ACC308 Blockchain Technology

Implicaitions for the profession

-Because blockchain offers enhanced transparency and accessibility of transaction records, it could have potentially transformative effects on record-keeping, reporting, and assurance practices. -While users of financial information will still require accounting, reporting, and assurance services, the delivery and execution of such services may change with the adoption of blockchain technology.

Impact on Reporting

-Companies using blockchain technology could have a powerful new set of reporting tools, complete with full transaction visibility, to manage and communicate their financial condition and performance. -Triple-Entry Accounting: Organizations could retain their double-entry accounting systems. In addition, parties to a transaction could record their respective entries in a shared blockchain ledger which would represent the "third entry." In this way, participants in the transactions would confirm the integrity of the transactions in the shared ledger. This could be beneficial to assurance providers.

Risks

-Hacking of the blockchain and its applications -While blockchain automatically validates transaction formats, it does not ensure the accuracy of the data underlying the digital record. -The blockchain stores data but does not store the underlying supporting documents. -There are concerns over the privacy and accessibility of data on public blockchains. -Blockchains may not be deemed secure or transparent enough by financial regulators and governments. -As with many advanced encrypted applications, there are concerns that blockchains could facilitate fraudulent or illegal activities due to the anonymity of blockchain participants. -There could be integration issues among blockchain applications and existing systems within the same large organization. -There could be obsolescence issues for early blockchain versions. Upgrades could be challenging.

Impact on Audit and Assurance

-Management could give a set of blockchain digital "keys" to external auditors that would provide unprecedented access to detailed, timestamped information about all transactions. -Such access could significantly impact an auditor's approach to an audit. -Enterprises that use the blockchain: -could conduct continuous internal audits on their processes, -supply an audit trail, and -provide account analysis at the push of a button -Systems and processes, including controls, would take a different form. Companies would want to institute appropriate controls and procedures over the encoding of smart contracts and any changes thereto to ensure their accuracy and appropriateness.

Impact on Governance

-Organizations using blockchain could be more transparent because blockchain could enable the disclosure of a fully traceable and timestamped record of all decisions and actions by management and the board of directors. -Shareholders could also digitally record their votes on the blockchain regarding shareholder proposals.

Smart Contract

-Smart contracts are agreements written in computer code that do not need human intervention to be executed. -A smart contract is software code representing business logic. -Blockchain technology supports and executes smart contracts. -Smart-contract programs can be designed to communicate with other smart contracts and send data among themselves. -Smart-contract technology can speed up business processes, reduce operational error, and improve cost efficiency.

Impact on Reporting: Cont.

-Smart contracts could be inserted into or replace operational and/or administrative functions affecting internal and external reporting. -Performance targets and budgets could be translated into smart contracts that would track performance against actual results. -Non-financial reporting such as sustainability reporting could also be facilitated. -Blockchain ledgers could rapidly aggregate and consolidate financial reports in real time thus reducing month-end reporting delays. -Financial statements for executive and board reporting requiring company-wide consolidation could be largely automated on the blockchain. -Regulators could be provided blockchain access to review transactions in real-time. -Companies could provide investors with access keys that would permit real-time access to financial information. This could enable easy transfer of information into analysts' financial models and enable drilling down into the details of material transactions. There would be no need to appropriate controls and procedures around access keys to enable regulators and others to determine who had access to what information and when.

What is Blockchain?

-Transformative technology -Blockchain originated as the technology underlying the digital currency Bitcoin. -Trust is at the heart of commerce. Blockchain delivers the potential for a powerful new form of transactional trust. -Blockchain could impact many facets of information management from the way transactions are processed and recorded to the way they are reported and verified.

Transaction Processing in the Blockchain

1. Transactions are initiated 2. Details of pending transactions are distributed throughout the network. 3. Details of pending transactions are transcribed into a block candidate. The new block cryptographically references the last block in the chain. 4. The block is distributed throughout the network and the formats of the transaction record are validated. This is referred to as "consensus." 5. Transactions are executed and the block is added to the blockchain. Each computer in the network carries the full blockchain ledger.

Hypothetical example: smart contract

A simple apartment rental agreement between two parties: -A smart contract could be programmed and deployed to a blockchain to accept a digital currency payment (e.g. Bitcoin) from the renter (in a way similar to a series of post-dated checks) and automatically distribute predetermined portions of the payment to the owner over time. The digital currency transfer would happen within the blockchain without requiring a trusted third party such as a bank to process the payments.

What is Blockchain? Cont.

Blockchain is a shared or "distributed" digital ledger of transactions over a network of participating computers; transactions are designed to create records that are secure, reliable, transparent, and accessible. Peer-to-peer communications among the participants Need for management of the network by a central third party is eliminated

Impact on Reporting: Accounting for Specific Accounts: Capital Assets

Capital assets could be recorded on a blockchain. Ownership could be readily transferred in a manner similar to the transfer of digital currencies discussed above. Additional blockchain ledgers could be established to record repairs and maintenance. The full maintenance history of capital assets would be readily available and transferable as well. This could be referenced in insurance clauses.

Impact on Reporting: Accounting for Specific Accounts: Cash

Cash in the form of digital currencies could clear directly without the need for reconciliations to third-party records. In addition, the instantaneous settlement of transactions would eliminate the time currently required to clear transactions through third parties.

Industries Using Blockchain: Consumer and Industrial Products

Companies in the consumer and industrial industries are exploring the use of blockchain to digitize and track the origins and history of transactions in various commodities.

How Blockchain Works

Computers participating in a blockchain use an automated process to validate the format of the transaction record to be included in the next "block;" Once this "consensus" is reached, the information is recorded in a block. Not just information but anything of value - money, titles, identities, votes - can be moved, stored, and managed securely and privately. Trust is established through mass collaboration and clever code rather than by powerful intermediaries like governments and banks.

Impact on Reporting: Accounting for Specific Accounts: Corporate Loans

Corporate loans could be fully digitized as "smart loan contracts" and deployed onto a blockchain. Once represented as blockchain smart contracts, these debt obligations could be readily transferrable and their history automatically tracked to maturity.

Built-in Security

Encryption Blockchain technology uses public- and private-key cryptography to sign transactions. All blocks are timestamped, sequenced chronologically can be used to prove the existence of records Irrevocability: once included in blocks, transactions are permanent records; more secure than traditional centralized databases; audit trail is automatically created. Access to a complete record of all transactions.

Industries Using Blockchain: Energy and Resources

Ethereum is being used to establish smart-grid technology that would allow for surplus energy to be used as tradable digital assets among consumers.

Industries Using Blockchain: Public Sector

Governments are exploring blockchain to to support asset registries such as land and corporate shares.

Industries Using Blockchain: Life Sciences and Healthcare

Healthcare organizations are exploring the use of blockchain to secure the integrity of electronic medical records, medical billing, claims, and other records.

Impact on Reporting: Accounting for Specific Accounts: Intangible Assets

Intangible assets reflecting intellectual property rights could be reflected as "smart royalty contracts" which could be programmed to route funds automatically. Disagreements over property ownership could be eliminated by the timestamping feature of the blockchain.

Impact on Reporting: Accounting for Specific Accounts: Inventories

Inventories could be updated based on "asset transfer" smart contracts that would respond to a "buy message" from the buyer's inventory management system.

Types of Blockchain

Public Blockchain: permissionless. Anyone can join the blockchain network, this means they can read, write, or participate with a public blockchain. Public blockchains are decentralized and no one has control over the network and they are secure in that the data cannot be changed once validated on the blockchain. Private Blockchain: permissioned. Permissioned network place restrictions on who is allowed to participate in the network and in what transactions. Consortium blockchain implementations can include the membership of an entire industry. For example, several global banks have joined a consortium of financial institutions to investigate blockchain technology.

Industries Using Blockchain: Financial Services

Several stock exchanges around the world are piloting a blockchain platform that enables the issuance and transfer of private securities. Additionally, multiple groups of banks are considering use cases for trade finance, cross-border payments, and other banking processes.

Impact on Reporting: Accounting for Specific Accounts: A/R and A/P

These balances could be embedded in a new form of smart contract that could be programmed to route funds automatically once certain conditions have been met (e.g., based on delivery receipts and agreed payment schedules)