Deloitte meets dlt technologies
Blockchain

Deloitte meets dlt technologies

By Fabio Lugano - 20 Jul 2018

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DLT technologies would lead to a revolution that is underway for its application to side fields.

What are the opportunities offered by the blockchain from an accounting point of view, and what are the problems that can arise.

The FERF, the Financial Executive Research Foundation, a branch of the FEI, Financial Executive International, questioned a number of financial auditors and accountants, asking them what the role of the blockchain is today and what it will be in the future.

The result was a paper, sponsored by Deloitte, of great technical interest, which provides numerous indications on the possibilities and dangers of applying blockchains and smart contracts in financial accounting.

Beyond the problems of accounting for digital values for GAAP standards (Generally Accepted Accounting Principles), according to Campbell Harvey of Duke University, the adoption of private ledgers, i.e. an internal blockchain system on which to record economic and financial transactions, can lead to profound changes in the way accounting and financial managers operate.

“Creating a private, real-time ledger would also, theoretically, remove the risk of earnings management from financial reporting, since all transactions are validated and recorded as they happen. When you go to real-time you actually eliminate all the negative incentives that exist at the end of the quarter to make the numbers look good… because there is no end of quarter.”

Moreover, the research carried out by the same professor shows that 78% of CFOs pursues these practices of distorting accounting data.

The application of the DLT would lead to a revolution that is underway for its application to side fields.

Jon Raphael Head of Innovation in Deloitte’s audit processes sees the future of blockchain within ten years as a tool for the creation not only of accounting records but also of financial contracts, which then become automatically regulated as interest rates change.

Moreover, the ability to make the information public to all players is of paramount importance: “How much information everybody is comfortable sharing – and that information could provide a strategic advantage – still needs to be resolved. The desire to make that information available for other parties to see is something companies will need to think through for each use case.”

However, the blockchain not only presents opportunities but also threats, as Joshua Coyne of the Memphis School of Accounting reveals.

Accounting entries are normally made in a manner consistent with the GAAP standards, which automatically makes them relevant.

On the contrary, if a DLT is used that is not based on a centralised consensus, but is disseminated through decentralisation, data collection will exist only if it is present on the blockchain, but this will only happen if all participants are aware of and accept the general accounting principles.

Coyne says: “We have to be in a situation where all of the members of the network know enough accounting to be able to create consensus about that.We can’t have average retail investors participating in this network because they would throw up their hands and say, ‘Well, I don’t know accounting standards. I can’t tell you whether this was correct.’”

So for Coyne, a sceptic of the use of blockchains, the solution can only come from a greater integration of accounting knowledge in the programming and use of DLT technologies.

Fabio Lugano
Fabio Lugano

Graduated with honors from Bocconi University, Fabio is a consultant for companies and wounded shareholders of the Banche Venete. He is also the author of "Scenari Economici", and lecturer and analyst of cryptocurrencies since 2016.

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