One of the common misconceptions about blockchain is that it’s one technology. You may have heard or seen references to companies tracking supplies on the blockchain or smart contracts being executed on the blockchain.
Fact is, there are many blockchains. The original blockchain was created to facilitate and record transactions of the digital currency bitcoin. Since then, blockchain technology has been used for myriad purposes: among them the automation of contract execution (smart contracts) on the Ethereum platform and the tracing of lettuce and other leafy greens in the Walmart supply chain to more quickly find sources of contamination in the event of illness outbreaks.
Just as there are many blockchains, there are differing opinions on how much and how quickly blockchain will affect the accounting profession. A few of those opinions drive much of the conversation in Part 2 of the JofA’s annual accounting technology roundtable.
Part 1 of the discussion, published in the July JofA, focused on technology’s role in the early days of the COVID-19 pandemic and also the short- and long-term outlook for automation technologies, including robotic process automation. In addition to blockchain, Part 2 touches on artificial intelligence.
Participating in the discussion were:
Donny Shimamoto, CPA/CITP, CGMA, founder and managing director of IntrapriseTechKnowlogies LLC, a CPA firm focused on helping not-for-profits and small and midsize businesses manage their technology, risk, and growth.
Amanda Wilkie, a consultant with Boomer Consulting and former chief information officer with top 30 accounting firm WithumSmith+Brown.
Nikki Winston, CPA, who helps candidates prepare for the CPA Exam and provides small business accounting, controllership, and advisory services through her firm, The Winston CPA Group.
Will blockchain revolutionize accounting or will it never live up to the hype?
Winston: Blockchain can be argued from both sides. You think about the transactions residing in this shared ledger. There’s this decreased risk for the fraudulent or collusive activity, but then again, if you have sound internal controls, this should be captured within your risk environments.
So does this one benefit outweigh the other things?
Wilkie: You mentioned the importance of internal controls, and I think that’s what we’ll see in a blockchain world. You can trust the transactions and the information coming out of the system. So the focus is going to be much more on how the information gets into those systems and about front-end process and internal controls.
I think there is still a great amount of fear about blockchain or the machines kind of taking over the role of the CPA, and that’s not going to happen. The role is definitely going to change, but I think that some of the fear is going to have to be addressed and overcome before CPAs are really going to embrace the technology.
Winston: I think there’s a lot of conversations that are being had, but before we take action, we need to decide if this is the right thing to do. I don’t think this debate is going to go away anytime soon.
Shimamoto: Let’s take the first point where it’s about the internal controls, because that is actually one of the reasons why I don’t think within accounting itself — and I want to be very specific, within accounting itself — I don’t think we’re going to see a ton of blockchain adoption. That’s because for blockchain to be able support the internal control environment, all of the automated controls and checks that are already built into enterprise resource planning (ERP) software would need to be built into the blockchain smart contracts.
And everyone talks about the blockchain smart contracts like, “Oh, it will do all these wonderful things.” Well, the reason the contracts do these wonderful things is that there is programming sitting behind them. And the programming sitting behind them is no different than the program that’s required to run an ERP.
So the migration of all the controls and those processes within the ERP into a blockchain smart contract would take way more effort than it would if you continue to operate within the ERP. So unless we can actually see some of that start to migrate or become a lot easier, I’m not seeing a wholesale move away from ERP into blockchain.
Wilkie: I’ve got to agree with you there, Donny. I think in accounting specifically it’s going to take a lot longer for true blockchain-based systems to be adopted.
I think we’ll eventually get there because to your point, a smart contract is just another piece of code. It’s just another part of an application to execute some of these terms and conditions or to implement some of these internal controls.
I just think it’s going to take a lot longer. I don’t think it’s impossible. I think the technology will mature. I think the profession — and society — will become more comfortable with smart contracts and with blockchain, but it will take a long time to get there in accounting.
Shimamoto: The supply chain is one of the areas where I think there is a huge potential for blockchain. If we can actually track food from the farm or products from the manufacturing out through the distribution chain, through warehousing and then distribution and then eventually to the final destination, that is a completely valid use of blockchain.
Here’s another very valid use of blockchain. Consider the information from the supply chain: the quantities that are passing through each stop on the chain, when they're passing through each point, when they arrive in stores. That nonfinancial information can be pulled into the accounting system to then be used to do accounting processes such as the three-way match, such as the validations on purchase orders or validations on invoices or write-offs, which might occur, for example, if you need to write off a frozen food product that spoiled because the temperature went too high in either storage or transportation.
How can blockchain be used to help drive the movement to artificial intelligence?
Shimamoto: This is actually a good time to bring in the fact that artificial intelligence can help us to automate some of the accounting functions. And what artificial intelligence needs is data to learn from. It needs a large set of data that demonstrates, for example, that when these data points are there or these data elements and these values are there, this is the way that we would handle this transaction.
So if we’re able to get a large volume of data from blockchain with all of these additional data points as they are moving through the supply chain, those different things could be used to actually help teach the artificial intelligence to then work with the accounting, perhaps with auto-classified transactions or auto-substantiated transactions or detection of fraud. It can just kind of throw a wide net out there really quickly.
Wilkie: I will piggyback off of that a little bit, because when I hear things like blockchain and automation, I naturally start to think about the convergence of some of these technologies, because blockchain isn’t the only technology that is going to lead to that automation. We’ve got to have the data from devices that are on the internet of things [IoT], and so you have a lot of IoT devices that are going to work with blockchain to serve up that data.
The emergence of things like 5G cellular is going to allow us to have more of those devices online and faster connectivity for those devices. So those devices on the internet of things, paired with the speed and the capacity of 5G and then things like the immutability of blockchain, are going to feed all of that into AI, and that’s going to give us all of this additional data that’s going to help the CPA of the future really become more of that business adviser and consultant to their clients.
Winston: I’ll speak from the business owner and CPA perspective. There’s going to be a learning curve to understanding the technology to make certain that you’re making the right selections when it comes to the platforms and apps that make your business run more efficiently. There’s also an onus on us as CPAs to evaluate what we’re doing and redefine our roles to expand our thinking just beyond those debits and credits to say, “Hmm, maybe that technology will help me. Maybe it will eliminate some of these mundane tasks that I have on my to-do list.”
And instead of allowing the technology to drive what we’re supposed to be doing, we really need to think about it in the reverse, saying something like, “As a CPA I’m providing value. I’m trying to make my firm more efficient. What are some things I need to be thinking about?”
I’m thinking also about what I learned from the IT part of the BEC (business environment and concepts) section of the CPA Exam about internal controls and really wanting to learn more about that. Because as we transition from a manual environment to a more automated environment, we’re going to have to revisit our controls and any type of mitigating factors that we have in place, because they are going to change as our processes change.
Wilkie: For some CPAs, technology is not going to be something that they’re passionate about, but that doesn’t mean that they’re going to be left in the dust. It means that they need to partner with people who can help them understand the technology. I think that’s going to be very important.
Shimamoto: What’s causing a lot of the change resistance right now is that a lot of CPAs, especially at the partner level, have been able to know pretty much everything about what’s happening and how it’s happening in their firms. Now with the technology coming in, these CPAs still need to understand what’s happening, but in some cases they don’t necessarily have to understand some of the how.
What kind of time frame are we talking about for seeing these changes?
Winston: It’s hard to put a time stamp on it because it’s such a dramatic change.
Wilkie: I think it depends on the industry that you’re in and the industries that you serve. If you look at areas such as transportation and supply chain, those are going to use IoT and leverage 5G and leverage blockchain a lot faster than other industries.
Shimamoto: With blockchain, what you really need to be doing now is starting to develop your understanding of internal controls and how internal controls are going to change when they’re automated or built into a blockchain system and integrated.
Then that is something that you need to start developing now because it won’t come overnight.
— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.