This blog is written by Mr. Muhammad Tariq Khan. Please read this blog and provide your valued comments
SHOULD ACCOUNTANTS BE REPLACED? OR SHOULD THEY EMBRACE TECHNOLOGY?
- Blockchain technology
- Money explained in context of Digital Currency
- Triple Entry Accounting
- Implications of Blockchain, Digital Currency, Triple Entry Accounting and Artificial Intelligence on Accounting, Audit and Assurance Profession
Block Chain Technology
Blockchain is an Immutable digital ledger or a list of growing records, called blocks. Each new block is linked with the previous one using a high level cryptography. The most important property of the blockchain is Decentralization and Immutability. In a blockchain Network many computers called Nodes are connected to each other using peer to peer Networking. Since it is immutable and distributed publicly, anyone can see the information in it without harming the original data. In order to add or create a block into the chain, approval and authorization of all the Nodes is compulsory. Once the block is authorized, it is created or added to the previous block (if any) with highly secured methods of cryptography. Since the block is authorized by many computers/ Nodes in real time and a copy of ledger is maintained by each of them, therefore if a Hacker wants to temper the block and manipulate the information then he would need to hack all the Nodes simultaneously in a network in real time which is almost impossible. This spectacular property of Blockchain technology creates an environment of trust among the network and in the business world ‘Trust and reliability is everything’.
Money in the Context of Digital Currency
Digital currency is the currency which is established on the basis of Block chain technology i.e. Bitcoin. As most of the people don’t really understand the real concept of money, eventually they fail to understand Bitcoin as well. It’s not the Money that people need rather the stuff they can buy with it (thereby the value in it). Many people are convinced by the fact that Bitcoins are ‘just data’ (Intangible). But that’s what all money is, Information! More directly, Money is a way of conveying information with respect to value given but not yet received.
Money is an Accounting system. For instance, if somebody has to transfer money from Pakistan to Qatar, It’s the entry that is recorded in the sender’s ledger, receiver’s ledger and intermediaries (Banks) ledger and each has to be reconciled.
Transferring Information from one place to another is different from transferring value. For instance, when a person sends an email to another, a copy of email is also maintained by him in his ‘Sent emails’ section. Conversely, if a person sends some money virtually to another person, maintaining the copy of the same in his account would be a huge problem, (though receipt of the transaction should be maintained). So here comes the Bitcoin currency. It is a currency through which value can be transferred reliably and without any duplication.
Let’s see this with another angle, money is a Ledger, with currencies like ‘PKR’ regulated by state institutions, that ledger is controlled by SBP. And that gives the central authority responsible for maintaining that ledger strong authority, the authority which has potential to be misused.
“TRUST” is the fundamental currency of Commerce. Bitcoin is decentralized ledger which means that nobody has the authority to create new units (causing inflation), block a particular payment or freeze one’s account. Since no one can print more gold but currency notes (the ledger in the metaphor) can be printed as per the will of central authority. One more problem is that physical nature of gold is hugely inefficient for virtual and global transactions. Hence, Digital currency is important because it has the potential to completely revolutionize the Economy.
Triple Entry Accounting:
Accounting world is known for over complicating things unnecessarily. For the last 600 years Bookkeepers and Accountants have been using the ‘Double entry system’ introduced by the Father of Accounting “ Luca Pacioli”. Double Entry system was a tremendous method of processing transactions so far, But due to the emergence of Fintech, it’s time to say ‘Good Bye’ to the conventional Bookkeeping methods as Whole accounting system is going to change in next few years.
Since Triple Entry system has been introduced but it is still in the development phase. Triple entry system is based on Blockchain technology. In the conventional double entry system, bookkeepers record two aspects of a transaction whereas in triple entry accounting, two parties records one aspect in their own books while there is a third entry which is to be recorded in the Block containing all the details of transactions, authorized by both the parties in real time, with no need of reconciliation.
Implications of Blockchain, Digital Currency, Triple Entry Accounting and Artificial Intelligence on Accounting, Audit and Assurance Profession
In a Financial Statement Audit the work of an auditor revolves around the financial statement Assertions. Financial statement assertions include existence, occurrence, completeness, rights and obligations, valuation, cut off and classification of the Transactions, Account Balances and Presentations & Disclosures. Most of these assertions have the problem of trust and reliability, for which audits are conducted. However, in practical scenario meeting the expectations of clients have become a big challenge for Auditors due to the limitations of their Audit procedures.
Trust and reliability is the key feature of Triple Entry System of Accounting and Smart contracts. Therefore, there will be no need of Audit and Review of majority of the Areas where trust and reliability is already ensured.
In this regard, Following Audit procedures might be replaced or no longer be needed to perform:
- Inter-Companies Account Balances Confirmations
- Bank Confirmations
- Reconciliation of Ledger
- Sampling would not be needed as less time would be required to check all the transactions by tracing Blocks through Smart Audit softwares
- With the emergence of Robotic process automation Fixed assets of the client entity will be verified by smart drones
Other Things to know for Accountants:
- In next few years, accounting firms will acquire Bot-keepers or Robo-bookeepers to provide rapid and more reliable service to their clients. Botkeepers or Robo-bookeepers are the Softwares that have been designed to eliminate the traditional bookkeepers. They are connected to the data sources (Payroll, QuickBooks, suppliers etc.) of the client entity. They gather the required data, rationalize it and prepare it for review. Presently, a software has been developed that can serve up to 1000 clients, 27 industries and 9 million business transactions.
- With the emergence of E-governance, all the regulatory authorities and business entities (customers and suppliers) will be linked to each other. Concealment of Assets or fraud like tax evasion will not be possible. Similarly, Services of tax accountants will be replaced to a large extent.
- Smart contracts allow the performance of credible transactions without Intermediaries like Lawyers (Stamp papers). As the contract can be stored in a block by mutual agreement of two parties and it can be traced and verified anytime. Blockchain has Infrastructure cost but no transaction cost at all.
- Blockchain based QR codes are more credible than merely the stamps and signatures on a contract document or product. Since each document or product can carry a unique QR code but signatures, letterheads and stamps remains identical. Users are able to scan the QR-codes to ensure their validity. By scanning the QR code on a product or document using a mobile phone, one can verify all the information stored in the Block.
- ERP is a software that helps to integrate and manage the different functional areas of an entity such as human resource, Finance, marketing and Operations. In order to conduct the Audit of such entities, the Audit staff should know the processing of the input, processing and output of data and Computer Assisted Audit Techniques (CAAT). The audit staff must be capable of inputting the dummy data to compare it with the predetermined results.
As a consequence of Automation and advancement in Fintech, focus of Accountants will certainly shift from Bookkeeping and Reporting to Planning, Decision making, Business Advisory and Consultancy. Accountants, Bookkeepers and Auditors are not supposed to worry about their careers or jobs due to the technological advancements rather they should strive for ways to add value to the Businesses and to keep their financial skills updated.
Muhammad Tariq Khan
November 5, 2020