Ep. 5: Dr. Ariel Markelevich - Blockchain in Accounting

Dr. Ariel Markelevich, CMA is an Associate Professor of Accounting at Suffolk University in Boston, MA. He has been published in numerous academic and professional journals for his work on topics like blockchain, XBRL, IFRS, M&A, and auditing, among others. With areas of expertise in standardized data and data analytics, Dr. Markelevich explains why blockchain is so important to the accounting industry and explains why accountants should care about it.

FULL EPISODE TRANSCRIPT

Mitch: (00:03)
Welcome to Count Me In, IMA's podcast about all things affecting the accounting and finance world. Mitch Roshong and Adam Larson here with you again and today we are going to hear all about how blockchain works and how it applies to accounting. Now, Adam, can you give us a little more background on the topic? 
 
Adam: (00:17)
Yes, thanks Mitch. Some of the biggest curiosities and ongoing questions in accounting revolve around blockchain. To get some insight on the topic, I asked Dr. Ariel Markelevich to help us answer a couple of the most common questions. Dr. Markelevich is an associate professor of accounting at Suffolk university. He has written a number of articles for academic and professional journals and has presented much of his work. I think you're going to learn a lot about blockchain. I certainly did. So let's take a listen. 
 
Adam: (00:52)
What is blockchain? And do accountants really need to care about it? 
 
Ariel: (00:56)
Thank you. That's a great question. So many people have heard about blockchain, and I'm guessing that many people don't really know what block chain is. So block chain is essentially a technology. So when you think about blockchain, you typically think about a list of individual records. So, many talk about the ledger or a distributed ledger. In essence, it's a list of individual records. Now the records can contain any type of information. So when you think about blockchain in the context of accounting, it could be transactions. When you think about a blockchain in the context of Bitcoin, it again could be transactions between individuals. Now what is unique about blockchain is that it forms a chain by the name. You can get that. So there are the key thing to understand is that there are many types of books and systems. The basic process in a blockchain system is that each record would include some information. As I said, for example, a transaction and it would contain a digital signature for each of the parties. Now the records, before added to the chain, they're checked and they're approved. We'll talk a little later about different ways to prove the records, but in essence, they need to be checked and approved before they're added to the system. Once they're approved, they're record is added to a block and then the blocks are in essence linked to each other and create the chain and we get the block chain. Now there are other common characteristics of blockchain. One of them is that it uses group cryptography. So instead of just having the information there we go through a crypto process to create what's called the hash, which essentially is a list of digits and letters that represent, in essence, the record, you can also think about it is the key to the record. Now the hashes connect the records and the blocks together in a specific order. If you were to make any change to the record, that would cause the hash to change as well. And hence you would know that there was a change in the record now because the next block contains still the old hashes. If you wanted to hack and change a potential record in the system, you would need to change all the subsequent records. Because again, all of them contain the previous hashes for the previous records. And that makes it hard, which is one of the key advantages or interests in blockchain. A key thing to understand is that blockchain is not Bitcoin. So many have heard about Bitcoin, which is a cryptocurrency. I'm guessing that some of you are sad that they didn't buy Bitcoin years ago. But anyway, Bitcoin uses blockchain. Blockchain's was introduced when Bitcoin was introduced, but the two are different. So the way Bitcoin uses blockchain is just a specific use for blockchain. And in many cases, when you think about blockchain, blockchain could be converted or used in a variety of different situation and variety of different settings and not just the one that Bitcoin is using. So for example, the Bitcoin use of blockchain is what's called a decentralized or a Galatarian network. The basic idea there is that there's nobody in charge of the system. There are many users within the Bitcoin blockchain system. All those users or nodes, sometimes that's the technical term, but again, no central authority. You don't need to get approval from anybody to join the system. In the Bitcoin network. The members are kept anonymous. Now I'm saying all this because you need to think about blockchain for potential business uses. And for example, you may not want to keep the blockchain system decentralized or egalitarian. You may not want to keep the members anonymous, but the fact that Bitcoin is using it that way doesn't mean that all blockchain applications would be the same. Another characteristic of the blockchain use in Bitcoin is the fact that transactions are approved by consensus. So in essence, what you have is you have what's called miners. Many of you have heard or potentially heard the term minor. A minor is somebody who is part of the blockchain system. Again, we're talking about Bitcoin specifically and they approve the transaction by solving, a variety of mathematical equations essentially checking that the hash represents the information in the transaction that is being uploaded to the system. And you have many miners that are trying to solve this equation or sets of equations. And the idea here, the reason for the miners to try and work is because they get paid in Bitcoin. So many of you have heard, that potentially the payment is going to be reduced in the future, things like that. But in essence, the way it works now is that miners are paid using Bitcoin for the work they're doing to approve the transactions. Again, since many there are many miners out there and the approve the transactions, it is approved by consensus. And what once it's approved, it's added to the system as we were discussing before. Now these characteristics of the Bitcoin application of blockchain may not be a good fit in all implementations. So as blockchain evolves there are other types of blockchain systems that exist. One example is the Hyperledger which is a consortium of companies that is developing an open source blockchain. So one question that comes up out of this is, okay, should accountants care about blockchain? So something that old transactions can be on a blockchain. So imagine a case in which the blockchain would include all the transactions that accompany has. Everybody would have access to that information. We can think of a case in which, and there's actually some, some academic research that talks about this, that users would have access to all these transactions and could use some software or some code to create their financial statements. Auditor's would have access to it and things like that. Personally, I don't think that would happen. Companies are not likely to be willing to share the information of all their transactions with the world. So I don't think things like that would happen. Just again, it doesn't make business sense. Now, it is true that blockchain systems can be used for some underlying relationships. So for example, when you think about your businesses, transactions with customers or suppliers, we could have all our supplies on a blockchain system. The idea here are the advantages that is that all the transactions will be recorded there. Now the approval would most likely not be by consensus. Maybe we do a two party verification. One of the attractions is that it could make it easy for some smart contracts. So, for example, if you think about a contract in which I promise to pay you, once you deliver some shipment, let's say we could have all that information in the blockchain, once that shipment is approved and it is received, the payment, I flag it as is the shipment being approved or received again and the payment is made automatically. So I don't need to send the invoice, I don't need to call you and ask where the money is and that could simplify things. So you can think about some blockchain applications that would be attractive and could have some impact on the accounting. Now what would it mean in the future? Would it mean less audit work because they'll be some two party verification for their transactions? Maybe. Would it mean continuous auditing? Like some are arguing that because all the transactions would be out there, auditor's can continuously audit the financial statements instead of doing it quarterly or annually. Maybe. I don't think so. Would it result in financial statements on demand? As I mentioned before, again, I personally find it not particularly likely. Would it mean nothing at all? Actually, maybe. So keeping mind that blockchain is again, just a ledger, just the list of transactions. They're proved they're more secure, they're harder to change, but they're just the list. What technology would bring it to the business in the future? It still remains to be seen. 
 
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