Blockchain has the promise to revolutionize the way businesses and their accountants keep track of their financial records. When it comes to audit evidence, blockchain may be able to give organizations more efficient ways to bring financial data into universal conformity; help businesses present relevant financial data in an open manner; and interpret and select data effectively. Blockchain is a digitally distributed ledger that captures transactions conducted among parties within a network. It’s a peer-to-peer, internet-based archive that records all transactions since its creation, and maintains proof of these transactions.
Each participant is a node on the mutual database connected to the blockchain, with every user maintaining an identical copy of the ledger. Each entry is a transaction that represents an exchange of value between participants. Along with featuring near real-time transaction settlement, which speeds up payment completion between parties, properly designed blockchains create unchangeable transaction records. This can help auditors investigate transactions as they occur in real time.
And as blockchain is adopted more and more, auditors will be able to obtain data from the blockchain; however, it’s important to view it all with a skeptical eye. Transactions may be fraudulent or prone to error. Viewers must be even more skeptical if the blockchain is controlled by an entity other than the entity being audited.
Using bitcoin as an example, the transfer of the assets is recorded on the blockchain. Accountants can use blockchain to look at transactions one by one. However, instead of focusing on bookkeeping tasks, for example, accountants’ roles are expected to evolve into higher level tasks requiring more judgment. As blockchain adoption increases, responsibilities like bookkeeping and reconciliation will require less of an accountant’s time, permitting them to work on more analytical tasks like transaction classification and valuations.
Determining depreciation and resulting salvage value of an asset when its useful life is exhausted is one example of a transaction that might need some investigating by an auditor.
The Internal Revenue Service mandates businesses judge a fair salvage value, but it’s just that – an estimate. Based on the asset’s usage and expected service time frame, equipment could have scrap value contingent on metal content or technology that might become obsolete, rendering it of little to no value. Since it’s so subjective, this can impact a company’s accounting and resulting profitability and income tax obligations, requiring careful judgment.
If the salvage value is determined to be too high, it would reduce the depreciation for the business. If it’s too low, depreciation would be factored in too much and the company’s net earnings will be less than expected. As part of determining the salvage value, businesses and those who audit a business’ financial statements need to exercise judgment when looking into transactions, whether it’s on blockchain or another type of ledger.
As blockchain evolves, businesses that take advantage of this technology can leverage its efficiencies to reduce the need for rote work and focus on the substance of accurately reporting transactions and not the rudimentary movement of data between parties.