Reprinted with permission from the Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of Certified Public Accountants.

CPAs must be aware of emerging technologies that have the potential to disrupt their profession. Blockchain technology is one of them. Blockchain streamlines trans-action accounting and enables real-time reporting and real-time audit. We are still at the early days of the technology, but considering the potential impact on the profession, CPAs need to understand what this new technology will bring.

Blockchain technology has been in the headlines of several publications and a hot topic at conferences. Many see in it a platform that has the potential to disrupt a vast array of industries. Still, there is tremendous confusion about the technology and how it is supposed to replace existing technologies. Generally, blockchain consists of a distributed ledger system that operates on a consensus basis, empowering peer-to-peer networks with a more secure and efficient way to transact, record, and analyze transactions in real time. This feature focuses on the status of the technology and its potential implications for our profession.

What Is Blockchain?

First known as the distributed ledger system behind the bitcoin digital currency, blockchain technology has evolved rapidly with the proliferation of competing products (Ethereum, Ripple, Digital Asset, among others). It is now considered much more than a digital currency infrastructure. According to technology research firm Gartner, there are more than 70 blockchain platforms on the market and at various stages of maturity.1

Blockchain is a type of highly secure, distributed ledger system accessible via a public or private network, where each server on the network has a copy of the system. Data is replicated among all servers on the network in real time and is encrypted. Each time data is recorded (from an authorized user, device, or machine connected to the system), it is validated by a consensus mechanism, time stamped, and recorded on a block – sort of a file of data, like a ledger page. To ensure that data is not tampered with, each block is “attached” or linked to the previous block by a cryptographic algorithm called a hash. Blockchain draws its name from this concept of chronological series of “hashed” blocks of safeguarded data that form a chain. The system is highly secure. To alter the data, hackers would face a much higher level of complexity due to the consensus and hashing algorithms, but also because a hack would have to attack all the servers at the same time.2

Here are some of the benefits of blockchain:

• Authentication of transactions or exchanges of information

• Peer-to-peer transactions or exchanges of information without an intermediary or clearinghouse

• Automated and highly secure record keeping

• Smart contracts: automated contract execution and processing when conditions are met, based on algorithms

• Real-time audit capabilities

• Registry and tracking of the ownership of assets

Conflicting Views on Blockchain

Blockchain tends to generate two conflicting views: enthusiasm and skepticism. As is often the case, there is likely some truth in both positions. Large-scale adoption of the technology might be a matter of how quickly the concerns raised by skeptics will be addressed by the promoters.

Blockchain enthusiasts believe that the technology will become the infrastructure of choice for managing exchanges of value moving forward, just as the Internet provided the infrastructure for managing exchanges of information.3 They say it will profoundly change the way transactions are processed, recorded, and analyzed. They believe that blockchain technology is moving fast (faster than we might imagine), and the time to learn and experiment with the technology is now.

For the skeptics, the technology seems too good to be true, and that currently it is not trusted by users or regulators. They caution that it is not mature, not scalable enough, and lacks standards. They add that there is significant risk if credentials are compromised or stolen, and there are concerns it might be vulnerable to programming errors or system weaknesses (such as the vulnerabilities behind the scandal of the popular bitcoin exchange, Mt. Gox, in 2014).4 They argue that there are insufficient controls in place to ensure that the system is functioning as intended.

The technology seems to be advancing quickly to address the concerns, and some new consortia have emerged (including Hyperledger, R3, Hashed Health) to accelerate the definition of industry standards and foster collaboration. New approaches to security and privacy controls for the technology also are starting to emerge.5

How Real Is It?

Business and technology leaders across multiple sectors of the economy are envisioning potential applications of the technology in many areas. Financial services firms have started to deploy the technology, mainly in experimental projects. The small steps are testing the technology in selected areas, such as identity management, cross-border payments, and currency exchange transactions. The number of use cases has increased significantly over the past two years, not only in the financial services sector, but also in utilities, manufacturing, supply chain, health care, telecommunications, and government. Use cases (“proof of concept” projects) range from global trade and payments to secure document and records management (such as voting records, mortgage loan records and documents, medical records, intellectual property, and so on) or digital asset management (including stocks, bonds, derivatives).

In a recent report, Gartner says blockchain is at an early stage of its development, with highly fragmented solutions and a lack of industry consensus on the functional and technical scope of the technology.6 Gartner has identified what it thinks will be characteristic of blockchain platforms:

• A distributed ledger that serves as an authoritative record of significant events (which can include monetary transactions, but not solely limited to that use case)

• A (theoretically) immutable, tamper-proof, uncensorable record

• Cryptographic algorithms and consensus protocols ensuring data consistency

•  An ability to record additional state information beyond recording transaction data
• Programmability, from simple scripts to more powerful programs such as “smart contracts” that can generate transactions
• Trust in a third party or centralized entity for certain functions, such as identity management or access control to a closed, private network

Blockchain aims to provide a digital infrastructure that will enable users to create and exchange value (not just money) across global peer-to-peer networks. The full disruptive potential of blockchain will come from its combination with other technologies, such as mobile computing, the Internet of things, data analytics, artificial intelligence, and machine learning. Blockchain will likely be part of the infrastructure that will empower these technologies as they come together in the new digital economy. This means that interoperability and standards will play a critical role for the technology to achieve its potential.

Potential Implications for CPAs

Double-entry accounting has been the basis for financial reporting for businesses throughout the world since the middle ages. However, in order to trust accounting records, costly reconciliations, confirmations, verifications, and audit procedures must be performed by the firm and its counterparties, as well as by auditors. Blockchain facilitates the innovation of a triple-entry accounting system; a system whereby all transactions are cryptographically sealed by a third entry and reside in a shared ledger. The third entry serves as a digitally signed receipt for the parties involved in the transaction, which can be verified without the need for a central certifying authority or a clearinghouse.

The implications of blockchain are potentially transformative, affecting CPAs in accounting, audit, tax, and advisory services. Big Four and large professional services firms already recognize the importance of blockchain. Deloitte, for example, recently announced a blockchain team of 800 professionals in 20 countries to develop applications in banking, cross-border payments, trade, and finance.7 PwC notes that blockchain may “structurally alter shared practices between customers, competitors, and suppliers.”8 For example, blockchain can improve the accuracy and efficiency of the billing and payment process, potentially minimizing disputes that arise from errors or missing invoices. Rather than sending a traditional invoice to a customer, Firm A shares invoices directly with the accounts payable department of Firm B, in real time, on a multiparty digital ledger.9 With the use of smart contract technology, Firm B could automatically pay the invoice after the computer confirms receipt of goods and checks for sufficient funds in the bank account.

Blockchain may extend far beyond accounts receivables and payables. In a recent article,10 Jun Dai and Miklos A. Vasarhelyi discuss how blockchain, coupled with smart-contract technology, could be used to automatically initiate performance-based compensation to managers based on predefined criteria. They also discuss how blockchain could be used to automate revenue recognition based on algorithms and data from shipping activities recorded in the blockchain ledger system.

Blockchain transactions are time-stamped and immutable, so auditors would benefit from traceable trails and the automatic authentication of transactions. Deloitte notes that the standardization created by blockchain could allow auditors to verify vast numbers of transactions underlying the financial statements automatically.11 For example, if complete data on inventory activity is recorded in a blockchain ledger system, auditors could determine the inventory balance remotely and in real time. As a result, the audit would evolve significantly, allowing auditors to spend more time on value-added insights, such as predictive analytics, internal control improvements, and other areas requiring human judgment and complex problem-solving.

Blockchain-based automated audits would also allow financial statement users to access information more quickly, more efficiently, and at the appropriate level of detail. Company management and auditors, for instance, may need full access to the data in the distributed ledger system, while investors may only need access to high-level financial summary information and key financial metrics such as revenue growth, profitability, and earnings per share.

Channing Flynn, a global technology leader at EY, speculates on the disruptive implications for corporate taxpayers, tax authorities, and tax practitioners – assuming the hurdles to widespread adoption are overcome.12 For example, transactions recorded in a real-time blockchain system would facilitate automatic tax reporting, and government tax authorities could streamline or accelerate certain tax computations and payments. As a result, Flynn can see certain tasks of tax advisers shifting from tax compliance administration to tax-knowledgeable blockchain systems expertise.

CPAs practicing in advisory services also would be affected. In the same way that CPAs have been assisting clients with accounting system implementations and system control audits, CPAs are likely to be involved in or solicited for advice on blockchain systems adoption, implementation, and integration. There will be growing demand for cybersecurity and tech-based audit expertise around blockchain, as well as blockchain system implementation. CPAs are well positioned to play a role in these areas.

What You Should Do

CPAs in practice and industry should become knowledgeable about blockchain technology and how it might affect their firm or business, as well as the CPA profession in general. Significant developments are expected in the near feature, and it is critical that CPAs keep up to date and prepare for potential disruptions. This includes incorporating blockchain in your strategic planning process and engaging in conversations with your technology vendors and partners about their own plans regarding the technology. Blockchain is in the early stages of implementation, but some professional services firms are already leading the way in collaborating with the tech industry to realize its benefits. EY, for example, recently announced the launch of EY Ops Chain, a set of applications and services to help firms leverage blockchain technology to enhance operations and drive growth.13 KPMG LLP and Microsoft announced a partnership to create a series of innovation workspaces and other initiatives dedicated to developing use cases and applications of blockchain technology.14 

For CPAs looking for opportunities to learn more about blockchain, the PICPA plans to enhance its course offerings. Also, several other organizations offer training programs and online resources, such as O’Reilly Media’s Safari (CPAs who hold a CITP credential and members of the AICPA Information Management and Technology Assurance section have unlimited access to this learning platform), Lynda.com, Edureka, Udemy, or Microsoft Virtual Academy. For example, Edureka offers an online certification training program for a fee. These instructor-led classes provide case studies and access to a platform that uses programming language to setup a private blockchain environment. Microsoft Virtual Academy, on the other hand, provides free online courses on a variety of topics, including distributed ledgers, smart contracts, and decentralized applications.
Blockchain may be in its infancy, but CPAs should become knowledgeable about it and its disruptive potential for the profession. The automation, high degree of security, and instant verification features of blockchain technology are expected to transform the way transactions are executed, recorded, authenticated, disseminated, and analyzed. Should the full potential of blockchain be realized, CPAs will likely need to transition from compliance and verification activities to providing value-added services that require more human judgment, analysis, and critical thinking.

1 Gartner Research Note, “Top 10 Strategic Technology Trends for 2017: Blockchain and Distributed Ledgers,” March 21, 2017.
2 For more on blockchain and how it works, check out the EY video at www.ey.com/gl/en/services/assurance/ey-reporting-blockchain-and-the-futu... or read “Building Blocks: How Financial Services Can Create Trust in Blockchain,” PwC, May 2017. www.pwc.com/us/en/financial-services/publications/financial-services-blo...
3 Don Tapscott and Alex Tapscott, “How Blockchain Will Change Organizations,” MIT Sloan Management Review, Winter 2017, Vol. 58., No. 2.
4 Robert McMillan, “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster,” Wired, March 3, 2014; P.H. Schumpeter, “Bitcoin’s Woes – Mt Gone,” The Economist, Feb. 25, 2014.
5 Robert E. Samuel, “A Layered Architectural Approach to Understanding Distributed Cryptographic Ledgers,” Issues in Information Systems, 17.4 (2016); A. Michael Smith, “Creating Assurance in Blockchain,” ISACA Journal, Vol. 2, 2017.
6 Gartner Research Note, “The Evolving Landscape of Blockchain Technology Platforms,” March 2, 2017.
7 “Deloitte Launches Blockchain Lab in New York, Increasing Focus on Key Technology in ‘Make-or-Break’ Year,” Deloitte press release, Jan. 12, 2017. www2.deloitte.com/us/en/pages/about-deloitte/articles/press-releases/deloitte-launches-blockchain-lab-in-new-york.html
8 “PwC, 2016. “What’s Next for Blockchain in 2016?” Fintech Q&A, a publication of PwC’s Financial Services Institute, January 2016. www.pwc.com/us/en/financial-services/publications/viewpoints/assets/pwc-...
9 Cesar Bacani, “Blockchain Will Revolutionise the Profession,” Accounting and Business, May 1, 2017. www.accaglobal.com/us/en/member/member/accounting-business/2017/05/in-fo...
10Jun Dai and Miklos A. Vasarhelyi, “Towards Blockchain-Based Accounting and Assurance,” Journal of Information Systems, 2017 (In Press). https://doi.org/10.2308/isys-51804
11 “Blockchain Technology: A Game-Changer in Accounting?” Deloitte, March 2016. www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/Blockchain_A%20game-changer%20in%20accounting.pdf
12 Channing Flynn, “Preparing for Digital Taxation in a Blockchain World,” International Tax, Bloomberg BNA. Nov. 28, 2016. www.bna.com/preparing-digital-taxation-n73014447764
13 “EY Infuses Blockchain into Enterprise and Across Industries with Launch of EY Ops Chain,” EY press release, April 26, 2017. www.ey.com/gl/en/newsroom/news-releases/news-ey-infuses-blockchain-into-...
14 “KPMG and Microsoft Announce New ‘Blockchain Nodes,’” KPMG press release, Feb. 15, 2017. https://home.kpmg.com/us/en/home/media/press-releases/2017/02/kpmg-and-m... 

L. “John” Alarcon, CPA, CGMA, CITP, is chief financial officer for LoanLogics Inc. in Feasterville-Trevose and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at [click-for-email].

Cory Ng, CPA, DBA, CGMA, is an assistant professor of instruction in accounting at the Fox School of Business at Temple University in Philadelphia and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at [click-for-email].