The Future-Proof Accountant: The evolving role of the accountant in the brave new world of blockchain and crypto

“Will blockchain technology replace accountants?” Dr. Erica Pimentel, an Assistant Professor at the Smith School of Business at Queen’s University, posed this question in late 2020 and it is one that both aspiring and professional accountants should be ruminating. Developments in blockchain technology followed by the meteoric rise of cryptocurrency continue to fuel the debate.

In short, the answer is a conditional no.

While some traditional and monotonous accounting tasks can and likely will be replaced by blockchain technology, professional judgement remains indispensable. However, accountants must be prepared to understand and adapt to the revolutionary impact that blockchain technology will have on the profession.

Blockchain-Based Accounting

The evolution of blockchain technology makes both financial reporting and audit processes much more efficient. With an automated process in place, transaction data inflow can be cleaned up. In a 2016 report, CPA Ontario stated that companies using blockchain can “conduct continuous internal audits on their processes, supply an audit trail, and provide account analysis at the push of a button.” Consequently, external auditors will have unprecedented access to detailed and timestamped information on clients’ transactions. Rather than receiving a jumble of trial balances, journal entries, and account reconciliations, accountants would possess real-time data from read-only nodes on the blockchain. This would save significant time in planning an audit, while further allowing auditors to obtain information in a predictable and consistent format. 

Blockchain technology can also be used to eliminate traditional accounting functions. For example, smart contracts, electronic agreements that automatically execute a transaction under predefined conditions, eliminate the possibility of human error and replace laborious, manual operational tasks. Jacky Chan, a San Francisco-based accountant turned software engineer, authored a Medium article entitled Full Cycle Accounting with Smart Contracts that illustrates how smart contracts can make the accounts payable process more efficient. Chan writes that a smart contract would create an audit trail that automatically updates as the buyer confirms receiving a good and the seller confirms receiving a payment.

Source: Medium

The automated process that Chan writes about is similar to Ian Grigg’s triple-entry accounting. The basic premise of triple-entry accounting is that, in addition to the transaction entries (debit and credit) created by Company A and B, a blockchain automatically notarizes the transaction with a third entry that includes an immutable ledger of the entire financial transaction. As all accounting entries are cryptographically sealed by the third entry, fraud and manipulations to entries are deterred. In addition to greater security, triple-entry accounting reduces the time and cost of audits, allowing auditors to add value elsewhere (e.g., complex transactions, internal controls).

Source: Deloitte

The Evolving Role of the Accountant

Without the programming skills to create a blockchain, accountants can find a niche as advisors on blockchain solutions.  Dr. Pimentel writes, “The accounting profession can reposition itself as a community of business advisors that use their professional judgment to help organizations make sense of financial challenges in the digital age.” In addition to being an advisor, CPA Ontario found that accountants could also provide value as auditors of smart contracts or administrators of private blockchains. Therefore, at the core of the future-proof accountant is the merging of professional training and judgement with blockchain technology.

The changing role of the accountant then begs the question: what type of skill set is required for an accountant in this blockchain society? While expert programming skills are not expected, functional knowledge of blockchain is required.

To start, a firm grasp of blockchain fundamentals is a sine qua non. This includes, but is not limited, to how blockchain technology operates, blockchain’s varieties (i.e., permissionless vs. permissioned, public vs. private), crypto-assets, and cryptocurrency exchanges. Building on those fundamentals, accountants must know how blockchain works in conjunction with, or in place of, accounting processes. Broadening accounting and tax knowledge to include the underlying network that ensures the integrity of transactions enables the critical work at the intersection of auditing and blockchain solutions. Moreover, mastering new blockchain-based accounting software and how to initiate automated processes is key.

Looking at the broader picture, accountants must also be capable of identifying inefficiencies in a client’s audit processes and assessing how blockchain technology can be a value-add solution. This begins with understanding blockchain’s strategic business value, then catering it to a specific client. McKinsey & Company estimates that in the short-term, approximately 70% of blockchain’s strategic value lies in cost reduction. That said, discerning the inherent risks of blockchain and whether these solutions are a worthwhile investment remains equally pivotal. Sometimes, existing reporting and data management tools are adequately operational that the cons of investing in blockchain (i.e., effect on end-users, expensive implementation costs) outweigh the pros. Furthermore, as strategic value varies across industries, understanding how to apply and optimize the technology to a client’s sector and market position is paramount to embracing the advisory role. 

Lastly, functional knowledge of blockchain technology includes staying up to date with the crypto market. Accountants should stay updated on major players (e.g., Bitcoin and Ethereum), large-scale crypto hacks (e.g., Coinbase in 2021, Mt. Gox in 2014), and changes in the broader blockchain ecosystem (e.g., Alchemy’s blockchain developer platform, pressure to address environmental concerns of mining). As a robust legal framework is paramount for establishing crypto-asset taxonomy and accounting for crypto, accountants should also keep a keen eye on the burgeoning regulatory landscape. Just last month, the Canadian Securities Administrators published new guidelines for cryptocurrency trading platforms “to address the proliferation of unregistered platforms that are based in Canada or facilitate trades for Canadians.” Abroad, the Biden administration is expected to bring about new crypto rules alongside the U.S. Securities Exchange Commission. The nascent crypto market is fast-paced and waits for no one.

Tackling crypto assets requires a keen understanding of both blockchain technology and relevant accounting concepts.  Many accountants, unfortunately, only possess the latter. Therefore, the overarching issue at hand is the discrepancy between the skills and knowledge of today’s accountants and blockchain innovations. Accountants need to upskill to match the fast-paced world of blockchain and crypto. The future is now, and accountants must evolve, or risk being left behind.