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More Disruption?

A GBQ Bottomline article from October 2017 explored various disruptors of the accounting industry. Naturally, the disruptive capacity of blockchain technology was given some well-deserved attention by the article’s author, Jeff Harden: “Best described as a digital ledger that cannot be corrupted nor manipulated, blockchain has the potential to redefine core tenants of auditing. As opposed to sampling, blockchain commercialization will potentially enable auditors to validate, for example, 100% of all cash transactions made on a near real-time basis impacting both the speed and effectiveness of engagements.”

The readers of this article are likely familiar with the formalized assertions imbedded in any set of useful financial statements. As a quick refresher, those assertions are Completeness, Existence, Accuracy, Valuation and Presentation.  It won’t come as a surprise that one of the primary roles of a financial statement auditor is to provide assurance over these assertions.  As a result of the possibilities brought about by blockchain technology as described above, audit procedures around the assertions of Completeness, Existence and Accuracy could become far simpler to perform. This would mean that an auditor’s relative value in being able to provide assurance over these particular assertions could diminish significantly.  It does seem, however, that while the relative ease in gaining assurance over the assertions of Completeness, Existence and Accuracy will likely increase, the same vein of disruptors could simultaneously make it far more difficult to arrive at true assurance over Valuation and Presentation assertions.  This idea will be revisited below.

Few will still find themselves unaware of recent activity in the world of cryptocurrency. At the time this article was written, total market capitalization of the world’s ~1,300 cryptocurrencies was approaching a half-trillion USD, with the largest “player”, Bitcoin, comprising almost half of this value.  Several properties of cryptocurrencies, most notably their relative finitude, which largely inoculates them from the persistent threat of purchasing power degradation, lead many to believe that there will be a complete paradigm shift resulting in the world’s fiat currencies being completely displaced by the “currency of the future”.  If the value of cryptocurrency rises while wealth remains constant, the sum value of all fiat currencies would have to fall, and in the most extreme case, all the way to zero.  This shift could be gradual, or could be remarkably sudden.

While no one knows for sure whether such a drastic displacement will actually occur, and whether the USD, Euro, Chinese Yuan, et al. will be almost entirely replaced by Bitcoin, Etherium, Dash and the like, it does appear at this point to be at least well within the range of possibility, and therefore worth contemplating. For a variety of reasons, personally, I would be surprised if I finished my public accounting career (~40 years in the future) still auditing financial statements in USD.  Doubtless, many sound arguments could be made for why such a shift will not happen, and that fiat currency will continue to reign supreme well beyond 2057. Regardless which course the future takes, what would such a paradigm shift mean for the public accounting profession and for company management with whom the profession closely works?  At this point, the article will take a speculative turn, considering the more extreme end of the range of possible futures.

In the event of such a paradigm shift in the monetary world, one thing would be almost certain: the time between the relative equilibria at either end will be exceptionally chaotic and difficult to navigate for individuals and businesses alike. Values of fiat currencies and cryptocurrencies alike could go through an unprecedented period of volatility and for an unknown amount of time before the markets achieve stability.  A series of sophisticated hedges and derivatives could possibly help an entity weather such a storm, continuing with business-as-usual, but preventing such an event from seriously affecting planning and decision-making could prove extraordinarily difficult or even impossible.  Newly profound questions that may not be given a great deal of consideration in the past, like “what will the value of our existing liquid assets be next Monday?”, or “how do we design a set of financial statements that are actually presented in an informative manner?”, or “how many times a day do we need to report our numbers to our lender?” may start to demand attention.  As is apparent in these questions, the Valuation and Presentation assertions could become exponentially more difficult to gain assurance over.

It would almost certainly be the case that the rate of change would be so rapid, no legacy accounting standards board could stay current in promulgating useful frames for financial information. Likely, lenders and borrowers would attempt completely new ways of determining and displaying credit-worthiness on their own.  A savvy and innovative public accountant would have a large part to play, as unique methodologies for both financial statement preparation and auditing may need to be developed in conjunction in order to help the above parties efficiently allocate resources during this tumultuous time.  A countless number of methodologies could be attempted across the set of all businesses, perhaps involving real-time information and near-constant auditing. Financial statements could become almost unrecognizable from their current form after several iterative experiments by various independent groups of players. It could be the most terrifying and exciting time the industry has ever seen.

No matter the future, GBQ intends to stay true to its entrepreneurial spirit. We will relentlessly head in whatever direction necessary to continue to add value to our clients.

The article was written by:
Kevin Schoen, CPA
Assurance Senior