Coronavirus has given the world a lot to digest on how fragile our established habits are facing the winds of change. Yet, compared to the Spanish Influenza a century before, we have seen mass migrations by consumers and companies alike to innovative information-age solutions to satiate the human desires to both consume and produce. The need for a common distributed compute environment between all participants in custody chains is clear now more than ever.
At Miami University Blockchain Club, we are working overclocked to help commercial entities recognize how their own operations are best run by including a blockchain in their business stack. To fuel technical innovation, we run MUBC Incentive Token as an opportunity for students to train in a pseudo-production setting. We are promoting education and business adoption through our Hackathon and multi-disciplinary workshops. We’re here today to talk about our Blockchain Accounting Summit on October 29th, attended by EY and PwC.
2018 and 2019 saw wide recognition of blockchain as a tool to improve supply chain management. Walmart made ventures into both China with VeChain and the US with Hyperledger. After years of success, financial information firms are preparing their own ventures into chain of custody solutions using blockchain to automate compliance. MUBC wanted to offer attendees the opportunity to see for themselves how accounting industry leaders consider blockchain technology.
The 2020 Blockchain Accounting Summit is a 3 hour virtual workshop that will have attendees up to speed on the bleeding edge of distributed ledger technology’s use in the average audit environment. The workshop will begin with a primer session co-hosted by Miami University Accounting Professor Dr. Brian Ballou and EY Assurance Senior Manager Kyle Kauffman. With a solid foundation on concepts and terminology established, we transition into our spotlight session: “Blockchain in the Accounting Professional’s Emerging Technology Toolbox”; moderated by 10XTS CEO Michael Hiles, and attended by EY US Blockchain Lead Partner Chen Zur and . Finally, to demonstrate how far the technology has come, EY will present a demo of their Baseline product with the OpsChain 4.0 supply chain procurement system usable by anyone with a basic understanding of Microsoft Excel! The session will be held virtually from 5pm to 8pm on October 29th. Registration is free- sign up here! If you aren’t already convinced that blockchain is the future of the financial information industry, we did a little research ourselves to help contextualize the kinds of conversations this workshop will have.
What is Blockchain?
Blockchain is a digital log that can only accept new entries, previous entries can never be fully removed or their history erased. Due to the inability to delete previous entries on a blockchain there is increased transparency surrounding transactions. A blockchain is supported through a decentralized collection of collection of nodes, in order for a change to take place on the ledger all of the nodes must agree that the recording is accurate through the use of a consensus protocol. The requirement of a consensus promotes transparency while increasing the auditability of the transactions recorded within the blockchain. In a private blockchain, such as one that an entity would use internally, changes to the ledger can only be made, and validated, by authorized users.
What is COSO?
When it comes to understanding the different uses and implications of blockchain within entities an important and valuable resource is COSO. COSO is the Committee of Sponsoring Organizations of the Treadway Commission, an initiative meant to provide guidance when it comes to risk management, internal control, and the deterrence of fraud. COSO’s framework is made up of five different components: control environment, risk assessment, control activities, information and communication, and monitoring activities. This framework is useful because it provides a playbook by which companies can assess and evaluate different approaches to financial reporting. We can use this same framework in order to assess the usefulness of blockchain in a reporting environment.
COSO 5 with Blockchain
When implementing blockchain into a company’s control environment many new opportunities and potential improvements come to light. Blockchain provides a new method in which entities may execute and record transactions in a more automated nature, limiting potential human error. In addition to the efficiencies of automation, the inherent ability of blockchain to validate and retain permanent records aids in combating fraud in transactions and reporting. Another added benefit of using a blockchain system for financial reporting is the visibility that comes with a shared ledger system, as well as the ability to quickly and effectively generate real-time reports. It is also important to note that blockchain is rarely implemented on its own, through combining blockchain technologies with AI and other analytical technologies, companies may be able to detect, and implement solutions to, irregularities with a shortened response time.
Another area in which companies may benefit from blockchain technology is risk assessment. An aforementioned benefit of blockchain is its capability to produce real-time reporting, while this benefit is useful in the control environment, it also enhances an entity’s ability to perform accurate and timely risk assessment. Because of blockchain’s transparency and it becomes easier for entities to assess and evaluate various objectives, such as operations, compliance, and external financial reporting.
When it comes to an entity’s control activities, blockchain provides increased transparency which may act as an important enhancer. Through the use of smart contracts blockchain can supply reliable and secure tools with which company’s may perform important verification and authorizations. Blockchain also mitigates the concern for potential record modification or removal due to its immutable recording process. Through the use of blockchain and automation employees are given less opportunities to commit manual error or fraud, thus reducing the company’s risk of loss. Another important note is that due to blockchain’s consensus protocol errors are much less likely to go unnoticed and can thus be quickly rectified.
Information and Communication
The information and communication component of the COSO 5 is primarily focused on the conveying of relevant information between internal and external participants. Communication can be enhanced with blockchain through the use of a shared database. As a direct result of blockchain’s visibility of transactions it becomes easier for entity management to provide financial information to key stakeholders. Due to the nature of blockchain’s comprehensive ledger it also becomes much less likely for data to become lost, as it is stored in multiple locations across the blockchain network.
The final component of the COSO 5 is monitoring activities. Monitoring activities are important because they allow for an entity to evaluate whether the implemented internal controls are effective and functioning in their intended manner. Due to blockchain’s integrated environment evaluations can be built into the blockchain through the use of smart contracts. Blockchain can record detailed data that may then be summarized in order to foster the completion of evaluations. Because information on a blockchain is collected in a real-time manner problems can be quickly recognized and remediated in order to reduce overall exposure.