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Blockchain for CPAs 101


Contributed by Kreston
October 19, 2020



Brenda Piazza, National Director of IT Audit, CBIZ & MHM, United States, Kreston International member firm

Back in 2008, when Satoshi Nakamoto - an alias for an unknown person or group of persons - released the Bitcoin White Paper, Bitcoin: A Peer-to-Peer Electronic Cash System, the blockchain was born. A blockchain is a distributed ledger. The blockchain was created to support the underlying technology behind bitcoin, but the current and future applications for the technology are far-reaching. One must first understand the terms behind the word 'blockchain'.

Bitcoin - the digital currency created by Satoshi Nakamoto in an effort to disrupt the traditional banking system. Bitcoin allows individuals to transfer value through electronic exchange, bypassing governments, banks and other third-party agencies that might limit the ability to transfer funds or charge fees.

Blockchain - a distributed ledger of all blocks chained together chronologically. There are multiple types of blockchains, including public, private, open and closed, each with multiple uses. A company could be using a private open blockchain to track the origination and transit of goods to the final destination. Alternatively, a company could use a private closed blockchain to keep internal accounting records that only upper management and the financial staff can access. In addition, and more relevant to the following inherent risks associated with auditing a crypto blockchain, the blockchain is the open public technology behind cryptocurrencies and related assets. As of 12 August 2020, there are 643,424 total blocks in the bitcoin blockchain.

Blocks - store information about transactions. A single block on the blockchain can store up to 1 MB of data. A single block can house a few thousand transactions. Once all a block's transactions have been verified, it is given a unique, identifying code called a hash. The block is also given the hash of the prior block.

Cryptographic hash - cryptography is the process of coding information so that normal words are not legible. The cryptographic message 'Hello', for example, might read as 'Sd99sg5*6r'. Computers, called miners, seek the solution to the math problem by mining. The nodes (many computers that contain real-time copies of the same blockchain) verify that the first miner to solve the problem has found the correct solution. The miner is paid in bitcoin.

So what does that mean to the auditor or CPA? A normal, non-blockchain, record-keeping procedure has the risk that transactions can be altered or deleted after being posted. A blockchain could solve this problem because it can only be added to, and historical records cannot be changed. Once a transaction is posted in a block, it is replicated across all nodes (resulting in multiple copies of same block across multiple computers throughout the world). In order to change a single block, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. Auditors would have an easier time relying on the completeness and accuracy of the data, knowing that all transactions are included in the ledger and have not been tampered with.

 

Tags: currency | accounting

 

 

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