticated distributed public ledger that tracked how each Bitcoin was spent, eliminating the possibility that a network user could spend the same digital currency more than once. This technology also provided the opportunity to publicly (but pseudo-anonymously) broadcast every transaction across a network so that every user on the network was aware of all the transactions of any other user.

Blockchain technology has the potential to revolutionize accounting because it can replace many functions of traditional accounting systems. When each party in a transaction, such as a buyer or seller, has separate accounting records, stacks of documents must be sent between the parties to verify the accuracy of the transaction and exchange payments. On a blockchain, each member of the network has an identical record of all financial flows which is updated in real time. This eliminates the need for timely (and costly) reconciliations. Digital currency can be sent to a counterparty anywhere in the world in a fraction of the time (and at a fraction of the cost) it would take to make a wire transfer payment using a traditional bank. Furthermore, smart contracts can be encoded in the architecture of a blockchain that would automate the tax withholding and remittances on that transaction. This could reduce (if not eliminate, in some cases) the need to file tax returns with government authorities.

Where can accountants lead the way?

While blockchains can replace many of the mundane (and often error-prone) accounting jobs that have traditionally been done by accountants, I believe this threat offers the accounting profession an opportunity to rename itself. Rather than being seen as a bean counter, the accounting profession can reposition itself as a community of business consultants who use their professional judgment to help organizations make sense of financial challenges in the digital age. I propose three arenas where accountants can add value:

1. Areas that require professional judgment: Although buy and sell transactions are recorded on a blockchain in real time, many of the items reported in the financial statements are based on estimates that cannot be automated. For example, when a company records its estimated annual tax payments or estimates its escrow liabilities that may be payable over several years, professionals with industry-specific expertise are required to ensure those numbers are reliable. Accountants can continue to support companies in preparing and verifying these figures. This is especially important in industries such as banking or insurance, where a difference of half a percentage point on an interest rate estimate can impact your bottom line in millions of dollars.
2. Technology-based services: While blockchains offer the opportunity to automate the collection of royalty payments or withholding taxes, these functions can only be used if the blockchain code accurately reflects the business purpose for which it was intended. For example, a blockchain can be coded to withhold provincial and federal sales tax on a transaction. However, it would take an accountant to advise on what types of transactions are taxable under GST, QST, HST and which transactions are exempt. A tax expert might review the business logic of the code to make sure transactions are accurately marked for the right type of withholding tax. While software engineers may be able to verify the computational logic of a blockchain architecture, accountants (and particularly financial auditors) will be required to review the business logic of the blockchain architecture.
3. Business planning and consulting: The digital revolution, and in particular fintech, offers many opportunities, but also many risks for businesses. Accountants can leverage their business acumen and industry experience to help companies design realistic business plans, manage complex tax laws, and better understand financial reporting requirements to address these challenges.

How can the profession go on?

While blockchain technology offers many opportunities, the profession will need to do its homework to be ready to take on it. For one, accountants will need to strengthen their skills in information technology. In my co-authored working paper on How to Best Prepare Future Accountants for the Profession, we argue that the information technology curriculum currently taught to undergraduate and graduate accounting students needs to be leveled if we want these students to prevail in digital economics.

Indeed, it is the lack of deep technology expertise that currently prevents many auditors from hiring new clients in the blockchain industry. In an article written in collaboration with Professor Emilio Boulianne (of the John Molson School of Business), Professor Jeremy Clark and Shayan Eskandari (both of the Concordia Institute for Information Systems Engineering), we argue that auditors do not believe they have an adequate level of expertise to hire customers in this sector.

An unintended consequence of this is that they are holding back blockchain companies from receiving certified financial statements, a prerequisite for obtaining large-scale funding. We invite auditors (and accountants in general) to work with computer scientists in interdisciplinary teams to develop mutual expertise in audit and blockchain technology.

I have been a professional accountant (and an accountant prior to the merger of the three accounting designations in Canada) for nearly a decade. I believe it is time for the profession to look to the future and develop their skills in information technology. If accountants can’t clearly articulate our value proposition in the digital age, we may soon face obsolescence.

Erica Pimentel, CPA, CA, is a PhD student in accounting and a Concordia Public Scholar at Concordia University in Montreal. This article originally appeared on Concordia.ca as a blog post. Photo by Launchpresso on Unsplash.