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Introduce Yourself to Blockchain

By Justin Hayes posted 02-20-2018 12:51


Lately, I feel like every other article I read is about either artificial intelligence or blockchain. I felt I have a pretty good understanding of AI but knew very little about the blockchain. Over the past few months, I made it my goal to learn more about it. How does it work? And how will it impact my profession?

So what is the blockchain? It is basically a digital record of economic transitions that can be programmed to record just about anything that is deemed to have value in knowing.
It creates a recorded history of whatever that blockchain is designed to track. We currently have a lot of systems that are used to record history, such as an accounting system that tracks the history of all the accounting transactions of a company. The flaw in these systems is that they can be corrupted, either by mistake or intentionally. The possibility of this data becoming corrupt drives the need for financial statement audits. Step in the blockchain. 

Blockchain.jpgIt is argued the biggest advantage to the blockchain is it is incorruptible or that once a “block” is added it can’t be changed. The blockchain database isn’t stored in any single location. This means the records it keeps are truly “public” and easily verifiable. No centralized version of this information exists for an individual to change. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. The blockchain network lives in a regular state of consensus, which automatically checks in with itself every 10 minutes. This creates a self-auditing system of data, and the network reconciles every transaction that happens in 10-minute intervals.

Each group of these transactions is referred to as a “block” that’s only accessible to users with a heavily encrypted, highly secure key. Only these users can post data to a block, which is then distributed to all the users of the blockchain and starts the self-auditing described above. It is also important to note that the creator of a block is irrevocably associated that block forever.

The important result is that the data is embedded within the network as a whole and thus transparent and cannot be corrupted by altering any unit of information within a block (i.e. a transaction) on the blockchain due to the self-auditing. In it is possible for the data to be altered by overriding the entire networking, but most computer scientists agree this would take a huge amount of computing power and is impractical. I would point out that a later block added to the chain may record a change to the status of the information in the original block, but that original block remains permanently in the chain.

There are already multiple blockchains (the most popular being the blockchain related to Bitcoin), and it is highly likely there will be more in the future. Blockchains can also be designed to be truly public (i.e. anyone in the world can see the information) or private (i.e. restricted to certain users to actually view the data). It is important to note that even if the blockchain is “private,” that data is still stored in multiple locations and will continue to be self-audited as noted above.

So what does that mean for the CPA profession? Well, the blockchain is a very new technology at this point and it is hard to determine the exact impact it will have for us. Will it continue to grow and become more common? Will it be surpassed by another, newer technology before it matures?

It is commonly thought that at the least there will be a big impact on the auditing side of the profession since the blockchain is self-auditing on a regular basis based on its nature. However, this does not mean that an audit will just disappear – it means that the scope or nature of the audit will most likely change. The focus of the audit would shift away from verifying the actual financial data, and more on checking the security of the keys and looking more for internal fraud from an employee. The audit will likely become more of a “trust” certification on the blockchain than an actual financial statement audit.

Does this mean the CPA profession needs to rapidly change out audit departments to adapt to the blockchain? No. It will evolve over time, and the current leading thoughts on what the blockchain will bring might change. The key is making sure that we are all staying alert on developments in the blockchain and are becoming more familiar with it (not the coding, but the concept) so that as a profession we are ready to move into the future.