There is a lot for accountants and auditors to understand as distributed ledger technology (also known as blockchain) and digital currencies emerge.
First, members of the accounting profession are being challenged to gain a deep understanding of how the technology works. Second, as the use cases for blockchain multiply, accountants and auditors need to consider how the existing accounting and auditing rules relate to distributed ledger technology.
The technology capitalizes on a digital ledger of economic transactions that is a list of continuous records in blocks and has major implications for accountants and auditors because it provides significant transparency and is considered extremely difficult to corrupt.
“If you haven’t spent any time trying to understand it, it’s about a ledger and we’re the profession that’s the master of ledgers would suggest that it’s worth your time to understand it better.” – CEO Covault, Inc.
This means that a world where all transactions for a company occur on the blockchain would enable auditors to verify large amounts of routine data automatically, allowing them to focus instead on more complex transactions and controls.
Recently, the SEC provides considerations for management related to distributed ledger technology:
- Maintain appropriate books and records — whether making use of distributed ledger technology or not — and maintain the necessary system of internal control over financial reporting on which the auditor will continue to report if required to do so.
- Consider what a “coin” is — as opposed to solely how it may be used — in determining how to account for any issuer participation in the “coin” aspect of a distributed ledger software program.
- Produce financial statements that reflect the facts and circumstances of any manner of claim — whether the claim is being referred to as being embodied in or represented by a “token” or not — in accordance with either U.S. GAAP or IFRS.
Meanwhile, the SEC said auditors should:
- Assess the application of the financial reporting framework used by the issuer in the preparation of its financial statements.
- Determine the nature of the audit procedures to perform based on the circumstances of the issuer and the assurance standards used. This would entail understanding and assessing the access to records, the validity of transactions recorded, and the integrity of the transaction records, as a starting point.
With a full understanding of the technology, the next step is to figure out how to apply the accounting and auditing model, technology will not change the fundamental responsibilities accountants and auditors have to investors and the capital markets.