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Banking Committee hosts panel on blockchain and other financial services innovations

January/February 2018

By Nigyar Mamedova and Gina Omolon

One of the most talked-about technologies in financial services is blockchain. Nowadays, many companies are making significant investments in emerging technologies and expect the accounting and auditing professions to keep pace.

What is blockchain, and how will it impact the way businesses are run and how risks are managed? How will this new technology affect auditors, in particular, and the profession, in general?

To address these questions and to prepare the accounting profession for the future,the NYSSCPA’s Banking Committee held a technical session titled, “Blockchain and Other Technological Innovations in the Financial Services Industry.” The technical session took place on Nov. 27 at Grant Thornton LLP’s offices in New York City, and was moderated by Nigyar Mamedova, technical director and innovation leader at the National Association of State Boards of Accountancy (NASBA).

The distinguished expert panel included A. Michael Smith, a partner and U.S. internal technology audit services leader at PricewaterhouseCoopers; Pramod Achanta, IBM’s blockchain services leader for North America; and Prashant Nisar, an audit senior manager leading the blockchain practice at Grant Thornton LLP.

The panel discussion focused on new technologies used in the financial services industry and the impact of these emerging technologies on existing processes and controls. Smith provided an overview of blockchain, bitcoin and smart contracts, clarifying that blockchain is not synonymous with bitcoin, and that bitcoin is a use case—in this context, a particular goal—of blockchain.

Blockchain is a form of applied cryptography, and there are different forms of blockchain currently used across different companies. Proper implementation of the blockchain technology enables the development of operational and processing systems that create irrefutable transaction history and transaction integrity.

Bitcoin does not have physical tangible value; its value is created by the market participants’ willingness to create its inherent value and to use it as a medium of commerce.

Achanta provided examples of use cases of blockchain, and its application in the financial services industry. The use of blockchain can decrease trade settlement time, streamline cross-border payments and automate know your customer (KYC) processes. Smart contracts, for example, can be used in the insurance industry to decrease processing and settlement time for insurance claims.

The panel also discussed emerging audit and accounting issues related to the implementation
of the new technology. Nisar highlighted some of the key audit risks associated with the use of blockchain and related technologies.

Blockchain, attendees learned, is a distributed ledger—in other words, a shared database, with each participant having both a public key and a private key. The public key serves as the user’s identification in the ledger, while the private key is used to send or receive payments via blockchain.

If the private key is lost, this can result in lost funds and a write-down of the digital asset. Private keys are susceptible to fraud risk, and auditors need to design audit procedures to Blockchain panel address that risk. Auditors will also need to audit securities policies centered on the use of the public and private keys, as well as new controls created around blockchain.

The use of bitcoin is also raising questions on valuation and classification. For example, is this a level 1, level 2 or level 3 item in the fair value hierarchy, and is bitcoin considered a cash item, a security or an intangible asset?

The panel emphasized that blockchain will significantly change the way audits are performed, in that it will make possible the auditing of transactions as they occur. The technology is still emerging, and there are many moving parts that create new questions and make it difficult to develop new standards and regulations.

However, there will always be a need for competent and knowledgeable auditors. Advancements in technology such as blockchain, robotics and artificial intelligence are no substitute for the need to provide assurance that new processes and controls are designed and operating effectively.

The Banking Committee will hold another technical session on April 19, focusing on three topics: “A Fairer Fair Value,” “Is My Net Worth Wrong?” and “The Interest Rate Lock Commitment Controversy.” For more information about the Banking Committee itself, please go to the committee’s web page at www.nysscpa.org/membership/committees.

 


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