Deloitte’s Blockchain Blues: Will New Technology Render Financial Auditing Obsolete?

Disruptive innovation may force the firm to go short on people and long on technology.

Just Trust Us

For the casual stock picker, it’s easy to take for granted the availability and reliability of data available for assessing a company’s financial health. Arriving at the clean-looking financial statements companies provide seems straightforward; in reality, it is an exhausting exercise. Internal accounting teams must use the tedious double entry accounting method to know whether they can trust their own books. To assure the public of the veracity of these statements, independent auditors are employed to verify that the internal accounting stays true to a complex set of regulatory control mechanisms, checks, and balances [1]. The whole process is both time intensive and costly, but ensuring that financial information about a firm’s performance can be trusted is the bedrock of making sure financial markets operate efficiently. Thought of from this perspective, auditing firms like Deloitte are less an auditor of financial statements than a creator of trust.

Enter blockchain, a decentralized, digital ledger where transactions are recorded instantaneously and publicly. By having thousands of computers on a network independently encrypt, verify, and record transaction on a public ledger, forgery or data alteration becomes a practical impossibility [2]. With blockchain technology, a consumer of financial information no longer has to rely on taking a company’s word that financial data is accurate or Deloitte’s word that it’s truthful; the data can be found quickly, accurately, and publicly, without the need of intermediary bookkeepers, auditors or other third parties.

Keeping this in mind, blockchain technology poses a serious risk to Deloitte’s auditing business. If blockchain can cut through a sea of regulatory code and efficiently record and verify the accuracy of a company’s internal transactions (Deloitte’s main value proposition to the company) and it can be trusted to verify the truthfulness of the company’s financial statements to the public (Deloitte’s main value proposition to the public), the value Deloitte has to offer as an independent auditor will be called into question as blockchain technology proliferates.

Ready, Aim, ?

Seeing the potential disruption the still-young blockchain technology could have on its core business, Deloitte has started investing heavily in both learning about and shaping what the future of the blockchain technology could look like.

In the near term, Deloitte has opened three blockchain labs in Dublin, New York, and Hong Kong, where Deloitte is building up a staff of blockchain developers and designers. These labs are focused on clients in financial services and their purpose is twofold: 1) develop a platform for the creation of blockchain technology, and 2) start creating prototypes of blockchain solutions [3]. According to Deloitte, current blockchain prototypes being worked on include “digital identity, digital banking, cross-border payments, trade finance and loyalty and rewards solutions, as well as distinct efforts for the investment management and insurance sectors” [4]. While a robust list, conspicuously absent from it is any mention of tools for traditional auditing, currently its largest business segment by revenue [5].

Longer-term, blockchain technology is expected by some to start replacing legacy accounting systems as early as 2023 and be widely accepted by 2025 [6]. However, predicting the advances and adoption of a technology still in relative infancy is incredibly difficult. As such, Deloitte has made it clear that the current work being done in the blockchain labs is a starting point. Deloitte can’t predict exactly how blockchain will be used in the future, but the labs should enable Deloitte’s blockchain capabilities as fast as the technology itself grows.

Pivoting the Profit Pool

Deloitte’s investments in the blockchain labs may prove to be quite prescient, but a further investment in products outside of financial services and in their classic auditing business will be critical to protect a core part of their business. In the near-term, Deloitte should be developing blockchain products that streamline a company’s internal record-keeping. As an auditor, Deloitte is uniquely positioned to understand the needs companies have for internal audit and controls. As Deloitte learns more about developing blockchain technology in the long-term, they can combine both of these knowledge sets to be a provider of blockchain auditing services. Pivoting from manpower-driven auditing to technology-driven auditing will no doubt be a difficult move for Deloitte to make, but will be an imperative one for Deloitte to stay ahead of its current, known competitors and its future, yet to formed ones.

Questions Remain

Given the absence of auditing prototypes begs the question: is Deloitte ceding that their auditing business is ripe for disruption, or is it too early to tell? Does blockchain technology truly pose a disruptive threat to auditors, or will there be a similar need for human oversight as blockchain technology progresses?

Word Count: 770

[1] Blockchain Technology: A Game Changer In Accounting?. 2016. Ebook. Deloitte. https://www2.deloitte.com/content/dam/Deloitte/de/Documents/Innovation/Blockchain_A%20game-changer%20in%20accounting.pdf.

[2] “Blockchain Promises Accountants, Auditors And Their Clients Better Data Sooner And Cheaper”. 2017. NASDAQ.Com. http://www.nasdaq.com/article/blockchain-promises-accountants-auditors-and-their-clients-better-data-sooner-and-cheaper-cm726746.

[3] “EMEA Blockchain Lab | Deloitte Ireland | Press Release”. 2017. Deloitte Ireland. https://www2.deloitte.com/ie/en/pages/about-deloitte/articles/emea-blockchain-lab.html.

[4] “Deloitte Launches Blockchain Lab In New York, Increasing Focus On Key Technology In ‘Make-Or-Break’ Year – Press Release | Deloitte US”. 2017. Deloitte United States. https://www2.deloitte.com/us/en/pages/about-deloitte/articles/press-releases/deloitte-launches-blockchain-lab-in-new-york.html.

[5] “Accounting Services In The U.S. | Statista”. 2017. Statista. https://www.statista.com/study/23427/accounting-services-in-the-us-statista-dossier/.

[6] “Why Cpas Need To Get A Grip On Blockchain”. 2017. Journal Of Accountancy. https://www.journalofaccountancy.com/news/2017/jun/blockchain-decentralized-ledger-system-201716738.html.

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10 thoughts on “Deloitte’s Blockchain Blues: Will New Technology Render Financial Auditing Obsolete?

  1. Hello Mister McBoatface – cool name you have.

    Okay, so you have to prove your blockchain application works, just as you do every other technology. Why, then, does blockchain pose such a challenge for internal auditors? I see 2 reasons:

    1.
    Technical expertise is rare: Few IT departments have relevant blockchain experience. In the 2017 Global Digital IQ Survey, 86% of financial services executives said that their organizations haven’t yet developed necessary blockchain skills. And even fewer companies have teams with enough expertise to provide any sort of assurance around the technology and the associated work.

    2.
    These controls are different: Since the tech is new, it requires a new way of thinking about controls. Auditors might welcome the change, but it’s their job to ask the difficult questions: Who controls the blockchain? Who gets access? Where are these servers? Who monitors activity? Is the technology in fact doing what it claims to do? How can you assess this claim when traditional auditing has never seen technology of this kind?

  2. Interesting read!

    I would argue though that while Blockchain looks promising, there has always been some form of application of technology to auditing. For instance, in systems audit for large commercial institutions like banks, computer-assisted audit techniques (CAATs) have been adopted to expand the sample size of transactions subjected to audit tests without any increase in human resources requirements, thus improving the reliability of audit results. Has that reduced number of CPAs? No, my auditor friends still work crazy hours. Why? The reality is that any system can be breached and Blockchain would not be an exception. “People” are the only thing can detect and correct those breaches when they do happen. So I would argue that the need for human beings to continue to verify records coming out of those systems would always remain. And more so, investors need a “scape goat” to blame when things go wrong. Deloitte’s main value proposition to the public as independent auditors can never be called into question, as least not as long as management remains separated from shareholders.

  3. As alluded to above, obsolete might not be the best word choice–despite being an extremely catchy title. However, there is no doubt that either Deloitte and similar auditing firms will benefit greatly and either 1. be more productive with the same resources or 2. not need the same amount of people. I have a hard time believing that CAATs haven’t increased productivity (which is essentially reducing the number of needed CPAs for the amount of work done.) Thoughtful, conscientious, integrity-centered people will always be necessary to make sure a system functions.

  4. Great article!

    In line with the previous comments, I think it is important to keep in mind that no system is perfect and free from errors, and some degree of oversight will always be required. Blockchain will need to find a way to address potential errors, fraudulent transactions or even bugs in the code. An interesting read on the editability of blockchain: https://www.accenture.com/t20160927T033514Z__w__/us-en/_acnmedia/PDF-33/Accenture-Editing-Uneditable-Blockchain.pdf#zoom=50.

  5. Great read!

    One concept you alluded to at the start of your article is trust – specifically, the role of the auditor in creating and instilling trust. It seems to be taken as a given that blockchain will ultimately eliminate the need for intermediaries, simply because its decentralized nature has many deeming it sufficiently trustworthy.

    Messi alluded to “people” being central to detecting and correcting breaches; I would argue that it is less about people or any one person, but, rather, a trusted central authority. This is the same reason why certain currencies are more stable and generally preferred for use in global markets (e.g. the USD) over other, more volatile currencies: people need to be able to appeal to a trusted central authority if the system fails. If people lose trust in the authority overseeing the currency and/or their ability to effectively govern / intervene, they will try to sell it off, leading to capital flight, currency devaluation, and hyperinflation. The same applies to blockchain.

    (Fascinating proof point: the mere rumour of its founder’s death sent stock of Ethereum – a blockchain-based decentralised platform – plummeting: https://qz.com/1014559/vitalik-buterin-dead-a-hoax-on-4chan-crashed-ethereums-price/ )

  6. Boaty,

    Very interesting read. I believe that over the next 20 years, blockchain technology (along with AI) will eliminate many jobs in professional services industries. While I agree with others that there will need to be humans involved in the design and maintenance of any system employed by Deloitte or comparable service organizations, I do not think the majority of them will be CPAs. Similar to audit, I believe title insurance is another industry that is ripe for disruption as blockchain would allow for permanent, incorruptible record of asset ownership throughout time. Time will tell, but I believe Deloitte should continue to invest in this area intensely over the next few years to assure they are on the leading edge of the trend.

  7. I will take the contrarian view here (based on the comments above) and argue that this is more hoopla and hype than it is a real cause for concern at this stage. Blockchain today has not demonstrated (to my knowledge) any remote functionality with respect to serving as a viable alternative to auditors. Yes, I am cognizant that at its face the technology may potentially serve to help verify transactions – but I view this more as a tool than substitute as the far more likely outcome. My advice to Deloitte – spread the headlines that you’re “investing in the blockchain lab,” but don’t waste your partners’ hard-earned money on this speculative technology.

  8. Thank you Boaty for sharing such a fascinating article. The potential of blockchain technology applied to other industries is indeed enormous and I’m excited to see how it will go.

    That being said, it is unclear to me how the blockchain technology will actually play out in the auditing space, based on my reading. I still think that the technology will not replace the core function of auditors for a few reasons different from other people’s comments. As you also mentioned, the main value proposition of the blockchain is that 1) data entries are decentralized and 2) manipulating data is practically impossible from a mathematical standpoint. When I apply the Bitcoin world to the auditing world and imagine how it would look like, the companies will submit their accounting journal entries into the virtual platform and the entries will be verified by other participants (or “miners”) and get finally recorded. In this world, companies cannot manipulate their prior entries, just like how Bitcoin users cannot manipulate their transactions, and every participant shares and looks at the collective ledger. This is consistent with the blockchain’s value proposition. However, companies can still “correctly” enter fraudulent numbers into the system and pass the verification. The Noble group from our earlier FRC class, for example, can correctly enter their controversial unrealized gains and losses from their commodities into the blockchain system. (As we know, they actually did it and still complied with the accounting rules!) The blockchain miners can only verify if the entries were real and correctly entered from a technological standpoint, but they need to take a step further and understand the meaning behind the numbers, which is more art than science and beyond what the current blockchain technology can offer. In short, I can see why the blockchain can be used as a more advanced version of the CAATs that Messi mentioned above, which will greatly improve the efficiency of auditing, and I do think that system errors will be very unlikely, but I don’t see how it can replace the core function of auditors, which is exercising judgment.

    Then it brings me to the next question – who will be the blockchain miners in this auditing space? We would need extremely skilled people who are both technologically sophisticated and well versed in accounting. Even if we could find such talents, how would we incentivize them to do their job? Bitcoin naturally solves this problem by rewarding the miners with new bitcoins. On the other hand, auditing firms would need to hire their miners separately and pay them to do the job. It is then essentially creating a new group of auditors, as opposed to replacing them.

    I would love to learn more how these issues will be addressed. (I might be misunderstanding something about the technology!)

  9. I completely agree. I’m reminded of the computer “Deep Blue”–the first computer to beat a reigning chess world champion, at the time, Garry Kasparov. Many analysts took this victory to mean that technology had bettered man definitively. Articles suggesting the end of human intelligence were rampant. Computers will replace scientists, they said. Computers will replace philosophers! But their hermeneutics were incomplete and premature. After the Deep Blue match, new competitions emerged that allowed any man/machine mix to compete. A player could be just a computer, just a person, a team of computers, a team of people, or people with computers. To this day, the only undefeated teams have been people with computers.

    Although we can seek to understand what it is human beings add that has so far been irreplaceable with technology, the chess matches following the Deep Blue competition show that human beings and computers have the most to add when they’re working in concert. Deloitte is no different.

  10. This is an interesting article, but I wish you took into account a few considerations that could decrease the adoption of blockchain as a mechanism for building trust in companies’ financial statements in the medium-term. Having all of the firm’s transactions recorded and publicly available through blockchain could relay sensitive information to competitors that they could use to poach customers or suppliers and could shed insight into a company’s secret sauce. Furthermore, customers or suppliers could get much more detail about a business’ financials that could show them that they were being overcharged and underpaid, respectively, and they could attempt to reduce the company’s margins through negotiations.

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