Future-proof technology: Blockchain’s expected impact on accounting

Abstract

In fact, blockchain technology is mostly a new type of database. To understand, you need to highlight the benefits that help, can help spread the use of blockchain technology in various services. The first important feature is that the blockchain does not require a central authority and users do not even have to trust each other, an innovation that allows digital money to work. Actually, the potential applications of blockchain go far beyond the financial world.

Introduction

The accounting was based on the principle of double-entry bookkeeping, the various entries being made in two accounts. The debit appeared on one account and the acknowledgment and credit on the other. The development of accounting and controlling, as well as related tools and methods, can be applied from the first historically proven appearance.

These past applications and the need for tracking information related to major management and organizational processes have created the economic macro environment that has forced the need for management information and laid the foundation for the rapid development of financial accounting. In fact, the XIX. Before the 19th century, the traditional financial accounting system provided sufficient information, as each transaction of production was carried out with different units and there was little long-term investment within the organizations (Horváth, 1990). The use of cost analysis and other newer analytical methods has increased the efficiency of accounting systems. The difference between financial accounting and managerial accounting and the difference between in their goals can still be found in organizations today. It is important to highlight the content relevance of the information available from the data collection activity, which significantly influences sound management decision-making.

In 2002, the Council of the European Union and the European Parliament adopted and implemented Regulation (EC) No 0606/2002 in order to compare the activities and efficiency of companies of different nationalities and to intensive increase the competitiveness of the European capital market. According to this, from 2005 listed companies of the Member States of the European Union are required to prepare and publish their consolidated and contracted financial statements in a form and content that complies with the criteria set or expected by the IRFS (Kondorosi, 2007).

This decree is also a direct part of the Hungarian accounting regulatory system. In contrast, Member States have been empowered to extend the scope of obligors within their remit (Droppa, – Becsky-Nagy, 2019). This allows some entities to prepare financial statements with the structure and content required by IFRSs instead of national accounting rules (Novák, 2005).

From 2017, for listed issuers and, from 2018, for various credit institutions and financial companies it became mandatory, as well as for many other organizations it has become an optional alternative to prepare their separate financial statements in accordance with international standards. Statements prepared in accordance with these international standards can ensure comparability, transparency, time and cost savings for users, as well as the expansion of capital markets and the strengthening of international competition for all organizations, including organizations operating in Hungary (Droppa, 2017).

The greater the content relevance of the information, the better it can serve to make the optimal management decision. The defining point of the development of information technology was the design of mainframe computers – e.g. univac – then came Bill Gates’ version of the eighties personal computer world. In the 1990s, the internet became a huge, popular phenomenon. The Internet is a network of networks made possible by the invention of a fairly simple digital communication protocol (Transmission Control Protocol / Internet Protocol or TCP / IP). It interconnected many existing networks and created new ones, resulting in the Internet growing steadily as Internet content exploded. By the early 2000s, we had gone from easy online access to information to being able to execute business transactions. This is the age of e-commerce. With the help of cloud computing, data can be stored and applications run on different server networks in data centers. Another major Internet evolution theme is the emergence of the “Internet of Things” (IoT). This means that we connect almost everything to the Internet into a network system, whether it’s the sensors of an airplane flying over the ocean, the sensors of our home appliances, or the sensors in our wristbands worn during training..

The last trend we need to mention is the open source movement, which started back in the late 1980s and developed into the late 1990s. The concept of open source software, which is free to use and whose programming steps can be examined (modified) by anyone, dates back to the earliest days of computers – the 1950s and 1960s, when most software was still written by scientists. The software only became copyrightable in 1976 with the enactment of copyright law, and there were misunderstandings in this regard until the 1983 case of Apple Computer Inc. v. Franklin Computer Corporation.

The famous open source milestone was Linux released by Linus Torvalds in the early 1990s. Later, Linux became the operating system of choice for many Internet servers, drastically reducing entry costs for digital start-ups and Internet innovators. Since then, Linux has become mainstream due to its low cost, breadth, and robustness, and dominates the server and supercomputer markets. Another major open source milestone is the 2008 release of Android. A new Linux-based smartphone operating system that is Google’s open source software. Android has since become the dominant operating system for smartphones. It can be stated that the blockchain system and technology appeared together with the launch of the bitcoin cryptocurrency. In my experience, they are used and developed in several industries and these have often fundamentally transformed the system associated with the original blockchain transaction.

Several modes of blockchain technology are being developed and tested, but there are currently two main groups of unlicensed and licensed. The biggest difference is determining which parties can access the network. If the blockchain can be shared publicly with anyone who has access to the Internet, then we are talking about an unlicensed or public blockchain, and if it can only be shared with certain participants, it means an authorized or private blockchain. If blockchain is a new type of accounting system, then blockchain systems (Deepak et.al., 2018) can be classified into three subtypes:

An unauthorized blockchain is available to all potential users. Such is the bitcoin blockchain, which is public, anyone can participate as a node in the chain if they agree to forward and validate transactions on the network, thereby offering their computer as a participating node. In the case of connection to a blockchain system, the limits are low, thus facilitating the connection with the highest possible volume. The blockchain maintains a list of all transactions that have ever been executed, including history and account balances for all parties. However, it may be a problem that when the blockchain was established, the volume or size of transactions was based on the best available technology (Barabási et al., 2000). As technology advances, initial settings can become constraints, potentially slowing down the speed of the transaction..

In addition, unlicensed blockchain users should also be aware that their transaction history may become available to anyone. The unlicensed blockchain is fully decentralized and its integrity is guaranteed by cryptography and a decentralized consensus mechanism. This is the Satoshi’s original blockchain concept.

The unrestricted nature of unlicensed blockchains is forcing some organizations to consider using private or licensed blockchains that restrict the blockchain network to participants whose participation has already been authorized by administrators. These blockchains address some of the shortcomings of public blockchains, but also sacrifice some of the potential benefits. Private chains are likely to be created by memebers of a consortium that can jointly benefit from a shared general ledger system. An example is if they want to use a supply chain network where they can track the movement of products (Reid – Harrigan, 2013). Given the limitations inherent in privately owned or licensed blockchain technology, these are expected to have a higher acceptance rate in the corporate environment. At the same time, public blockchain adoption is also expected to increase in the longer term as new technologies find solutions to key infrastructure and technical challenges.

A licensed blockchain is already a centralized control and is therefore different from the essence of Satoshi’s idea of a blockchain, which is a decentralized business relationship open to all. Moreover, the private chain is neither immutable nor irreversible because it can be influenced by the central authority. (Peet van Biljon et.al., 2020)

The third version is a combination of the two, the consortium blockchain – This is a hybrid between public and private blockchain. It is partly privately owned and licensed, but no organization or gatekeeper decides who can join. Instead, predefined validation nodes make this decision. The consortium decides whether read and write permissions are public or limited to existing participants. This is neither immutable nor irreversible because the majority of the consortium could potentially agree to make changes to the blockchain. (Peet van Biljon et.al., 2020)

Operation of the Blockchain

An essential element of the operation of blockchains is the so-called consensus mechanism, according to which computers must agree on updating the blockchain in order to have a uniform blockchain data content on all computers thereafter. How does it all happen? I would like to illustrate the operation of blockchains through an example of the Proof of Work consensus mechanism of a blockchain called Bitcoin. Transactions are packaged into blocks every 10 minutes, i.e. data on them is aggregated. The transactions included in the new block are then authenticated by the computers (e.g., they confirm that the buyer actually had the given amount of cryptocurrency). The new block’s transaction data set is then supplemented with the so-called header of the previous block. This header practically works like a personal number. Each block has a unique header that can be identified by it. This therefore means that each block refers to the previous block, and consequently the chain of transactions can be traced back to the original block containing its very first transactions. Once the header of the previous block has also been added to the new block, encryption of the data contained therein begins by decrypting a cryptographic puzzle. All the computers that run the blockchain (i.e., the miners) compete on, which one can solve this cryptographic puzzle the fastest, because the one that solves it first gets Bitcoin (or a different type of cryptocurrency for other blockchains) for its work. The new block is then added to the block chain and shared on all computers in the system.

Fields of application for blockchain

Any content or data can be written into the blocks, so the use of blockchain technology goes far beyond the processes currently used most in the financial sector.

Due to the encryption of the data and the lack of the data decryption, as well as the exclusion of subsequent modifiability, the need to use this technology may and has appeared in many fields. The introduction of the technology may affect the following fields in the near future, such as.: http://alapjogokert.hu/2020/04/14/a-blokklanc-technologia-es-a-kriptovalutak-mukodesenek-vizsgalata/ (Download date: 2020.10.28.)

– Electronic voting

– Taxation (easily transparent and traceable data)

– Healthcare (development of a unified system of patient data)

– Vehicle data register (technical data, damage event register)

– Online gambling (access to anonymity)

– Insurance

– Administration (e.g. registration of refugees)

– Real estate market (e.g. replacement of credit administration)

– Logistics, shipping

Blockchain business applications that may appear in the near future in the following fields:

– Smart contracts (Distributed general ledgers allow the coding of simpler contracts, which are executed when the specified conditions are met. Ethereum)

– Community economy

– Crowdfundig (Community funding)

– Government

– Supply chain audit

– Stock trading

– Internet of Things (IoT)Kormányzás

The use of new technology is very diverse and can has many benefits in the field of financial services. Many stock exchanges around the world are experimenting with issuing and transferring private securities on a blockchain platform. Several banks are implementing technology related to the management of trade finance, cross-border payments and other banking processes through a blockchain system (Pilkington, 2016).

They are also experimenting with the production and sale of consumer products using blockchain, as they can digitize and track the movement of goods and materials, the origins and history of business and other transactions in various fields.

Healthcare organizations are also trying to explore the benefits of blockchain. Mainly to ensure integrity, for example in the field of electronic medical records and related measures.

In energy management, blockchain technology can be used to create smart grid technology that would allow consumers to trade the surplus energy that can be used.

Numerous critical publications have been published on smart contracts. As early as 2016, one of the most prominent critiques, published by The Economist Schumpeter, drew attention to a number of serious concerns about the concept of smart contracts used in blockchain. (Schumpeter, 2016) Schumpeter questions whether a concept of “techno-utopia” in which human decision-making is completely avoided could ever work in the real world and points to its possible adverse legal consequences.

According to the latest 2020 report, users have assessed the factors in the construction and design of blockchange technology that, if they exist, may hinder its design and development. It can be stated from Figure 1 that the issue of regulation and the issue of underlying performance are the first barrier, but the influential impact of security, trust, system operation and network connections is also remarkable.

In fact, the opportunities inherent in the formation of the block chain are needed by the enterprises primarily from the point of view of cash flow and asset management, therefore they try to incorporate it into their management background as soon as possible. It can also be said from the 2020 study that block sizes are constantly increasing, which means that the number of users is increasing. The development of this is shown in Figure 2.

Overall, the figure shows this increase in continuous blocking from 2017, which implements a “gigantic” form of cooperation in the field of management.

Implementing blockchain model in business environment

Different types of consensus models are at the focus of different blockchain systems. They are designed to meet a variety of design criteria, such as licensed or unlicensed, desired transaction rate (work validation is usually slow), desired scalability, participation fees, level of trust between nodes – high private – and conservative blockchains, and low in unlicensed blockchains (Deepak et.al., 2018).

Three leading blockchain consortia, the Enterprise Ethereum Alliance (EEA), Hyperledger from the Linux Foundation, which includes Microsoft and Salesforce.com, and R3 (Corda platform), which includes several large financial companies, they are currently helping already mature companies figure out how to pool their resources and how they can reap the benefits of blockchain technology. And, of course, the entire ecosystem of conventional technology vendors is active in this rapidly expanding space, enthusiastically helping its customers with blockchain attempts and experiments.

Conclusion

The general opinion of users is that if the number of blockchain use cases is projected to increase, it could even become mainstream technology in the next few years. Records show that there are still few proven uses for the blockchain outside of the world of cryptocurrencies, even though a cursory Internet search brings out hundreds of hypothesized uses. Many challenges and compliance with technology requirements hinder the widespread adoption of blockchain models in the business environment and accounting systems, but from a theoretical point of view, there are many opportunities in it, as the models we illustrate.

Positive features of the blockchain service:

• process automation can be accelerated,

• transparency of processes, during which it provides a more transparent economic background

• developing and accelerating the data connection system,

• performing digitization tasks in the corporate relationship system data,

• access to data may become easier,

• transparency of the relationship system of devices, registration of their movements,

• task management, value focus can be better,

• better fit the data-driven management decisions,

• operation of professional financial accounting management,

• improving the operation of risk management, more qualitative improvements in the scope of data use,

• applicability and design of BI systems,

• a clear improvement in financial and accounting data management,

• comparing the possibilities of utilizing different financial sources,

• the rise of account-based financing,

• broadening accounting analyzes,

• automatic decision support,

• raising the brand image,

• the use of innovative users can increase the benefits,

• adequacy of trust and data security,

• quick use and operation in the field of financial and accounting management.

Negative features of the blockchain service:

• human factor (operator rights),

• it is difficult to define a system of double and triple accounting relationships,

• defining the legal certainty of network participants,

• achieving code security,

• maximum disclosure of transactions,

• a separate assessment of debt pay-off,

• ownership of source codes,

• precise definition of validation algorithms.

Summary

Blockchain technology can affect all records processes, including how transactions are initiated, processed, authorized, recorded, and reported (Ming et al., 2019). Changes due to its application, new business models, and business processes may affect back-office activities, financial activities, and the performance of reporting and tax preparation obligations (Reid – Harrigan, 2013). Due to the emergence of new blockchain-based techniques and procedures, for example, new possible ways to obtain appropriate audit evidence need to be considered. Furthermore, a greater degree of standardization is expected in controlling and business reporting, which has the advantage of allowing more efficient data extraction and analysis.

Many accounting problems can be solved by a blockchain system, but in most cases the technology is not yet advanced enough to be implemented on the merits. Many theoretical challenges also hinder the application of blockchain in accounting systems, the trend is clearly moving in the direction that these challenges will be solved in the near future. The blockchain system may be the most suitable for putting the triple accounting system into practice. The in-depth implementation and development of different systems is a research opportunity that has many opportunities for researchers and practitioners in the future.

In summary, it requires a paradigm shift in thinking and this is certainly of great importance in economic thinking, which also heralds the arrival of the concept of online economics.

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Dr. Habil. Zoltán Zéman Ph.D. Professor
Szent Istvan University