Blockchain – Unchain the Working Behind This

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Before entering to this technical topic i.e.  Unchain the working of Block Chain it is quintessential to understand about what Blockchain means because then only we can understand about its methodology and how it changed the business altogether. Also as I am into CA Profession, I will be discovering some facts related to the same.

As simple the word “Blockchain” is, it is as difficult to comprehend the working behind this.

I would like you to just understand this scenario:

Suppose one girl Simran wants to send the money to the other person Raj abroad, she can do this by transferring to his account. And we all know that the transfer is not such that money is flying from one place to another.  It is just the entries made respectively in the receiver and the sender ledger or accounts.

Now the case in this is that there are many bunch of ledgers involved in one transaction like government, banking regulators, money transferring institutions which needs to be reconciled and to be updated as well. Now this creates a situation where there is a delay and increase in cost of transferring the amount.

Now imagine another scenario where there is only one universal ledger and every person like Simran's ,  Raj's  bank transferring institutions are the participants in that ledger or in language of this technology the nodes in that ledger. Now every time the entry is made in that ledger it needs to be authenticated by every such party as said above. Now this concept of single universal ledger is what is the heart of block chain concept.

Similarly, any other transaction happens it gets added on as one more block in the chain of already existing transaction.

Now one question SHOULD come to your mind that if no one owns the chain,  then who maintains it? It’s not the bank or trusted authority and to maintain this you required resources, time. So, when back in 2008 when Satoshi Nakomoto  invented this concept, he invented the currency along with it so that it acts as an incentive to all those people who are maintaining that chain and he named it BITCOIN and the people who maintain it or MIND IT called the MINDERS.

For easy understanding let us take one real life example:

Block chain is like a kitty party, where a bunch of women usually getting together having a good time, eating food, playing cards AND exchanging money. And this money part is important. Now suppose they have a lucky draw where they put money and lucky winners get the money and if there is a woman, whom is she going to trust ? 

There is no superwoman, or the bank, she is trusting all of them. Also, she knows if any women defraud she must influence all or most of them. And therefore, there is a change in the concept of trust, from centralized trust to distributed or decentralized trust. This decentralized trust is the heart and soul of the block chain.

Now just try to understand Two Words Professional Skepticism meaning being alert and having a Questioning mind, which usually a Chartered Accountant has. Now as I Mentioned earlier I will be discovering facts related to CA Profession, whether there is anything left to Check as everything is captured in immutable Block Chain.

How the Auditing and Our Profession Evolve With the Block Chain?

As we know that “It’s not the one who is strong survives, it’s the one who adopts changes rapidly survives”. Despite its complexities block chain provides an opportunity to streamline reporting an auditing process.

Every audit engagement begins with huge sets of information and schedules that requires auditor to invest a major time at planning the audit and develop an audit plan.

In case of Block Chain world as more and more entities as well as process shift towards the block chain solution, accessing information will become more convenient and will also eliminate many labors intensive and time-consuming activities for entity’s management and staff. The result of which can speed up the audit preparation activities and can reduce the major criticism of financial reporting that is lag time between transaction and verification dates.

Prospects and Roles of Chartered Accountants in Block Chain Environment

Whenever the new technology emerges it paved the way for all pupil working in relation with it. Same is the case with this profession as well. As there is more standardization of processing transactions the auditors may be able to help provide assurance to users of technology.

The following are some of the opportunities for CA in this era - 


1. Auditor of Smart Contract

A key development in block chain technology was the introduction of smart contracts. Smart contracts are computer code stored on a block chain that executes actions under specified circumstances. They enable counter parties to automate tasks usually performed manually through a third-party intermediary. Now with this advantage of block chain, contracting parties may want to engage an assurance provider to verify that smart contract is implemented with correct business logic and ensure that interface between smart contracts and external data source that trigger business events are equivalent.

2. Administration Function

This function is responsible for the verification of the identity or any process to be completed by the participants (nodes) in the block chain. Now if this function is himself performed by the node itself, then undue advantage could exist and trust among the consortium members could be weakened. Since this role is designed to create and maintain the trust for the block chain, due care would be needed when establishing its function and roles. Therefore, a trusted independent professional can carry out the responsibilities.

3. Arbitration Function

Business arrangements can be complex and result in disputes between even the most well-intention parties. an arbitration function might be needed in the future to settle disputes among the consortium-block chain participants. This function is analogous to the executor of an estate, a role typically filled by various qualified professionals, including CPA auditors. Participants on the block chain may require this type of function to enforce contract terms where the spirit of the smart contract departs from a legal document, contractual agreement or letter.

Conclusion

At last concluding that Block chain is already impacting auditors of those organizations who use block chain to record the transaction and rate of adoption of this technique would expected to increase in near future.

However, one thing out of this discussion is very clear that this technology is not going to replace the financial reporting and financial statement auditing in immediate future. 

Audited financial statements are a cornerstone of business and play a key role in debt and equity financing, participation in capital markets, mergers and acquisitions, regulatory compliance, and the effective and efficient functioning of capital markets.

Furthermore, the process of an independent audit of financial statements enhances the trust that is crucial for the effective functioning of the capital markets system. Any erosion of this trust may damage an entity’s reputation, stock price and shareholder value, and can result in fines, penalties or loss of assets.

Auditors will need to be conversant with the basics of block chain technology and work with experts to audit the complex technical risks associated with block chains.

In addition, auditors should be aware of opportunities to leverage their clients’ adoption of block chain technology to improve data gathering during the audit. The auditing profession must embrace and “lean in” to the opportunities and challenges from widespread block chain adoption.

At last each one of us in this profession should monitor the developments in such technologies like Block Chain because this will have an opportunity to evolve, learn and capitalize their ability to adopt the needs of the rapidly changing business world.

Written By - Utkarsh Samaiya

                   

Edited By - Nidhi Verma