New Kids on the Block - Blockchain Reaction

At June’s 2017 ENGAGE conference of the American Institute of CPAs, I grabbed an early seat at a breakout session on blockchain technology and how it will impact the accounting business. I was glad I got there early because by the time the speaker, Gary Boomer, got his PowerPoint going, the audience had filled the room to the walls and spilled out into the hallway. A subsequent blockchain session from Amanda Wilkie, CIO of Withum, was moved to a larger room to accommodate everybody.

The fact that so many CPAs wanted to get into these sessions speaks a lot about the hype – and the substance – surrounding the idea of blockchain and the related topics of cryptocurrency and smart contracts. Like a lot of businesspeople, accountants might go directly from ignorance to great excitement (or worry) when they learn about the potential impact of blockchain.

Chain of Rules

So, what is blockchain, and why does it get accountants so worked up? In essence, blockchain is a distributed network of transaction records, called blocks, that are connected, time-stamped, and verified across all the nodes in the network. Once verified, a block is tied to the block preceding it and the block that follows it, and it cannot be altered or deleted.

Rather than being stored in a central database, these blocks are copied across a multitude of nodes, or private computers, so it’s not possible for a hacker or piece of malware to alter a transaction or bring the network down.

The first and most famous use of the concept is Bitcoin, which is still conflated with blockchain in a lot of people’s minds. The hype, volatility, and limitations of Bitcoin might make people dismiss blockchain if they think it’s one and the same. But the possibilities go beyond just the global cryptocurrency.

New Kids on the Block

The fact that there could be verified and immutable transactions stored in a public ledger is what has CPAs intrigued. Because much of what accountants do – and don’t necessarily want to do – is verifying transactions and balances, the broad use of blockchains could greatly reduce the work of an audit or just getting sales and bills posted into an accounting system.

A Brooklyn-based group called ConsenSys has begun a project called Balanc3, touted as a triple-entry accounting system, where each party to a transaction has the debit and the credit recorded on its ledger, but those are unalterably connected to a third entry in the public distributed ledger, which is stored in a blockchain.

The possibilities are clear to cloud ERP visionaries like Aaron Harris, Chief Technology Officer of Intacct.

“We see blockchain providing a sort of referential integrity check on two party transactions,” says Harris. “I think in the future, you’ll see tight integrations between blockchain networks and accounting systems, eliminating much of the audit burden.”

As Amanda Wilkie discussed in her ENGAGE conference session, companies as diverse as Maersk, Walmart, and Spotify are experimenting with use of blockchain to manage their global supply chain, food production chain of custody, and digital music licensing, respectively. None of these projects is based on Bitcoin but rather the more enterprise-oriented Ethereum blockchain, or on Hyperledger, a blockchain project started by the Linux Foundation.

These investments, as well as those of companies like JP Morgan Chase, IBM, Deloitte, and others, point to a future where transactions are harder to hack, easier to validate, and faster to settle and record.

Get Smart

In addition to enabling more fraud-resistant transaction records, blockchain has the potential to help companies with complex contract and revenue structures meet all the requirements of newer accounting rules. That’s because Ethereum and similar blockchains are able to contain detailed contract and performance information and automatically record milestones met, based on a verified external input. Because such a contract executes according to a program code, these are called Smart Contracts.

Say, for example, two people bet on a baseball game. If their bet were recorded in a Smart Contract, an agreed-upon outside data source like ESPN.com could trigger the execution of the contract when the final game score is posted. Similar executions of Smart Contracts might happen with LIBOR rates, commodities shipments, or other verifiable markers of performance.

“We think Smart Contracts have the opportunity to revolutionize accounting for performance-based contracts,” says Intacct’s Harris. “In the future, Smart Contracts will automatically trigger expense and revenue recognition based on the specifically coded performance obligations.” With revenue recognition rules becoming more complex, the ability to integrate these Smart Contracts directly into a cloud-based revenue recognition system such as Intacct could be a significant relief to businesses in the not-too-distant future.

We’ll keep an eye on developments. Those who get to that space early are going to be glad they got a seat!

[ Published: August 1, 2017 ]