Fluent Essays

In Module 5, weve learned about blockchain and Auditing. Please review all materials posted in this module, and submit a thoughtful discussion post in response to the readings. Specifically, you’ll have to: (1) summarize and explain the main points of the articles that you choose from the assigned papers  (2) conclude with your own opinion about the issue being discussed in the article. Your opinion can be supported by personal experience, specialized publications, textbooks, and/or scholarly research.  Discussion posts should be no shorter than 200 words (approx. 10 lines of text) and should cite at least 3 sources outside the textbook and followBlockchain Technology A game-changer in accounting? 2 Introduction Blockchain technology has the potential to upend entire industries. Especially the financial sector may undergo disruptive change. Although this technology caught the attention of many of the largest financial institu- tions, use cases still remain in the experimental phase. This whitepaper lays out the benefits of the blockchain technology for specific use-cases in accounting across industries. Current state of accounting technology Digitalisation of the accounting system is still in its infancy compared to other industries, some of which have been massively disrupted by the advances of technology. Some of the reasons may be found in the exceptionally high regulatory requirements in respect to validity and integrity. The entire accounting system is built, such that forgery is impossible or at least very costly. To achieve this it relies on mutual control mechanisms, checks and balances. This inevitably affects every day’s operations. Among other things there are systematic duplication of efforts, extensive documentations and periodical controls. Most of them are manual, labour intensive tasks and far from being automated. To date, that seemed to be the sacrifice of revealing the truth. The recently emerged Blockchain is a trustless, distributed ledger that is openly available and has negligible costs of use. The use of the Blockchain for accounting use-cases is hugely promising. From simpli- fying the compliance with regulatory requirements to enhancing the prevalent double entry bookkeeping, anything is imaginable. The giant leap: How the Blockchain may enhance today’s accounting practice Modern financial accounting is based on a double entry system. Double entry bookkeeping revolutionized the field of financial accounting during the Renaissance period; it solved the problem of managers knowing whether they could trust their own books. However, to gain the trust of outsiders, independent public auditors also verify the company’s financial information.1 Each audit is a costly exercise, binding the company’s accoun- tants for long time periods. 1 Stakeholders place their trust in the auditors retained by management to vouch for them. An obvious problem of agency is created by this arrangement: Do auditors work for the managers who hire and pay them or for the public that relies on their integrity in order to make decisions? $ Complete, automated audit of all transactions Blockchain entry serves in both companies accounting Every transaction becomes notarized Courts Banks Tax authorities Auditors Blockchain B Company BCompany A Fig. 1 – Blockchain technology enables complete, conclusive verification without a trusted party 3 Blockchain technology may represent the next step for accounting:2 Instead of keeping separate records based on transaction receipts, companies can write their trans- actions directly into a jBlockchain Technology and Its Potential Impact on the Audit and Assurance Profession Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession DISCLAIMER This paper was prepared by the Chartered Professional Accountants of Canada (CPA Canada) and the American Institute of CPAs (AICPA), as non-authoritative guidance. CPA Canada and AICPA do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material. Copyright © 2017 Deloitte Development LLC. All rights reserved. This publication is protected by copyright and written permission is required to reproduce, store in a retrieval system or transmit in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise). For information regarding permission, please contact [email protected] v Table of Contents Executive Summary 1 The ABCs of Blockchain 3 What Is Blockchain Technology? 3 Characteristics of a Blockchain 4 What Are the Benefits? 4 Blockchains Are Not Made Equal 5 Permissionless Blockchain 5 Permissioned Blockchain 6 Evolution of Blockchain: Smart Contracts 6 Where Can Blockchain Be Applied? 8 The Potential Impact of Blockchain on the Financial Statement Audit and the Assurance Profession 9 Financial Statement Auditing 9 How Audit and Assurance Might Evolve with Blockchain 10 Opportunities for Future Roles of the CPA in the Blockchain Ecosystem 11 Auditor of Smart Contracts and Oracles 11 Service Auditor of Consortium Blockchains 12 Administrator Function 12 Arbitration Function 13 Blockchain Technology and Its Potential Impact on the Audit and Assurance Professionvi Conclusion 15 Call to Action 16 Other Resources 17 About the Authors 17 About Deloitte 17 1 Executive Summary Blockchain was first introduced as the core technology behind Bitcoin,1 the headline-grabbing decentralized digital currency2 ecosystem proposed in 2008. The appeal of blockchain tech- nology lies in its use of peer-to-peer network technology3 combined with cryptography.4 This combination enables parties who do not know each other to conduct transactions without requiring a traditional trusted intermediary such as a bank or payment processing network. By eliminating the intermediary and harnessing the power of peer-to-peer networks, block- chain technology may provide new opportunities to reduce transaction costs dramatically and decrease transaction settlement time. Blockchain has the potential to transform and disrupt a multitude of industries, from financial services to the public sector to healthcare. As a result, a number of venture capital firms and large enterprises are investing in blockchain technology research and trials to re-imagine traditional practices and business models. In recent years, blockchain technolBlockchain and the future of accountancy IC A E W THOUGHT LE A DE RSHIP IT FACULT Y B LOC KC H A I N A N D TH E FU T U R E OF ACCOU N TA NC Y 2 ICAEW’s IT Faculty provides products and services to help its members make the best possible use of IT. It represents chartered accountants’ IT-related interests and expertise, contributes to IT- related public affairs and helps those in business to keep up to date with IT issues and developments. The faculty also works to further the study of the application of IT to business and accountancy, including the development of thought leadership and research. As an independent body, the IT Faculty is able to take a truly objective view and get past the hype surrounding IT, leading and shaping debate, challenging common assumptions and clarifying arguments. For more information about the IT Faculty please visit icaew.com/itfac About the ICAEW IT Faculty Copyright © ICAEW 2018 All rights reserved. If you want to reproduce or redistribute any of the material in this publication, you should first get ICAEW’s permission in writing. ICAEW will not be liable for any reliance you place on the information in this publication. You should seek independent advice. ISBN 978-1-78363-933-5 B LOC KC H A I N A N D TH E FU T U R E O F ACCOU N TA NC Y 1 Blockchain is fundamentally an accounting technology. In this paper, we describe the technology and its likely impact on business, and in particular on the accounting profession. Blockchain has the potential to increase the efficiency of the process of accounting for transactions and assets, operating as a system of universal entry bookkeeping. This would create certainty over rights and obligations and provenance, which in turn would empower the accountancy profession to expand its scope to record more types of activity than before, and to drill down closer to the economic reality underpinning the transactions recorded. The key features of blockchain are that: new transactions originate with one user but propagate to a network of identical ledgers, without a central controller; all transactions and records are permanent, unable to be tampered with or removed; and many blockchains are programmable, allowing for automation of new transactions and controls via ‘smart contracts’. In this paper, we explain how the technology differs from the familiar, and how these features drive the potential applications of blockchain. While there are undoubtedly some technological and legal challenges to solve before blockchain can be fully bedded into the financial recordkeeping systems of the world, the accountancy profession’s unique combination of technical and business knowledge makes it particularly well-suited to helping design the environment and solutions that blockchain will rely on. Blockchain is a combination of an economically-incentivised business model and clever supporting technology; by working with blockchain specialistIntroduction to blockchain H-1 ©McGraw-Hill Education 1 What are blockchains? Familiar elements, combined in an elegant new way Shared ledger immutable database transacting and recording data and value securely and for very A shared database of records, in which data transactions are recorded, replicated, shared and synchronized among the members of a decentralized network Information that has been translated into a form that is more convenient to move or process (e.g., bits) Preventing unauthorized access, use, disclosure, disruption, modification, inspection, recording or destruction of information/value A collection of information that is organized so that it can easily be accessed managed, updated, and virtually impossible to alter without detection Database Single elegant design Traditional elements Network Public key infrastructure Blockchain Introduction to blockchain Page 2 2 Cryptocurrencies have experienced high growth and volatility Funding for companies with blockchain applications has grown exponentially Blockchain is one of the fastest-growing disruptive technologies of the last decade Investment in crypto-economy ($MM, end of June 2018) Source: Autonomous NEXT, Various for ICO, Pitchbook for VC, EOS Scan $255b as of June 2019 219 exchanges that deal in cryptocurrency $65.8b total daily trading volume as of June 10, 2019 55.6\% of total market cap accounted for by bitcoin, as of June 2019 Introduction to blockchain Page 3 Coinbase, whose users primarily deal in bitcoin and ethereum, reported that its revenue soared 847\% in the first quarter to $1.8 billion, and that it now has 56 million verified users in 2021. 3 Life cycle of a transaction on the blockchain A B A wants to send tokens to B from its address in the ledger. The tokens then move to B‘s address in the ledger. The transaction is broadcast to every node on the network. ? ? ? ? All or a subset of nodes in the network approve the transaction from A to B is valid. ✓ ✓ ✓ ✓ The approved transactions are bundled into blocks, which then are added to the chain – this provides an immutable and transparent record. Introduction to blockchain Page 4 4 A cryptographic hash function creates a unique digital output from any digital input by applying an algorithm: creates unique digital ID # for each block. Blocks are hashed to create a tamper-evident trail that spans the entire blockchain. Each block added to the blockchain contains the evidence (hash) of the previous block adding further security to previously validated transactions. Cryptography brings security and immutability to the blockchain Transactions require a digital signature, which is generated by using a private key. A valid digital signature authorizes a transaction and unlocks cryptocurrency from its associated public address to be sent to the recipient’s public aC o m m i t t e e o f S p o n s o r i n g O r g a n i z a t i o n s o f t h e T r e a d w a y C o m m i s s i o n Sponsored By The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your professional adviser, and this paper should not be considered substitute for the services of such advisors, nor should it be used as a basis for any decision or action that may affect your organization. Jennifer Burns | Amy Steele | Eric E. Cohen | Dr. Sri Ramamoorti T H E C O S O P E R S P E C T I V E G o v e r n a n c e a n d I n t e r n a l C o n t r o l B L O C K C H A I N A N D I N T E R N A L C O N T R O L This project was commissioned by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which is dedicated to providing thought leadership through the development of comprehensive frameworks and guidance on enterprise risk management, internal control, and fraud deterrence designed to improve organizational performance and governance and to reduce the extent of fraud in organizations. COSO is a private-sector initiative jointly sponsored and funded by the following organizations: American Accounting Association (AAA) American Institute of CPAs (AICPA) Financial Executives International (FEI) The Institute of Management Accountants (IMA) The Institute of Internal Auditors (IIA) Acknowledgements We would like to recognize and thank Yoland Sinclair, Manager, Deloitte & Touche LLP, the COSO Board, and COSO Chairman Paul Sobel for providing input, assistance, and valuable feedback in developing this paper. We also thank Tim Davis, Principal, Shelby Murphy, Managing Director, and Gireesh Sivakumar, Senior Manager, Deloitte & Touche LLP for their technical input and advice. The COSO Board would like to thank Dr. Sri Ramamoorti for originating the idea for this paper and Deloitte & Touche LLP for its support. Committee of Sponsoring Organizations of the Treadway Commission c o s o . o r g Preface COSO Board Members Paul J. Sobel COSO Chair Douglas F. Prawitt American Accounting Association Robert D. Dohrer American Institute of CPAs (AICPA) Daniel C. Murdock Financial Executives International Jeffrey C. Thomson Institute of Management Accountants Richard F. Chambers The Institute of Internal Auditors Authors Contributing Authors Jennifer Burns Partner Deloitte & Touche LLP Eric E. Cohen Cohen Computer Consulting Amy Steele Partner Deloitte & Touche LLP Dr. Sri Ramamoorti Associate Professor University of Dayton http://www.COSO.org c o s o . o r g Blockchain and Internal Control: The COSO Perspective | i C o m m i t te e o f S p o n s o r i n g O rg a n i z a t i o n s o f t h e Tre a d way Co m m i ss i o n July 2020 Research Commissioned byResearch Commissioned by T H E C O S O P E R