Compromises Necessary for Blockchain Accounting Domination
I am not individually being successful in countering claims that blockchain will make auditing obsolete. So I’ve decided to try another tack: what will it take for a blockchain ecosystem to develop that is sufficient to be self-auditing? Not saying all these things would be bad, but what are the foundational changes that will make this possible?
A couple of recent announcements from the US Financial Accounting Standards Board (FASB) have caught my eye. The first is the release of the 2020 US GAAP Financial Reporting Taxonomy, along with a few companion taxonomies. The other is that FASB has recently issued its Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes.
For those who are sending their Qs and Ks, 20-Fs and 40-Fs to the US Securities and Exchange Commission (SEC) using the Extensible Business Reporting Language (XBRL, including Inline XBRL), this is a great time to come up to speed on the changes found in the 2020 FASB taxonomy. If past performance holds, companies will be permitted to use the new taxonomy for submissions to the SEC come March, and will be required to use it - or its 2021 counterpart - by Summer 2021.
As to ASU 2019-12, some of you may have to deal with accounting for uncertainty related to taxes … where a company that takes a more aggressive position on tax issues has to account for the possibility a tax authority may come in and perform an examination, and there may be appeals or litigation, but at the end, the company’s position may not be sustained, and stakeholders have to be made aware of the possible impact.
All of this comes back to my article in the Spring 2019 ThinkTwenty20 publication about blockchain, accountants and auditors (1). I laid out an argument on why blockchain does not inherently make accountants or auditors obsolete. And yet those claims keep coming. Even respected research and advisory firm Gartner, Inc. (the “Hype Cycle” people), claimed in a September publication that “A blockchain ledger would provide an assurance baseline that eliminates the need for traditional auditing entirely.” (2)
As careful readers of mine are aware, there is a big difference between a reliable audit trail (the beginning of the audit) and a self-auditing audit trail ecosystem. As I have stated before, I will state again: I am a huge believer in the potential of blockchain technology to be an enabler and facilitator for the seamless, public, transparent, standardized, cryptographically-supported audit trail. I believe such an accounting and audit ecosystem is necessary for trusted continuous reporting and auditing environments, and that there is a need for those environments.
A question is: at what cost? What will it take for blockchain to eliminate the need for “traditional” audit?
Here’s a couple of things – there are many more:
- A common blockchain must be used so all activity between all supply chain stakeholders is captured
- All value exchanged must be tracked on a common blockchain, or a seamlessly interoperable ecosystem of blockchains
- Every adaptation to change must be overseen and automated
1. A common blockchain must be used so all activity between all supply chain stakeholders is captured
Step one: everything has to be conducted and captured on one seamless blockchain ecosystem, with no gaps and every stakeholder represented, nothing to exploit.
Enterprises today select from a wide variety of accounting/ERP/operational systems. Can one end-to-end blockchain environment that “eliminates the need for traditional auditing entirely” possibly meet the widely disparate needs of retail, wholesale, distribution, manufacturing, job costing, time and billing, agriculture, insurance, banking, oil and gas, casinos, B2B, B2C, B2G? How can all of these be end-to-end in the One Blockchain that Rules Them All?
It’s not just trade. It’s every service, every estimate, every valuation, every judgement, every governmental interaction, every contractual term. And it’s not just every transaction; it is the individual and cumulative impact of every transaction, every business event, every environmental change. Remember that new ASU? One of the things it adds is this: “Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.”
2. All value exchanged must be tracked on a common blockchain or seamless blockchain ecosystem
Eric Hughes (3), author of the Cypherpunk Manifesto, was a strong component of a digital cash society. Twenty-five years ago, he was advocating for strong cryptography and privacy-enhancing technologies and untraceable transactions, noting, for example, that “The need and risk and cost of accounts receivables [can be] eliminated.” (4)
The underlying philosophy behind the crypto asset movement was for a “cash” society. Are businesses/the market ready to obsolete receivables and payables and loans and notes and credit arrangements of all sorts? If not, won’t audit procedures still be necessary to make sure collateral and loan terms and liquidity of creditors are tracked. Are investors ready for historical costs only? No assessments of market versus cost? No external/exogenous data for comparison?
3. Every adaptation to change must be externally overseen/credentialed and automated
Back to the recent FASB announcements – a new taxonomy, updates to the rules about accounting for taxes:
Will lack of trust in management’s motives lead to a demand that third party firms (or government driven AI) do the changes for the mappings necessary to move from a prior version of the FASB’s (or IFRS’s) taxonomies? Will enterprises no longer be able to take certain tax positions (recognizing, for example, that what the US Internal Revenue Service (IRS) interprets can be appealed to and often overturned in tax courts; the IRS is notthe law maker)(5)?
So that’s just three of the things I think would be necessary for blockchain to be the trusted “one ledger”. What do you think?
(1) https://thinktwenty20.com/images/docs/Spring-Issue-2019.pdf
(2) https://www.gartner.com/smarterwithgartner/what-assurance-leaders-need-to-know-about-blockchain/
(3) https://en.wikipedia.org/wiki/Eric_Hughes_(cypherpunk)
(4) Eric Hughes, Cypherpunks list, 1994-08-03
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