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The ABCs of Blockchain

Posted on 12-06-2018
The ABCs of Blockchain

By Miriam F. Rouziek, CPA

Blockchain is one of the newest and probably most confusing technologies to recently come about – and most companies don’t know what it is or how it could be used in their business. From a financial perspective, blockchain has the potential to significantly improve the accounting process and make company data more secure. 

What is Blockchain?

Blockchain is a digital ledger that can be programmed to record transactions between users on a network. The ledger is reconciled in real time as transactions occur, and multiple users can work in the file at the same time. Since the file isn’t in one centralized location, hackers would find it difficult to corrupt or manipulate the file.

Currently, most files are static on a network, editable by only one person at a time so other users are locked out. Version tracking is done manually by saving a new document each time changes are made, usually with a file name like “FS_Draft_v5_02282018.docx.” The potential for accidentally deleting or overwriting a file is high, and users often make changes and save the file to their own desktop, resulting in changes that never make it into a final document.

Blockchain would eliminate these critical failure points. Since the ledger exists simultaneously on all network machines, it cannot be accidentally deleted or overwritten, and corruption of the file would require corruption of every machine on the network. For larger networks, corruption of data is virtually impossible.

Is it Secure?

Blockchain technology protects data integrity by utilizing public and private “keys.” Public keys are a user’s identification on the network and ledgers are identified as belonging to a user based on the public key. Private keys are a user’s access to private stored data. Only users with the private key to a ledger will be able to access and modify the data. However, safeguarding the private key would require printing it out and storing it securely.

Who Uses Blockchain?

The most common and most well-known usage of blockchain technology is in cryptocurrency transactions, such as Bitcoin. Users purchase and trade cryptocurrencies using a “wallet” application to store their currency and to make purchases. While not exactly blockchain, Google Docs runs on a similar principle: a single file can be shared with, and edited by, multiple people at the same time. The document can be opened to the general public, or shared only to specific e-mail addresses or to people who have a direct link.

What’s the Potential for My Company?

Blockchain can be utilized in several ways:

  • Board members would be able to review and assess financial information more easily, utilizing information that is readily accessible and fully transparent. This facilitates real-time organizational decision making.
  • Supply chain auditing would provide companies and customers a way of verifying transactions and the source of goods. Customers can verify sustainability and ethical sourcing claims, while companies can verify that goods come from a legitimate vendor.
  • Decentralized file storage prevents files from being lost or hacked, and allows for faster file transfer between users. Data management solutions will also allow for sharing of data fragments, rather than public sharing of all data across a network.
  • Identity management enables verification of user identity on distributed networks, preventing asset losses from falsified identities.

Accounting Considerations

Your company’s accounting software is unlikely to significantly change. Most companies will continue using the same accounting software, but software providers are likely to start implementing blockchain as they provide more cloud-based solutions. However, external files, such as manual reconciliations and financial projections, are likely to be transferred to a digital ledger system

Management will also need to develop and implement internal controls to ensure these new processes are in line with US GAAP or IFRS, and that these processes are appropriately mitigating risks within the company. Most controls will be functionally the same in terms of identifying who performs controls, when management’s review occurs and what kind of documents are involved.

IT controls will become more important as these new technologies are developed. Security of the company’s network will be even more important as more reliance is placed on networked and cloud-based systems. Software and hardware upgrades will be necessary to ensure the company’s IT systems can handle blockchain transactions, and that existing network safeguards can prevent hacking attempts.

Blockchain application is still being refined and hasn’t quite hit the mainstream, but companies should keep it on their radar and start looking at implementation strategies now. As new apps are developed, companies will be able to more easily adopt blockchain and improve their business processes. Implementation of blockchain will also become easier and more accessible to companies of all sizes. Your company’s IT department can help you look ahead to integrating blockchain and identifying helpful apps for your company’s business.

This article was originally posted for the Leading Edge Digital Magazine - Fall 2018 Edition.

This article also appeared on the Houston Business Journal website.