For all the buzz around blockchain and its transformative potential for the profession, accountants should bear in mind that it’s an evolution, not a revolution
This article was first published in the April 2017 international edition of Accounting and Business magazine.
‘Like a rush-hour gridlock trapping a Formula 1 race car,’ is how Harvard professors Marco Iansiti and Karim Lakhani described the records of transactions that underpin the world’s economic and legal systems and are threatening to clog up global financial networks.
Real-time, global transactions taking place 24 hours a day, seven days a week and computer-generated trading activities that are measured in milliseconds are just a couple of examples of how today’s financial system is very different from just a few years ago. The challenge is to have a system of administration that is trusted, transparent and able to cope. With central clearing houses, accountants and audit firms stretched to the limit in trying to keep up with increasing and changing demand, the arrival of a radical new approach to the underlying support structure couldn’t come soon enough.
Enter blockchain, a system based on distributed ledgers and computational logic (see box) that could provide the means to overcome the congestion, and on which the professors were focused.
Billions have been poured into the development of blockchain by financial institutions, venture capitalists and governments alike in a frenzied and sustained period of investment. Make no mistake, blockchain is in for the long haul, and finance professionals, like everyone else linked to the financial system, must adapt.
Transforming the infrastructure
One of those financial institutions making a bet on blockchain fundamentally rewriting the rules of global commerce is Deloitte. The Big Four firm has invested heavily in the technology, and in January opened a new blockchain lab in Dublin, Ireland, which by the end of the year will be home to 50 developers and designers who will work on the technology full time.
‘We are still at the early stages of the adoption of blockchain technology,’ says David Dalton, a financial services partner at the firm. ‘But it is becoming increasingly clear that it is transforming the infrastructure that underpins financial services and other industries.’
For the accounting profession, the impact could be particularly fundamental, with blockchain finally superseding a system of financial governance and control that’s been around for the best part of 2,000 years: double-entry bookkeeping.
In a recent white paper, again published by Deloitte, the firm lays out scenarios for the impact blockchain might have. ‘Companies would benefit in many ways: standardisation would allow auditors to verify a large portion of the most important data behind the financial statements automatically,’ it claimed. ‘The cost and time necessary to conduct an audit would decline considerably.’
The paper goes on to explain how the impact of blockchain on the accounting process, while fundamental, will be evolutionary rather than revolutionary. It can be gradually introduced within the chain of activities, bringing increased value and security along the way. But, claims Deloitte, ‘at the end of the road, fully automated audits may be reality’.
While the buzz surrounding blockchain is inescapable, and it’s clear that the technology is here to stay, we shouldn’t overestimate the speed with which it becomes embedded into our everyday business-to-business and accounting activities. As the Deloitte paper points out, blockchain is bringing gradual, rather than sudden, change to our world. Or, in other words, the technology will bring foundational change, where an entire system and way of working must be rebuilt over time.
This gradual pace of change is a good thing, and will allow industries and professions to adapt over time rather than being forced to react to the immediate implications of a sudden and disruptive technology change.
Narayanan Vaidyanathan, who develops ACCA’s research on the future of accountancy, and is the author of its report on blockchain due out this month, explains that the technology has potentially far-reaching implications for accounting and business, but needs a few years to mature. ‘The headline message of the report is that you need a measured approach to it,’ he says. ‘It’s not going to solve everything, and it’s important to understand where it is relevant and where it is not.’
This second point of Vaidyanathan’s is particularly important, given the membership of ACCA and the fundamental role of the profession. There have been countless headlines about artificial intelligence and machine learning leading to rampant job erosion, with accountants often being squarely in the firing line. Similarly, blockchain has been cited as providing the essential component of trust that has traditionally been provided by accountants and is required to facilitate a successful financial system.
Vaidyanathan explains: ‘We need to draw a distinction between revolutionising the transactional reporting cycle to better manage volume and scale (which is an area that can benefit from blockchain) and focusing on other activities pertinent to the role of professional accountants. There are aspects to understanding and driving a company’s performance that are not directly definable from the ledger.
‘Sensible valuation estimates might require an understanding of information outside a blockchain such as future outlook. Effective finance business partnering relies on human judgment and communication to balance priorities such as supporting a business unit’s divisional growth ambitions, alongside applying a risk, governance or ethical lens.’
He is essentially referring to going beyond the literal definition of a task. For example, conceptually, the blockchain allows for all entries to be visible to the auditor in a transparent way. So it then becomes a question of understanding the extent and manner in which the auditor questions what is in front of them as part of professional scepticism.
Sticking with this audit scenario, it isn’t outside the realms of possibility for a company to want to understate its liabilities and not present what the auditor might consider a ‘true and fair’ view. It’s the auditor’s job to look out for these things (and related party accounts or other indicators) to suggest that certain areas need to be explored in more detail. In a blockchain world, all this would depend very directly on the absolute confidence that there is no way the company could exclude a transaction on its distributed ledger.
Vaidyanathan says: ‘If you are relying on a bit of kit to tell you everything, that clearly has some implications. In general, technology works best when combined with human judgment. It is possible that, in future, accountants may increasingly need to adapt from auditing the transactions to providing some form of audit or assurance with respect to the systems that spit out the transactions.’
Deloitte isn’t the only Big Four firm to focus on blockchain; days after its Dublin announcement, KPMG and Microsoft revealed that they were partnering on something called Blockchain Nodes, a series of innovation workshops focused on the development of the technology.
‘The Blockchain Nodes will play a critical role in identifying new applications and use cases that blockchain can address,’ says Eamonn Maguire, head of digital ledger services at KPMG. ‘They will enable us to work directly with clients to discover and test ideas based on market insights, creating and implementing prototype solutions that use this innovative technology.’
Ratings and research firm Moody’s is another organisation taking a keen interest in the potential impact that blockchain might have on the global financial system, and last year published a report highlighting what it believes to be the 25 top use cases, categorised into four different types of stakeholder: financial institutions, corporates, governments and cross-industry groups. Applications range from regulatory compliance and audit, financial management and accounting, and trade finance through to supply chain management, identity management and the Internet of Things.
But while the report clearly recognises the potential impact of blockchain, it also brings a degree of realism. ‘There is significant enthusiasm for the potential of the technology, but there is still a limited track record of large-scale blockchain implementation in a regulated environment, and many hurdles lie ahead before we see widespread applications,’ says Robard Williams, senior vice president at Moody’s.
A framework for adoption
Perhaps the best way of looking at the technology’s pace of development and potential is to return to Harvard Business School (HBS) professors of business administration, Iansiti and Lakhani. They have developed a framework for blockchain adoption that, while they conclude that the technology is ‘decades’ from reaching its full potential, allows them to predict which kinds of applications will gain traction first.
By analysing how foundational technologies take hold, Iansiti and Lakhani surmise that it happens in four broad phases, each of which is defined by the novelty of the application and complexity of the coordination efforts needed to make them workable. Those low in novelty and complexity are first to take hold, while those high in both can take a great deal of time to become embedded into our lives. They have named the resulting quadrants single use (low novelty, low complexity); localisation (high novelty, low complexity); substitution (low novelty, high complexity) and transformation (high novelty, high complexity).
Bitcoin payments fall at the bottom end of the scale within the ‘single-use’ quadrant because they are typically one-to-one in nature and used as a simple alternative payment method. Within the ‘localisation’ quadrant, the professors point to private online ledgers to process financial transactions; in ‘substitution’, to retailer gift cards based on bitcoin; and in ‘transformation’, to self-executing smart contracts.
On this last point, the implications for traditional professions may be felt the most. ‘Smart contracts may be the most transformative blockchain application at the moment,’ Iansiti and Lakhani wrote in a recent issue of the Harvard Business Review. ‘These automate payments and the transfer of currency or other assets as negotiated conditions are met. The implications are fascinating. Firms are built on contracts. If contracts are automated, then what will happen to traditional firm structures, processes and intermediaries like lawyers and accountants? Before we get too excited here, let’s remember that we are decades away from the widespread adoption of smart contracts.’
However, this doesn’t mean that accountants – in practice and in business – shouldn’t be putting a great deal of thought into the subject right now. The HBS framework can help in guiding that thought and lead to the beginnings of a strategic plan being put in place.
Nor, according to Vaidyanathan, should accountants be fearful or suspicious of the technology: ‘If this plays out in the right way, it will be a huge advantage because it takes away from the professional accountant the relatively low-value tasks, and allows the focus to stay firmly on activities with a direct link to business value. What technology does better than a human, technology should be allowed to do; humans should focus on what humans can do better.’
David Rae, journalist
"It's not going to solve everything, and it’s important to understand where it’s relevant and where it is not"