Pathways to Growth: ‘Chain’ reaction
Most of us first became aware of blockchain — the cloud-based distributed general ledger — as a technology associated with bitcoin. Today blockchain is emerging with extraordinary implications for firm growth.
At the most recent AICPA Blockchain Symposium, I talked with three pioneers in the field. As a former auditor, I was especially interested in how blockchain is disrupting the traditional audit function. These explorers have embraced this brave new technology, even as guidelines are still being formulated. I was curious, like many of you, about what it’s like to audit the blockchain.
I interviewed André Sterley, digital asset group leader for Mazars USA in New York; Andries Verschelden, the partner who leads the blockchain practice at Armanino in San Francisco; and Jagruti Solanki, an assurance partner at Aprio in Atlanta specializing in technology and blockchain.
These pioneers have a couple things in common. They were all born outside the U.S. and all had a strong internal motivation to master blockchain technology. An “Aha!” moment for me was finding out that the blockchain is a subledger. I could get my head wrapped around auditing a subledger. Yet it’s very different in that it represents a single set of books, housed in the cloud, which serves as a historical repository for every cryptocurrency-based transaction.
A personal journey
South Africa native André Sterley, who had always wanted to live and work in the U.S., moved from Mazars South Africa to join Mazars USA in their New York City office in 2014. During the move, parts of his life were on both continents, and André found that conventional means of making cross-border payments were slow, costly and inefficient. He started studying bitcoin, thinking it might be an alternative to methods like MoneyGram and Western Union.
André’s intellectual curiosity grew beyond his own needs. After an in-depth exploration he conducted experiments with a few transactions. It took seconds, versus the days in more traditional methods, plus it was quite inexpensive. André saw the potential immediately and concluded that crypto assets and blockchain technology presented an enormous potential business opportunity. Since then, he has become something of a LinkedIn blockchain personality, providing entertaining content and commentary.
By early 2018, he was able to offer services to his first Mazars USA client — a business in need of an external financial statement audit. André described the need to develop cryptography skills: “Auditors were never taught cryptography, the functional discipline combining computer science and locking things digitally. This includes techniques derived from algorithms to secure information in ways that are hard to decipher. But now I had to rely on cryptography and had to get educated, to know that what I was evaluating could be relied upon.”
Also, since blockchain is a universal ledger, a transaction’s historical record can be visible to all parties who have permission to access the blockchain. Imagine grain bushels on a boat, coming in and out of various locations, with the entire record chained together. This becomes the central source of truth, eliminating the necessity for traditional confirmations and reconciliations.
Instead, typical questions to be answered are: Was this particular transaction authorized? Did it go to the right address? Were the parties to the transaction related?
Leveraging a passion
Andries Verschelden’s career choice was not a surprise. His father Frans was managing partner of the Moore Stephens (now Moore) firm in Brussels, Belgium. In 2017 Andries merged the interim CFO business he was leading with Armanino, a leading Moore member based out of California. Andries was drawn to the firm for its relentless focus on innovation. He went on to lead the firm’s entire outsourcing business.
Increasingly fascinated by blockchain and the growing use of cryptocurrencies, Andries expressed his interest to managing partner Matt Armanino, who was impressed by his passion and enthusiasm. Having been involved in helping clients since 2014 with blockchain services, in 2019 Armanino upped its strategic investment in blockchain. The firm made the equally strategic decision to put Andries in charge of the practice. He entered the arrangement with the understanding that blockchain would not be just another industry offering, but one that could fundamentally change the profession, the business model and client expectations.
How revolutionary would that change be? Extremely! Andries described to me the intriguing fact that the majority of digital assets today have no underlying “real world” asset associated with them. They are series of ones and zeros that only live in this blockchain world, and have the ability to instantaneously transfer value around the world in a direct (peer-to-peer), secure way. He said, “Basically, you’re being asked to do audits on something that is purely digital in nature, but is known to have value.” Ponder that for a moment!
Also of note is the fact that existing enterprise resource planning systems are not set up to integrate with blockchain transactions. In a client situation, this creates a mixed bag of digital assets (like bitcoin) and non-digital assets (like greenbacks) living in different systems. The challenge is reconciling the two with existing tools such as Excel. Luckily, a number of new software startups are closing this gap. Examples are Lukka, Ledgible, Softledger and Blox.
Born in India and raised in Oman, Jagruti Solanki (pictured) is an audit partner at Aprio in Atlanta. All things considered, she’s an old hand at blockchain, having served her first client in 2013 when Bitcoin was selling for $200. She recalls with a smile her response (“You’re crazy!”) when her husband suggested investing. “Then it hit $20,000 and I thought I was the crazy one,” she added.
Always up for a challenge, this tech-minded auditor made clear her interest in getting involved. Like André and Andries, she jumped in with both hands and feet, learning as she went about the risks and the upside potential.
Traditionally, blockchains have been operated publicly. And while private blockchain applications are growing, including among large retailers like Walmart, Jagruti noted the reluctance, even fear, on the part of some accounting firms to get involved.
That’s because they see auditing companies using blockchain technology as carrying a high risk. One contributing factor is that there is currently an absence of definitive standards for auditing the blockchain.
As a result, said Jagruti, there’s a considerable amount of judgment involved. Firms that wish to get involved in blockchain should have a culture that is welcoming to technology and has significant trust in its leaders. What’s more, she said, there is not yet a checklist for auditors in this space.
The path forward
Andries noted, “I wish there were a clearer roadmap, but we aren’t there yet.” As a result, those CPAs working with blockchain have a sharing community, learning from each other and making the journey together. The AICPA has been instrumental in facilitating this evolution.
I asked the three experts how they would proceed vis à vis blockchain if they were managing partners at their respective firms. Aprio’s Solanki recommended moving boldly forward without fear, and bringing your clients along with you. She believes the spoils will go to the proactive, not to those who rest on the sidelines waiting and watching.
All three explorers concurred that training to get firm members comfortable with the technology is a high priority. Mazars’ Sterley suggested building blockchain into your strategic planning for the future. Start thinking about what you will offer and how you will get up to speed. Survey clients to gauge their level of understanding and interest.
Armanino’s Verschelden weighed in, calling blockchain “a trustless, utopian world” that disrupts perceptions of traditional trust and value in the CPA domain, like the production of quarterly or annual financial statements.
Armanino recently released the world’s first real-time audit capability, Trustexplorer. It is a tool that utilizes blockchain technology to continuously collect audit evidence. It enables users to generate an audit report over balances that are never older than 30 seconds, on demand when the end user needs it. The technology reminds me of streaming on demand versus how we accessed audio/video in years past.
Our explorers agreed that it’s essential to ask the tough questions, i.e., will your culture support adoption of blockchain? How forward-looking is your firm? Are members locked into compliance mode, or are they ready to break out and innovate?
As you consider adopting blockchain as a strategic technology, note that it’s viewed as a plus by young accounting professionals and could even become a recruitment tool. Offering it may also win you points from tech-forward clients, and those whose trust in established financial institutions and structures has eroded over the years.
Said Verschelden, “We are providing trust today. But our trust-providing function will change dramatically and the value that we are bringing can’t be the way it’s always been through quarterly reports.”
Much remains to be known about the role and impact of blockchain in the future. But there is no doubt that it will continue to migrate from the perimeter into the mainstream of our profession. And our pioneers will continue to chart the course in delivering on-the-ground, real-life experiences.