Understanding how blockchain and data science improve accounting

Understanding how blockchain and data science improve accounting

Blockchain has become the new buzzword. Though it was initially only understood within the context of cryptocurrency like bitcoin, blockchain has recently gained newfound attraction as developers apply the technology to different industries. According to Deloitte’s 2018 global survey, however, about 39 percent of global respondents, and 44 percent of United States respondents, believed that blockchain was mostly hype.

While this skepticism is understandable given our tendency to exaggerate “hot topics,” blockchain technology does have legitimate potential to revolutionize many sectors in society. By peering past the “fairy dust” claims, forward-thinking accountants can embrace the opportunities provided by blockchain technology – and we certainly have, too, at MBS Accountancy. In this article, we’ll explain how blockchain works, outline some practical (realistic) use cases that are relevant to accountants, and describe the barriers that are impeding its adoption.

What is blockchain?

The basic mechanics of blockchain are relatively simple, though there are various nuances to the technology that are beyond the scope of this post. Blockchain is a database (“chain”) of digital information (“blocks”) that each consist of three pieces of information: the transaction information, the name of the parties involved in the transaction, and a unique hash. It’s worth noting that your real name is not stored in the block, but rather just your digital signature (similar to a username) that identifies you on the blockchain network.

For example, a block containing information about your purchase from ABC store would contain the transactional information (date, time, purchase amount), the names of the parties involved (ABC, Inc. and your “username”), and a hash that distinguishes the block from others in the chain.

When a transaction occurs on a blockchain, it’s verified by the hundreds or thousands of computers in the blockchain network, rather than by a single person or company. After being verified, the transaction block is given its unique hash, as well as the hash of the block preceding it in the blockchain. Once the block has been verified and hashed, it is added to the database (“chain”).

A quick note on public vs. private blockchains

Private and public blockchains are often misunderstood, so it’s helpful to clarify (and verify) all definitions so that this article has the maximum level of accuracy and effectiveness. Anyone can write data to a public blockchain network, whereas only specific users can write to a private blockchain. Open networks are viewable by anyone, but closed networks are only viewable by authorized users. These four traits provide us with four types of blockchain networks, each suitable for different use cases in areas relevant to accountants.

Blockchain use cases

Taxation. The world of taxes is fraught with frequent changes, excessive amounts of paperwork, and the consequential frustration. Though blockchain is by no means a cure for all of our tax-related woes, it does offer features that could decrease administrative workload and decrease costs associated with tax collection. For example, using a private open blockchain network would provide unchangeable, transparent, and secure records that are trackable by government agencies, as well as mitigate opportunities for tax evasion.

Programmatic efficiency. While blockchain provides many opportunities to the world through its distributed ledger technology, blockchain networks also employ smart contracts for additional functionality. Smart contracts are self-executing contracts that run when predefined conditions are met. Businesses and governments can use these contracts to decrease the administrative burden of mundane, algorithmic tasks, while preserving quality and measurability.

Auditing and assurance. Blockchain networks provide a real-time, immutable ledger of all transaction activity on the network, allowing users to track items of interest, such as land and corporate shares, as they “change hands” from start to finish.

Preparing for the future

Just as with any new thing or idea, misconceptions are abound when it comes to blockchain. According to research conducted by the Association for Information Systems (AIS), blockchain is so commonly associated with bitcoin and other cryptocurrencies that any misgivings or problems with one affects the other, whether or not it is actually true. There is also the reality that blockchain requires enormous amounts of energy and storage capacity to process and duplicate records since blockchains are “append-only.” Though the issues slowing blockchain adoption are real, there is no denying its potential for reshaping familiar infrastructures. As we continue to explore and overcome each obstacle, many industries as we know them will become increasingly ripe for disruption by this often misunderstood technology.