TechnologyBlockchain

26 August 2017

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Firms, such as the Big Four, are playing an active role in the global adoption of blockchain. Jemelyn Yadao finds

out how they are exploring this nascent technology and asks, will it really disrupt the profession?

MAKING SENSE OFBLOCKCHAIN

Illustrations by Ester Zirilli

M any believe that we are in the midst of the biggest revolu-

tion since the invention of the Internet. Blockchain, a distributed ledger spread across a network of computers, that can record transactions in a verifiable way without any trusted central authority, promises to transform the way in which people and busi-nesses cooperate, by streamlining processes, establishing trust and making it almost impossible to commit fraud.

The technology is full of prom-ise, and also confusion. “The real-ity is that most people, when they are talking about it today, really don’t have the depth of understand-ing required to make a decision on how to use the technology, where to apply it or how it can benefit their organization, but I think we’ll start to see a shift later this year,” Peter Smith, Chief Executive Officer and Co-Founder of Blockchain, the London-based start-up that allows users to store and transact with digital currencies using blockchain technology, told CNBC in an inter-view earlier this year.

Consulting firms, particu-larly the Big Four and mid-tier accounting firms, have been actively helping organizations understand, implement and use the technology. “It is a nascent

dialogue, but a vibrant one,” says Johnny Lee, Principal, Practice Leader Forensic Technology at Grant Thornton in the United States, adding the firm has been working on financial statement audits that have blockchain touch points for the last two years. For example, he notes, clients increas-ingly have accounts that they maintain in bitcoin – the virtual currency system, introduced in 2008, that eschews central authorities for issuing currency and confirming transactions. It is the first application of blockchain technology.

However, blockchain allows for much more than creating and transferring digital coins. “Our Spanish firm has a dedicated team of developers helping energy companies and telecom com-panies adopt this for inventory management and supply-chain uses. Our London firm is begin-ning to get serious enquiries to use this in court-related matters. We are certainly being brought more to the table in 2017 than any other prior year,” says Lee. “Our clients say, ‘We’d like to get your best thinking on this,’ and ask, ‘What are the risks? If we can make this work, what does that mean in terms of reduced audit fees or consulting needs or technology improvements?’”

Experimenting the possibilitiesThe Big Four currently advise clients on a range of blockchain-related issues – from the strate-gic approach and commercial deployment of blockchain-enabled solutions to providing assurance over a blockchain ecosystem. They are also known to be engaging in researching and developing block-chain applications.

In 2016, Deloitte created its first blockchain lab in Dublin, followed by the second lab in New York earlier this year. The third is being set up in Hong Kong to serve clients in Asia Pacific. In April, EY launched Ops Chain to help orga-nizations commercialize the use of blockchain technology across an enterprise.

PwC in March announced that it was exploring blockchain solutions with Alibaba Group with the aim of building better trust in the supply chain of food prod-ucts traded through the Alibaba platform. The e-commerce giant wants to address counterfeit and fraudulent food.

KPMG has been research-ing the digitization of trade and trade finance, and exploring its potential for streamlining compli-ance with Know Your Customer (KYC) requirements. At present, financial institutions must satisfy

What is blockchain?It's a shared ledger for recording the history of

transactions that cannot be altered.

Why do we need it?Transactions take place every second – orders,

payments, account tracking. Often, each

participant has his own ledger – and, thus, his

own version of the truth. Having multiple ledgers

is a recipe for error, fraud and inefficiencies.

The goal is to see a transaction end-to-

end and reduce those vulnerabilities.

How does it work?• Single shared ledger

that is tamper-evident. Once recorded,

transactions cannot be altered.

• All parties must give consensus before a new transaction is

added to the network.• Eliminates or reduces

paper processes, speeding up

transaction times and increasing efficiencies.

Source: IBM

August 2017 27

TechnologyBlockchain

KYC regulations for each existing and new customer, even though that customer has most probably completed a KYC process somewhere else before. Financial institutions such as banks are spending on average US$60 million per year on compliance with KYC, according to a Thomson Reuters survey last year.

Explaining how blockchain can help, James McKeogh, Partner at KPMG China, points to digital identity services, such as those currently provided to some governments to help them manage their citizens’ identities. “It is one thing for the government to external-ize information but the other thing is provid-ing verification services on that information – that is what everyone is looking for,” he says. “If I am doing KYC on somebody and I want to know who they are, what their date of birth is, I can either store that information on my [blockchain] system and use it as needed or request validation. I can then get a confirma-tion that says on this date the information was

valid and correct and there is the ‘hash’ – no risk of theft and violating privacy.”

The hash can be understood as a certifica-tion number that helps validate the “block” of records in the blockchain, explains Brian Chan, Partner at KPMG China. Each block is linked to the previous one with a hash, and the linked blocks form a chain, hence the name.

Understanding the drawbacksWhile the technology’s potential seems to be huge, there are hurdles to overcome. The chal-lenge of helping companies deploy blockchain is not at a technical level, says William Gee, Risk Assurance Partner at PwC China. “A blockchain ecosystem is about sharing and consensus, and often the challenge is to agree-ing what the participants within a blockchain ecosystem are willing to share, and the rules upon which to achieve consensus.”

Uncertain regulatory status is another challenge to implementation. “There are

virtually zero experimental business models being converted into commercial operations using blockchain currently. When you look at the pilots and the proof-of-concept such as identity management and KYC, they have proven conceptually that it works, however the business models and legal frameworks have not been established,” explains McKeogh at KPMG. “Building legal contracts into code to establish certain requirements around differ-ent transactions – that’s extremely difficult. How do you convert years of legal precedents into a computer program that everyone is going to agree with?”

Other constraints include the lack of interoperability and international standards for the technology, according to Paul Sin, Con-sulting Partner at Deloitte Hong Kong, mak-ing ecosystems incompatible with each other. This year, it was announced that Deloitte and a consortium of banks were working with the Hong Kong Monetary Authority to develop a proof-of-concept blockchain-based platform for trade finance. “This is only Hong Kong. But if the seller is in Hong Kong, and the buyer is in Singapore or Dubai, those countries will need to use the same underlying technology in order to share invoices. People using different technologies and different standards cannot talk to each other,” says Sin, who is closely involved in the HKMA project. “There are a lot of people working on the interoperability issue, like MIT labs, but it is still not com-pletely resolved.”

The disintermediation aspect of block-chains is considered a big advantage. Two par-ties are able to conduct an exchange without the need of a third party acting as an interme-diary, which helps to speed up the exchange. However, this aspect also “terrifies a lot of participants,” notes Lee at Grant Thornton. “In many transactions, there is a reliance on third-party verification for many different aspects of the transaction, such as valuation-related aspects. But third parties are used to also address hidden liabilities that are not self-evident, and the promise of blockchain will reduce or eliminate the need for such third-party verification,” he says.

McKeogh at KPMG agrees, following con-

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versations with clients. “People are uncom-fortable with the distributed nature. When you have a trusted third party providing a specific answer, you know who to sue when it comes to legal liability perspective. You can’t sue the entire ecosystem,” he says.

Real-time auditsOnly 4 percent of accountants identified blockchain as the disruptor that will have a great impact on their business 25 years from now, according to a recent survey conducted jointly by Thomson Reuters and the Chartered Institute of Management Accountants. This contrasts with the much-written-about idea of how blockchain is poised to eliminate traditional methods of invoicing and documentation for businesses, as well as the need for audits in the future.

Some experts say it is too soon for the doom and gloom talk. “The technology has the potential to significantly enhance the efficiency of processes surrounding routine transactions, but less so in areas requiring professional judgment,” says Gee at PwC. “Blockchain is but a collection of facts, and in itself is not an auditing or accounting system. Availability of facts kept in a blockchain solution can, of course, help auditors and accountants, but the extent to which the process can be streamlined would depend on the design and operation of the blockchain ecosystem, as well as any related aspects, such as applicable accounting standards.”

Others say that in the long term, audit firms could be able to do audits in real-time thanks to the technology, because all unchangeable transaction data is recorded to the distributed ledger. According to a EY report, “Blockchain might also be able to replace random sampling by auditors, by making it easier and more effective to check every single transaction using code. This would also make it easier to investigate fraud, since real-time systems could highlight and investigate anomalies.”

In the meantime, CPAs are encouraged to keep themselves informed about this new technology and embrace changes on the horizon. “In jurisdictions where the

standards are very set, and there are policy-makers that are amenable to this trend – which is very hard to ignore – I think there will be attempts to integrate blockchain technol-ogy over time into the audit. Certain assets held in bitcoin, for example,” says Lee at Grant Thornton. “We see it in isolated inci-dents now in the U.S. but I predict in six to 12 months we will see more clients demand-ing a larger component or at least contem-plate blockchain as a potential avenue for conducting audits of various kinds.”

With the potential of new technologies, such as blockchain applications, still unravel-ing, firms are forced to rethink their future

talent needs. “Talking about blockchain, we will need accountants with multi-disciplinary capabilities. There is a lot of repetitive procedures that can now be done by AI. A lot of manual work will be minimized,” says

Peter Koo, Partner of Advisory in Audit and National Leader of IT Advisory at Deloitte. “We need CPAs no matter what, but we need ones who are open to IT and have good business sense plus strong soft skills. The future of accoun-tants is that they’ll become half accoun-tants and half advisors

specialized in different businesses or industry domains. This will be the new generation of accountants.”

“ When you have a trusted third party providing a specific answer, you know who to sue when it comes to legal liability perspective. You can’t sue the entire ecosystem.”

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