A Blockchain Analogy for CPAs

by Susan Firriolo, CPA, CISA, Pet Rescue 990 Project | January 18, 2022

Think of blockchain as a huge group of obsessed accountants who want to perfectly keep track of everything. The group has a million complicated rules they must follow to make sure each accountant records the same thing at the same time. After every accountant is satisfied, they all have an exact copy of each record — the records are filed in a see-through drawer with a combination. The combination to the drawer is scrambled. The scrambled combination is put into the next drawer along with the new records from the second day. Since the combination to the first drawer was scrambled, it will never be able to open that drawer again. The same thing happens with the second drawer — the combination is scrambled, put into the third drawer and so on. There are an unlimited number of drawers in each file cabinet. Because the drawers are transparent, clients can view what was done. For instance, Joe Client can view the file cabinet and see when his bank reconciliation was done.

In reality, a blockchain is an intricate technology designed to securely record transactions. There are various blockchain platforms running different systems. All blockchains work with specialized machines called nodes, which are connected to each other and work together exchanging, storing and securing information. Software specific to the blockchain network runs on the nodes. 

Types of Blockchains

There are public and private blockchains, with benefits to both. Public blockchains are available to anyone and provide privacy to participants. Bitcoin and Ethereum are examples of public blockchains. Bitcoin uses a mining and proof of work (PoW) system to validate cryptocurrency transactions, while Ethereum uses a mining and proof of stake (PoS) system.

In a private blockchain, every user is known and has specific permissions such as viewing, entering and approving data. Walmart uses a private blockchain system which allows suppliers to add certificates of authenticity to the network making it easier for the company to trace the origin of a product. 

While blockchain technology is very complex, fortunately users do not have to know how the blockchain works to participate in it. Similar to Venmo and PayPal, the user can transfer money to someone without knowing what happens in the background.    

Susan  Firriolo

Susan Firriolo

Susan Firriolo, CPA, CISA, is the director and founder of Pet Rescue 990 Project, which provides online tax and advisory services for pet rescue 501(c)(3) organizations. She is a member of several NJCPA interest groups and can be reached at sac2364@gmail.com.

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