Explore how Blockchain and Secure Ledger Technology are reshaping traditional bookkeeping methods in the UK. Discover the innovative solutions driving efficiency, transparency, and security in financial record-keeping processes.
What is Accounting?
Every individual does some kind of economic activity. A salaried person gets a salary and spends to buy provisions and clothing for children’s education, investment, etc. A sports club is a business run by an individual or group of individuals, a local authority like a municipal corporation, and government entities, either state or central, all carrying some kind of economic activity. So to have a sound financial practice, the accounting role comes.
As the language of business, accounting was first established by Luca Pacioli in 1494.
In 1946, The American Institute of Certified Public Accountants (AICPA) said accounting is the art of recording, classifying, and making records in a significant manner and in terms of funds. Also, transactions and events which are, partially at least, of financial character, and decoding the results thereof.
The function of bookkeeping operations is to provide quantitative information, basically of a financial nature. Also, economic entities need to be useful in making economic decisions by related stakeholders, such as corporate managers, creditors, consumers, and regulators.
Following the Enron collapse in October of 2001, a very unprecedented happened. For the first time in its recent history, although for a short time, the global audit industry lost its most precious thing: public trust. Although the field has since recovered, and the rules have become different to limit the risk of another scandal of similar proportions, the potential for auditor fraud remains as uncovered in 2001.
Blockchain Technology is the messiah!
As the tech-savvy Millennial generation has aged, banking and financial practices evolved, too. Recent developments in intelligent automation have introduced dramatic changes to the practice of many traditional professions, including accounting. According to a study performed by the BBC, accountants rank 21st of a total of 366 occupations that are likely to be eliminated due to the introduction of artificial intelligence (AI), and blockchain technology, with an elimination rate of 96%
The Big Four(i.e., Deloitte, EY, PwC, and KPMG) accounting firms have launched their financial robots that are capable of automatically recognizing data, entering invoices, and generating financial reports. These financial robots are likely to replace basic accounting clerks, allowing business managers with zero accounting knowledge to make good business decisions based on basic accounting information
What is Blockchain Technology?
Blockchain technology is a type of distributed ledger technology (DLT) that consists of growing lists of records called blocks that are safely linked together using cryptography. These series of blocks are used to establish or record the ownership of assets between parties.
Blockchain does not need an arbiter and can therefore facilitate direct trading in the private sector. It improves the efficiency of transaction that requires multiple validations and validation via more rapid checking between parties.
Impact of Blockchain Technology:
1. Nontamperable features provide a reliable data source to support the auditing business while ensuring unique accounting data sources. Once the data for the audited entity are entered into the blockchain technology network, they are difficult to tamper with.
2. Distributed ledgers improve the authenticity and reliability of audit data, significantly reducing the risk of data being attacked by the audited unit.
Traditional audit data are stored on a centralized cloud server and are highly vulnerable to hackers, resulting in file loss or data tampering. Blockchain technology stores data in a distributed manner and uses multiple nodes to back up data. Even if a single node is attacked by a hacker, it will not affect the consensus state of the data in the network as a whole.
3. False transactions and accounting fraud are the main sources of material misstatement risk. The existence of the timestamp feature requires that the data for the audited unit be revised to reach a consensus with multiple participants. This greatly increases the difficulty of providing fraudulent financial data and improves the authenticity and reliability of the data for the audited unit, thereby reducing the cost of false financial information verification.
4. Network consensus has improved the authenticity, reliability, and timeliness of the data for the audited entity.
5. The programmable feature enables auditors to write audit algorithms and audit business processing rules according to different audit application scenarios, laying a solid foundation for the automation of audit work
Some thoughts about blockchain technology:
The deep integration of emerging fields such as big data, ML, AI, and blockchain technology in the accounting field has introduced tremendous changes to the accounting profession, such as reengineering accounting procedures, reducing accounting information errors and distortions, improving accounting efficiency, and promoting the transformation of accounting career structures.
For example, with the help of blockchain technology audit application platforms, large-scale and real-time automated audits can be derived. At the same time, considering the increasing adoption of technologies in accounting, how to protect data privacy becomes an important issue. While corporations can enhance their data security structures, regulators are also expected to strengthen and implement regulations for the associated crime.
A blockchain is a network of systems and distributed data (ledger), meaning the people share the ownership and control of the network using computer nodes. As a database, blockchain technology stores information in a digital format.
Blockchain system stores data in blocks and links them in one lump to form a chain. The blocks have a particular capacity and, when filled, are closed and connected to the previous block. This is very good for bookkeeping practices. Any newly added information after the last block is compiled into a secure ledger and newly formed block and becomes an addition to the chain once filled.
Blockchain is well known for its critical role in the secure ledger, which drives cryptocurrency systems like Bitcoin. It maintains a secure ledger and decentralized and secure record of crypto transactions. Therefore, blockchain technology can guarantee the fidelity and security of data records and make it for the need for a third party.
Advantages Of Blockchain technology Over Non-Blockchain secure ledger
• Immutability. Blockchain supports non-changing, meaning it is impossible to erase or change recorded data. Therefore, the blockchain stops data tampering within the network.
Traditional data do not offer this immutability. The conventional database makes use of CRUD (create, read, update, and delete) at the basic level to ensure proper work operation, and the CRUD model enables easy deleting and replacing of data. Such data can be open to manipulation by rogue people or third-party hacks.
• Transparency. Blockchain is decentralized, meaning every network member can double-check data recorded into the blockchain. Thus, the public can trust the network.
On the other end, a traditional database is central in nature and does not support transparency. People cannot verify information whenever they want, and the management makes a selected set of data for the world. Still, however, people cannot verify the data.
• Censorship. Blockchain technology does not have censorship since it does not have the dominance of any single group. Therefore, no single authority (including states) can interrupt the operation of the network.
Meanwhile, traditional bookkeeping operations have central authorities regulating the work of the network. Also, the authority can exercise censorship. For example, banks can suspend customers’ accounts.
• Traceability. Blockchain creates an irreversible digital trail. This allows easy tracing of changes in the system.
The traditional database is neither clear nor immutable; hence, no permanent trial is guaranteed.
Disadvantages Of Blockchain Technology
• Speed and performance. Blockchain is considerably more time-consuming than the traditional database. The reason is that blockchain technology does more operations. First, it performs signature verification, which involves signing transactions cryptographically. Blockchain technology also relies on a consensus mechanism to confirm transactions. Some consensus mechanisms, such as proof of deal, have a low transaction throughput. Finally, there is redundancy, where the system requires each node to play a key role in verifying and storing each transaction.
• High implementation cost. Blockchain costs more compared to traditional secure ledgers. Additionally, businesses need proper planning and completion to integrate blockchain into their process.
• Data modification. Blockchain technology does not allow for easy modification of data once noted. Also, it requires rewriting the codes in all blocks, which is time-consuming and expensive. The downside of this secure ledger feature is that correcting an error or making any necessary adjustments is hard.
One solution never fits all needs. Also, this is the same with blockchain technology. There is a lot of excitement in the industry about blockchain and the Internet of Things, and many organizations are looking to move from Web 2.0 to the Internet of Things. However, this is not a straightforward “lift-and-move” type of solution. Everyone should do their due diligence and conduct a deep-level analysis to see if the blockchain technology caters to their needs and then plan the development or migration to Web3 accordingly.