Blockchain: The Epistemological Objectivity in Digital Accounting

Generally, there is little disagreement that the world economy has entered an era of global interaction on a scale rarely experienced before. In particular, financial markets in various parts of the world operate twenty-four hours a day as capital seeks involvement in this global economy[1]. This ongoing development also challenges the epistemological objectivity in financial reporting in terms of accounting, accountability now and in the future. As illustrated in this research the concept of accountability varies throughout history and according to external circumstances such as culture, education or simply the person in a position perceiving accountability differently. Luca Pacioli a professional accountant of his time wrote on accounting ethics already in 1494[2]. Ethics is an important element of our social life which has the potential to influence relationships between people and organizations. Ethics and ethical behavior refers to more general principles such as honesty, integrity as well as morals. Whereas, the concept of accountability furthermore combines liability, responsibility, answerability but also culpability. Friedrich Nietzsche in his times has already described that there is a relatively strong connection between moral and responsibility[3]. Ethics in accounting is mainly known as applied ethics which strongly focuses on human and business ethics, judgements, moral values, and their practice.

Since then ethical standards in accounting evolved through government groups, professional organizations and independent companies, leading accountants follow several codes of ethics when performing their duties. In order to develop a legitimate accountancy philosophy it is important among others to consider ethical issues in accountancy. Many accounting theorists[4] have defined accounting theory as the framework of accounting principles that guide and inform accountants. Accountants must follow the code of ethics set out by the professional body of which they are a member. They are not just members of a specialized organization, in fact they are still members of society. Thus, their behaviour influences not just the business environments but rather the entire society they belong to. Ethical responsibility within the business world is not holistic but lies under the particular context of ethical behaviour[5]. Moral and ethical standards seem to be interpreted differently by different people, point in time, societies or organizations. There are many managers, entrepreneurs and businessman — then and now — who believe in a fast way of enrichment and for these reason they do not believe in the ethical principles. Research has shown that the promotion of honesty is considered to be old fashion when doing business and the general believe is that only an aggressive way of business can bring profits[6].

The twenty-first century has witnessed a surprising and disheartening number of accounting scandals, implying a significant failure in management oversight and reporting process[7]. In response to those failures, it became apparent that organizations needed to critically review the relationship between the accounting role and accounting professional. Furthermore, organizations are now re-examining ethics in the accounting profession also. The reoccurring financially harming economic events called for more sophisticated or alternative mechanisms in accounting. Morality is impossible unless one is free to choose between alternatives without outside coercion. Since capitalism is based on freedom of choice. Therefore, it provides the best environment for morality and character development[8]. In a business environment without ethical principles is like a state without legislation including anarchy and disorder. Fortunately, the number of those who think in that way decreases but ethical principles probably will be never respected by all society members. The code of professional conduct, however, is a specific set of rules set by the governing bodies of chartered accountants. Although, the rules set out by the different institutions are unique, some of them are universal and form the ethics of accountancy. Therefore, it can be affirmed that like a state cannot exist without legislation, the business environment cannot exist without ethical principles.

Professionals Accountants need to demonstrate a practical commitment of being ethical and in this way they will contribute not just to the health of the business environment, but also to the health and welfare of the society as a whole. Consequently, an accounting system is of great importance for society and for business decisions. The way of gathering, analyzing, processing, distribution and archiving has been changing during the recent years. A more precise description is that accounting system which produces reliable information, free from unethical behavior, significantly affects the business operation but also the society. Therefore, the effectiveness of any organization depends on the quality of its information. This brings us to the assumption in this research is: if the business environment without ethics is equally to a state without law in which anarchy and disorganization happens. Then, in order to stop anarchy and disorganization the state must implement laws. Vice versa, in order to prevent accounting scandals in a business environment that environment must adopt accounting methods following ethical rules and standards in order that stakeholders place their trust in the auditors. An obvious problem besides moral and ethical issues is the problem of agency in this situation. Auditors work for managers who hire them and pay them or for the public that relies on their integrity in order to make a decision? Modern financial accounting is based on a double entry system. Double entry bookkeeping revolutionized the field of financial accounting during the Renaissance period; it solved the problem of managers knowing whether they could trust their own books.

However, to gain the trust of outsiders, independent public auditors also verify the company’s financial information. Each audit is a costly exercise, binding the company’s accountants for long time periods. Instead of keeping separate records based on transaction receipts, companies can write their transactions directly into a joint register, creating an interlocking system of enduring accounting records. Since all entries are distributed and cryptographically sealed, falsifying or destroying them to conceal activity is practically impossible. It is similar to the transaction being verified by a notary — only in an electronic way.

From a philosophical standpoint then it would require further research of what is the difference between accounting responsibility and computational system responsibility?’ Some argue that such distributed governance by code still implies moral duties or responsibility on the part of the community of the technology to intervene in crucial decisions, while others are working towards embedding human values and the general will of citizens into algorithmic social contracts.

Many organizations are already using the Internet to communicate with their customers, stakeholders, creditors, etc. in a variety of ways. Many companies whose business models are based on increased use of the internet have argued that there is a need for a new accounting model in the internet environment[9]. Although, financial reporting using new technologies has numerous advantages, it also creates a number of challenges for accounting, accounting history research and influences the epistemological concept of accountability. Another challenge is from an epistemological point of view that Blockchains provide certain kinds of accountability. Accountability in this case can be what is considered to be ‘pro-active’ meaning when a transfer from one account takes place only after a person has authorized it. Accountability can also be ‘re-active’ when the tamperproof technology might allow after-the-fact analysis actions in form of determining who did what, when and punishing the guilty[10]. That being said blockchain based technology could force accountability in many public and business areas. The fact that the data on the blockchain is immutable meaning that it cannot be altered or removed once it has been entered provides accountability and fulfills ethical and moral standards and expectations. Ethical issues of accounting can to some extend be obsolete through software in particular blockchain technology.

by Tilmar W. Goos, LL.M, Ph.D. Researcher Digital Economy, specialization accounting and taxation, published 13th February 2019, Zurich, Switzerland © All rights reserved

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[2] Smith, M. L. (2011.). Texas A&M University. Retrieved from Luca Pacioli: The Father of Accounting: https://web.archive.org/web/20110818055709/http://acct.tamu.edu/smith/ethics/pacioli.htm, Archived from the original on August 18. 2011

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[10] Herlihy, M., & Moir, M. (2016). Blockchains and the Logic of Accountability. 31st Annual ACM/IEEE Symposium on Logic in ComputerScience, ( p. 1–4).