Blockchain: Unlocking new potential
Think blockchain is just a buzzword? Think again. In recent years, blockchain technology has spread beyond its cryptocurrency roots and is touching a myriad of industries including supply chain management, health care, insurance, government, banking and real estate. The accounting and audit profession is no exception. While still a young technology, blockchain and its various applications are demonstrating the potential to significantly impact the profession.
“There’s a really strong potential for the accounting community to shine in this new arena. It won’t resemble what it has historically, but there will be a role for accounting professionals in this arena, and in some ways blockchain technologies and distributed ledgers, in particular, simplify the work that accountants do. In other ways, they are going to have to understand the new technology,” said Johnny Lee, national practice leader for forensic technology services at Grant Thornton LLP.
In the last few years, a growing number of accounting firms have undertaken blockchain initiatives to further understand the implications of this disruptive technology — and the efforts are likely to gain even greater momentum in the years ahead. This comes as no surprise when you consider not only the rise in use cases across various industries, but also the fact that blockchain is an accounting technology that seamlessly aligns with the profession.
Further demonstrating its importance, the American Institute of CPAs and the Wall Street Blockchain Alliance, a nonprofit trade association promoting the adoption of blockchain technology across global markets, announced in 2017 a joint effort to advance blockchain technology for the accounting profession.
“The accounting profession is built on confirmation and verification, and that’s what blockchain is all about,” stated AICPA president and CEO Barry Melancon, in announcing the collaboration. “This technology can have a profound impact on accounting and finance going forward, and it’s important we make sure that its adoption proceeds in a way that’s in the best interest of the public and our financial markets. Our working relationship with the WSBA, combined with our expanded global reach through the Association of International Certified Professional Accountants, will help further that goal.”
Sources agree that blockchain and its various applications present multiple opportunities for the profession. Let’s first, however, take a closer look at the technology.
Blockchain up close
Perhaps best known as the record-keeping technology behind the Bitcoin phenomenon that emerged ten years ago, blockchain has since spread well beyond its cryptocurrency roots.
According to Deloitte’s 2019 “Global Blockchain Survey,” fintech remains a blockchain leader today, but more organizations in more sectors — such as technology, media, telecommunications, life sciences and health care, and government — are expanding and diversifying their blockchain initiatives.
More specifically, the survey found that those willing to invest $5 million or more in new blockchain initiatives over the next 12 months held steady at 40 percent. In addition, 53 percent of respondents said that blockchain technology became a critical priority for their organizations in 2019 — a 10 point increase over last year. Moreover, 83 percent said they see compelling use cases for blockchain, up from 74 percent in 2018.
So what exactly is blockchain? It is a decentralized, digital ledger that keeps a record of all transactions that take place across a peer-to-peer network. Users, who must possess highly secure keys to access it, can post transactions, or “blocks,” to the database. Each block is timestamped and, once validated, entries cannot be deleted or altered. In practice, there are many different types of blockchains being developed and tested, and blockchains can be either private (shared with only certain participants) or public (shared publicly with anyone who has access to the internet).
As outlined in a paper published by CPA Canada, the AICPA, and the University of Waterloo Centre for Information Integrity and Information System Assurance, a blockchain has several unique and valuable characteristics:
- Near real-time settlement: A blockchain enables the near real-time settlement of transactions, thus reducing risk of non-payment by one party to the transaction.
- Distributed ledger: The peer-to-peer distributed network contains a public history of transactions. A blockchain is distributed, highly available, and retains a secure record of proof that the transaction occurred.
- Irreversibility: A blockchain contains a verifiable record of every single transaction ever made on that blockchain. This prevents double spending of the item tracked by the blockchain.
- Censorship-resistant: The economic rules built into a blockchain model provide monetary incentives for the independent participants to continue validating new blocks. This means a blockchain continues to grow without an “owner.” It is also costly to censor.
Because blockchain provides a transparent and immutable record of all accountancy-based data, it offers an opportunity for accounting professionals to streamline financial reporting and paves the way for continuous audit processes.
An opportunity to evolve
While the technology may disrupt the profession, sources agree that it will not eliminate the role of the accounting and audit professional. On the contrary, it represents an opportunity to evolve the profession.
“We very much subscribe to the idea that the role of the auditor or the role of the accountant will evolve. And that’s true for all roles in the face [of] the innovation,” said Ron Quaranta, chairman and CEO of the Wall Street Blockchain Alliance.
Added Quaranta, “In our mind, it really is an opportunity to expand the advisory role, to expand the consultative services that might be available. So, contrary to the idea that the auditor or the accounting professional is going away … our argument is that the auditing function and the accounting profession are going to become more important.”
Kacee Johnson, strategic advisor for CPA.com, agreed and said, “The shift to advisor rather than record keeper is even more prevalent with the advent of blockchain. The role of auditor and accountant [will] evolve to predictive and prescriptive rather than assemble and record.”
Said Asael Meir, partner and national technology practice leader for New York-based CohnReznick, “The audit profession is going to change when the technology is adopted … The focus is really going to be around assertions like validation or valuation. For example, when I’m dealing with inventory I may have a ledger obtained in the public domain but there’s still going to be a need for somebody to physically observe that the inventory exists … that it’s not destroyed. That is not going to be available in the blockchain record. … You can see maybe the focus of where the profession is going to go is going to change. Where we obtain the sources for us to obtain support for assertions is going to change.”
Meanwhile, Chicago-based Grant Thornton has been involved with blockchain technology for the past five years due, in part, to a rise in client interest.
“There’s an active role that auditors are playing and Grant Thornton has been in this space for five years now. We are doing very traditional business problem-solving. A financial statement audit is a very traditional business concept, but we’re doing it in ways that are vastly different than we would before a blockchain came along,” said Lee. “So, it is a prism. It’s more of a different way of looking at a traditional problem. These companies still want, and seek, and, in some cases, need audited financials. The audits are very traditional in some cases — the test of controls, looking at assets, point in time balances — but the methodology for getting to some of those questions and answers is vastly different because the technology is so new.”
Felix Ramirez, IT audit services leader at Citrin Cooperman in New York, believes that while blockchain may facilitate record keeping, the analyzing, interpreting and auditing of those transactions will not become simplified.
“Record keeping will be a lot easier; however, the intellectual part of the job will be elevated because the accountants will need to apply more discipline in interpreting and classifying, and even identifying, some of those transactions on the blockchain,” Ramirez said.
For auditors, it will be important to understand how transactions are recorded in the blockchain and to keep in mind that recording a transaction in a blockchain may or may not provide sufficient audit evidence related to the nature of the transaction. In order to use blockchain as a credible data source, there must be an audit of the process itself to ensure system confidence and the integrity of the data. As noted by the AICPA, a transaction recorded in a blockchain may still be:
- Unauthorized, fraudulent or illegal;
- Executed between related parties;
- Linked to a side agreement that is “off-chain;” or,
- Incorrectly classified in the financial statements.
“The need for someone to do auditing procedures that validate information on the blockchain, or that the blockchain itself is working, or that it’s providing reliable information, or that the data sets have integrity, are not going away. What is new and incremental is the application of technology, and the need to know and understand and be able to work with that technology,” said Matthew Schell, a partner in the assurance and professional practice at Chicago-based Crowe LLP.
Schell said the firm is involved with various industry groups that are developing and collaborating on blockchain-related best practices, and is currently exploring use cases with various clients in its consulting practice.
Echoing the sentiment, David Rosenbaum, practice leader of the technology and risk advisory consulting practice for Citrin Cooperman, said, “A big feature of the blockchain is that the ledgers are immutable. They can’t be changed. But what’s really important for auditors to keep in mind is the integrity of the data. The fact that it doesn’t change doesn’t mean that it is accurate or authentic. So all of the testing and controls that took place before need to still take place without being lulled into a sense that this immutable ledger is necessarily correct.”
Rosenbaum noted that Citrin Cooperman is working with clients on blockchain-related initiatives that fall outside of cryptocurrency. For example, it is working with one client who is building a blockchain platform to broker services like marketing services, software development services, etc.
Another example is a client who is leveraging the technology to enable parties to negotiate contracts, like real estate contracts or legal services contracts, on a blockchain.
In the firm’s advisory practice, it is advising startups that were considering an initial coin offering, which is the cryptocurrency industry’s equivalent to an initial public offering. It is also helping clients with financial modeling given the potential cost, revenue and tax considerations that may be involved. And, if needed, it can provide forensic investigations into digital asset-based transactions and holdings.
“So it’s a pretty broad opportunity to leverage the same accounting skills and advisory skills into what’s really a brand new marketplace,” said Rosenbaum. “And it’s fun. It’s a chance to really work with some creative people and take creative concepts, marry it with a reasonably new technology, and come up with some exciting offerings for the public and some profitable businesses.”
Meanwhile, tax reporting and classification of crypto assets remains a prominent topic and some tax practitioners are seeing growth in questions regarding crypto-tax liabilities. In fact, the IRS issued in October two new pieces of guidance for taxpayers who engage in transactions involving virtual currency, expanding on its guidance from 2014.
The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork. In addition, a set of FAQs address virtual currency transactions for those who hold virtual currency as a capital asset.
“The IRS is committed to helping taxpayers understand their tax obligations in this emerging area,” said IRS Commissioner Chuck Rettig, in a statement. “The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”
According to the IRS, some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax, or did not report their transactions properly. The agency noted that it is actively addressing potential noncompliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
For example, in July of this year the IRS began mailing educational letters to more than 10,000 taxpayers who may have reported transactions involving virtual currency incorrectly or not at all. Taxpayers may be liable for tax, penalties and interest, and, in some cases, could be subject to criminal prosecution.
As blockchain technology evolves, more and more accounting professionals may be wondering what skills sets they need to remain relevant. While accounting professionals may not need to know how to build or manage blockchains, sources agree that having a solid understanding of the technology and its implications is critical.
“For the accounting professional, or the banker, or the lawyer, you don’t necessarily need to know how to code, for example. But you will need to be knowledgeable about what are the different types of blockchains? What are the use cases they are focused on? What are the implementations that are out there?” said Quaranta of the Wall Street Blockchain Alliance.
Said Johnson of CPA.com, “We need to focus on awareness, learning the basics as well as the implications, and then identifying which types of blockchain applications are relevant to our firm and clients’ businesses.”
Johnson noted that the AICPA and CPA.com, for instance, hold an annual Blockchain Symposium in partnership with the Wall Street Blockchain Alliance. The symposium is one component of the AICPA and CPA.com’s broader blockchain strategy. Other initiatives include advocacy work, webcasts, online self-study courses, a podcast series, and a blockchain certificate program.
When asked about the rise of cryptocurrency and blockchain, finance leaders in a Robert Half Finance & Accounting survey said staff will need to expand skill sets to adapt for new accounting and finance technologies (36 percent). Furthermore, 34 percent said it will increase the need for specialized accounting (e.g., tax and forensic accounting), and 30 percent believe there will be more cross-departmental collaboration with IT. Robert Half also offered advice on how companies can build their accounting and finance teams’ blockchain expertise:
- Facilitate collaboration. Encourage communication with the IT department for seamless integration of the new technology. IT colleagues may also be able to share best practices and training.
- Relax the job requirements. Blockchain expertise is hard to find but can be developed. When hiring for roles requiring this knowledge, consider focusing on candidates who will have a short learning curve and can be trained on it.
- Accelerate the hiring process. If you find a candidate you want to hire, move fast. Also, enlist the help of a specialized recruiting firm that has access to candidates you may not be able to find on your own and can assist with your hiring efforts.