Blockchain represents both an end and a beginning for the accountancy profession.
By Fearghal McHugh and Dr Trevor Clohessy
Transparency can be considered the holy grail of governance best practice. The codes, acts and markets demand it as it enhances the view of corporate transactions, which has in turn affected issues such as environmental and sustainability reporting. Transparency is the core of blockchain, which will affect accountancy while satisfying this core principle and driver of good corporate governance. The difference is that it will not take the blockchain elements outlined below as long to become mainstream as it has taken to impact on environment and sustainability concerns.
The consensus is that blockchain and its technologies will change the people skills, the processes, the systems and the structure of accounting practice currently applied to any transactions involved in the recording of any information. This has big implications for those in the sector but, significantly, gives a market opportunity to those who are not. Indeed, this opportunity is further enhanced when artificial intelligence integrates with blockchain.
Scale of disruption
The potential disruption is on the same scale as Amazon, which competes with all retail shops in the country. The first to market with the ‘Accountazon’ brand, named here first, will dent the current position of large or small practices. Accountazon requires accountants, but the ability to scale, integrate and generate output based on fully transparent and rules-based decision-making at the lower level of processing while, at the upper level, having the decision-making and knowledge base of a collective of highly-paid accountants will affect the accounting industry.
This can drive the accounting industry to build on specialisation and value proposition offerings at a higher level than those currently generating income. In other words, intelligent computer systems will do what accountants currently do. The impact will force the industry to seek a new place away from rudimentary transaction-type roles of fundamental audit and tax processes. This will require in-depth knowledge (which artificial intelligence can replace) to pure decision-making; in essence, the better the decision-making, the higher one’s revenue and reputation. The purpose and role of accountants will remain, but will be implemented at a higher knowledge application and analysis level and further away from the current operations position and perspective.
A personal approach
There is no need for panic yet. As with Amazon, retail shops have continued in business but the pricing, delivery, support, convenience and speed we enjoy from the online retailer may also need to be addressed in the accountancy industry; we need to make accountancy accessible, friendly, convenient, productive and transparent. Either the market or the technology will drive the change, or the accountancy industry will embrace it first and deliver value.
A Ryanair approach, encouraging a more direct business model using technology, could be applied in the accountancy industry and is more likely now with blockchain and artificial intelligence. The middleman remains the accountant, however, and if it is deemed that a lot of processes don’t add value, the middleman needs to present a value proposition that cannot be offered by the system itself in order to add future value. In the Ryanair model context, so many travel agents adjusted and seem to have found that personal service, customisation and the time taken to provide a tailored travel package for customers is what many consumers want.
The drive for digitisation
An example of a driver of this type of change arose earlier this year when the then-head of the IMF, Christine Lagarde, urged central banks to launch digital currencies to satisfy public policy, financial inclusion, security, consumer protection and privacy in payments. While blockchain is mostly linked with cryptocurrencies, digitisation policies embraced by companies like Nestlé, Guinness and Glanbia are being encouraged by stakeholders but embraced in a controlled manner.
Blockchain technology is part of the cryptocurrency system that actually worked. It is becoming embedded in many industries from manufacturing to web-based services, facilitating faster and more secure transactions on a growing scale. When companies and consumers have a better, easier, faster and more transparent way to do business, they will select it as time is a critical factor in corporate life. The practical elements and approaches to blockchain, as highlighted below, will be seen by clients as having the potential to reduce charges and the time involved in accountant reviews and advice, which Revenue could see as a means of speeding up returns.
Public versus private
Blockchain is not a mobile application, a company or a cryptocurrency. In its simplest terms, blockchain is a ledger that records transactions digitally and records details about the transaction. These details are recorded in multiple places on the same network. Blockchain comes in two flavours: public and private. A public blockchain allows anybody on the network to input transactions and data onto the blockchain. No single entity controls the network. A public blockchain operates like Wikipedia in that users have a composite view that’s constantly changing. Bitcoin, the tradename used to represent the familiar digital currency along with another called Ethereum are examples of public blockchains. Private blockchains work in a similar fashion to public blockchains, but with access restrictions that control who has access to the network. One or multiple entities control the network. Think of this in terms of a traditional database system that can only be accessed by specific authorised employees.
Two features differentiate blockchain digital ledgers from traditional ledgers. First, the assets and transactions recorded in these digital ledgers are secured through cryptography. As an example, in season four of the Netflix drama, Narcos, Guillermo Pallomari’s financial ledgers records are taken as evidence by the Drug Enforcement Authority (DEA). However, due to the complicated coding system deployed by Pallomari within these financial ledgers, the DEA is unable to decipher the transactions and/or assets in order to use them as evidence. Pallomari holds the encryption key, which would enable the DEA to crack the code. In terms of blockchain, this also holds true. Due to sophisticated encryption keys, the transactions and assets are secure, immutable and unforgeable. Second, blockchain encompasses the disintermediation of traditional financial intermediaries (e.g. banks, brokerages, mutual funds). This disintermediation is made possible by smart contracts, which are complex algorithms that execute the terms and conditions of a traditional contract without the need for human intervention. This leads to a superior ability to prove custodianship and ownership of assets, which could potentially improve efficiency and enhance transparency while also reducing costs and income in the accountancy profession.
Complexity and novelty
Today, a number of multinational technology organisations enable businesses to implement blockchain practically. For instance, Microsoft currently offers a blockchain development solution that combines the advantages of cloud computing (e.g. virtualisation, scalability, pay-as-you-go pricing model) and blockchain. This service is called Blockchain-as-a-Service (BaaS) and comes with a set of development templates (e.g. smart contract development and integration) that users can deploy and configure with minimal blockchain knowledge. However, prior to diving into the blockchain sea, accountancy organisations should adopt a caveat emptor mantra. History suggests that two dimensions impact on how a new technological trend and its business use can evolve. The first is complexity, which is represented by the level of coordination required by the organisation to produce value with the new technology. The second dimension is novelty, which describes the level of effort a user requires to understand the problems that the new technological trend can solve. The more novel a concept is, the greater the learning curve. Accountancy organisations can develop adoption strategies that map possible blockchain implementations against these two dimensions. Complexity and novelty can vary from low to high in terms of the stage of technology development. For instance, accountancy organisations that are new to the blockchain concept may want to introduce a pilot initiative that is low in novelty and low in complexity. One such initiative could encompass the inclusion of cryptocurrency transactions in a firm’s transactions processes.
New skills
While blockchain is spread across many systems, it is not public. It protects transactions because they are shared and copied on many parts of storage devices, and would require all parts and copies of the transaction to be amended and/or deleted to have an effect. Deleting a transaction in one place is easy, deleting it from several locations and tracking each one – while not impossible – would require some work. This capability could potentially scare some in that transactions cannot suddenly be erased, but it is encouraging for others. Apply this concept first to the level of payments and receipts and build that up to management reporting, budgets and strategic reports to ensure a higher level of accuracy and clarity. This will eventually lead to a sense of integrity, another governance ideal. With reference to speed, this can move business from reliance on past information to live analysis and if it’s faster, it will be cheaper in the long-run to produce. While a positive for business, it will not require the skill of a finance professional but a computing-finance professional.
In a 2018 Irish industry report, one of the authors, Trevor Clohessy, identified that IT/education providers must do more to demystify blockchain and expedite the learning process. The report outlined how the core competencies and skills required for blockchain are broader than the core technology and encompassed skill sets, which fall under the following categories:
- Foundational technology (e.g. cryptography, public key architecture);
- Distributed ledger technology (e.g. mining, consensus algorithms);
- Forensics and law enforcement (e.g. money laundering, dark-net);
- Markets, economics and finance (e.g. business modelling, cryptonomics);
- Industrial design (e.g. supply chain, Internet of Things); and
- Regulations and standards (e.g. smart contracts, governance frameworks).
From an accountancy perspective, it is envisaged that certain traditional skills relating to accountancy will be eliminated or reduced (such as reconciliations or provenance assurance, for example). Blockchain transactions will enable new value-adding activities but while the range of extant skills required will change, this change need not be Byzantine. It is envisaged that the markets and regulations categories outlined above will be important for bridging the blockchain literacy gap between various business and technology stakeholders. Looking ahead, accountancy practices can examine their business models in order to derive value from blockchain. Janus, the Roman god, contained both beginnings and endings within him. That duality characterises blockchain too. It will put an end to traditional ways of doing things and usher in a new era for business and for the world at large. It will be divisive, pervasive and transformational all at the same time, and will encourage accountancy professionals to look ahead and not base their operations and decision-making on past data. The blockchain future is one with present and predictive transacting data systems with in-built transparency and integrity.
Fearghal McHugh is a lecturer in Chartered Accountants Ireland and GMIT. Dr Trevor Clohessy is a researcher and lecturer in GMIT.