How Blockchain Can Reshape The Accounting Industry For Good

Blockchain technology stands to disrupt the way business is done across a range of sectors, from fine art to supply chains to retail lending. But one of the more underappreciated areas ripe for an overhaul is also one of the most promising. I’m talking about the world of accounting.

The old joke goes something like: there are only two secrets to being a successful accountant. First, don’t tell them everything you know. Second, [redacted].  Pithy, yes — but it gets at much of what is wrong with accounting today. More importantly, it suggests exactly why blockchain holds the solution to so many of the problems that make accounting such a dreaded and mystifying science.

Why is it important to know everything other people know? And what is that well-kept second secret? If we understand the two fundamental questions at stake, we can keep the crypto space from falling into the same trap traditional bookkeeping did — and maybe, fix everything else while we’re at it.

Don’t tell them everything you know

One distressing fact about bookkeeping today is that it has been — and is — happily outsourced by all sorts of companies, big and small. Why not? It’s an expensive, complex, and time-consuming task — a burden so heavy that a $576 billion dollar industry has grown around it. At the top of the pyramid, just four companies — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — are responsible for auditing the books of the world’s most powerful corporations, setting standard practices for the whole sector.

We have seen the consequences — and they can be disastrous. In the wake of the Great Recession, for example, a parliamentary inquiry showed that 99% of companies in the FTSE 100 Index were audited by one of the so-called Big Four.

In a scorching report, the inquiry’s leaders criticized the four companies for failing to raise the alarm in the run-up to the banking crisis and forming an oligopoly that restricted new players from entering the market. Moreover, this level of concentration resulted in a lack of choice, higher fees and lower-quality audits.

Blockchain Photo: Getty

Ten years later, the Big Four are still under fire for the collapse of several high-profile European clients: the British government contractor Carillion, which cost 2,400 people their jobs and more than $200 million to the taxpayers; the holiday company Thomas Cook, which went bust, leaving thousands of clients and contractors high and dry, overnight; and the German payments firm Wirecard, which recently disclosed a $2.3 billion hole in its accounts and subsequently filed for bankruptcy.

All this has led people to wonder, how can the accountants be getting it so wrong? After more than two decades inside the industry, I can give you a few answers off the top of my head, but all of them go to the same original source. Accounting’s original sin, so to speak: the books of account are the shared truth about our world’s finances. And the truth shouldn’t be left in the hands of the few.

Unredacted: the second secret of a successful accounting business

The second secret of successful accounting is simple, and you can find it in one of the oldest adages of bookkeeping: “Trust but verify.” The real accounting challenge is not the math behind it — it is the painstaking process and infinite steps required to double-check and verify every transaction when every minute thing a business does produces a financial record.

The very complexity and inefficiency of accounting have caused another industry to flourish. The global accounting software market, valued at more than $11 billion in revenue in 2018, is expected to double in size, surpassing the $20 billion mark in 2026.

But all these software companies compete with each other. The industry is built on top of a license-fee-paying business model that offers no incentive to standardize the interoperability between ledgers. In some cases, your data is the business model. At the same time, banks’ messaging systems are very basic, and they do not handle the details of each transaction.

Accounting’s future is a distributed ledger

As the crypto economy grows stronger, wealthier and more sophisticated, we should be asking ourselves two fundamental questions: how can we build a global real-time accounting ecosystem with no monopolistic risks? And how can we design a system that is safe, simple, and fair — something that moves us beyond the current, fragmented accounting market, with its high fees and data collection?

The answer is a global, interconnected real-time accounting ledger that combines the power of the most sophisticated bookkeeping software with the vast potential of blockchain. Such an accounting protocol can be an entirely different beast — a working, decentralized accounting network.

This would be a system where any financial action is instantly executed, settled for all actors involved, and safely stored in the blockchain. Your business and personal expenses — meals, hotels, plane tickets, groceries, rent and everything else — would all show up in the books automatically in a simplified and more efficient reconciliation process.

We have the power to move toward a future where we pay for things we couldn’t imagine in ways we’d never dreamed of. A future in which bookkeeping is at the atomic level of our own identities. One in which accounting is transparent, trustless, decentralized and dynamic — so the joke is not on you.

(Chris D’Costa is the CEO of Totem Accounting, which provides blockchain solutions for companies to modernize accounting systems transparently and efficiently)