Blockchain

Big Four and Blockchain: Are Auditing Giants Adopting Yet?

Last week, Big Four firm Deloitte unveiled a mobile platform designed to host blockchain networks on a small scale for demonstration purposes. The product is “based on client interest in understanding blockchain capabilities in live interactions,” as per the press release.

With this move, the Big Four companies — comprised of Deloitte, PwC, Ernst & Young (EY) and KPMG — continue their expansion into the field of blockchain. Combined, the firms brought in over $148 billion in revenue last year, as they handle over 50% of audits for both public and private companies. Consequently, their presence in the crypto space could be a reflection of the state of blockchain adoption.

So, how far have the Big Four gone while exploring distributed ledger technology (DLT), and can blockchain offer any particular perks for those companies?

Big Four: Consistent, but limited interest in blockchain

At this point, all of the Big Four companies have at least demonstrated some interest in blockchain, albeit their approaches tend to differ. Some companies, like Deloitte, have been mostly researching how this technology has affected the general market, while EY, for instance, has focused on releasing software solutions tailored for the needs of cryptocurrency businesses.

Such diversity can be explained by the very nature of those companies — being professional services networks, they offer a variety of services, including audit, tax, consulting, enterprise risk and financial advisory. It is also the reason why the Big Four have yet to fully dive into blockchain instead of merely flirting with the technology, as Cal Evans — the founder of Gresham International, a compliance and strategy firm — opined in a conversation with Cointelegraph:

Because the Big Four work in such a wide scope of sectors, they are unable (or unwilling) to dedicate serious time to blockchain. This makes sense, given that they cannot invest in every new technology set which comes along (although we view blockchain as different). One key thing to note is that many of the big four only got into blockchain when Crypto projects began using them to show more transparency. The Big Four are known to only get involved with something when their client base is using it, blockchain was and is no exception.”

“These appear to be just early steps,” Juan M. Villaverde, chief crypto analyst at Weiss Ratings, said. “They [the Big Four] have begun to recognize the potential of DLT, but they have not yet figured out how to leverage that potential.”

According to recruitment platform Indeed, as of March 2019, PwC had 40 blockchain-related job offerings, being the top recruiter in the field among the Big Four. EY came second with 17 vacancies, followed by Deloitte with 10 job offers.

Meanwhile, a more up-to-date search shows that PwC is still the most active professional services network when it comes to blockchain technology, but has only 13 positions directly mentioning the word “blockchain” left. EY has four job offerings, while apparently neither KPMG nor Deloitte are hunting for any blockchain talent at this point. That seems to confirm that the Big Four’s interest in the crypto space is existent, but moderate: PwC, for instance, has a total of 1,010 open vacancies on Indeed, meaning that its 40 blockchain-related job offers account for a minuscule fraction of that number.

Maurizio Raffone, CEO at crypto-focused consultancy and advisory firm Finetiq Ltd., told Cointelegraph:

“My impression is that the Big Four are keen on blockchain as an additional area where they can provide consulting services rather than audit services. There has been a trend by audit firms to move into more lucrative consulting and blockchain offers them yet another opportunity for that strategy.”

Related: How Blockchain Is Reshaping External Audit: Crypto Developments by PwC, KPMG, EY and Deloitte

Nevertheless, blockchain itself should also prove especially useful in the auditing market due to its transparent nature, as Evans told Cointelegraph:

“Blockchain is one of the few technology sets that can actually aid in most auditing respects. Financial auditing can be assisted by an end-to-end blockchain-based company as all transactions will be open and verifiable. They will also be contained within one ledger, which is one of the largest problems for an independent financial audit. Of course, there is more than one type of audit. Blockchain can be deployed across different sectors to make, for example, a service level agreement audit more effective. Companies could be monitored using blockchain to ensure that they are meeting compliance and the clients wishes.”

Raffone agrees that auditing practices could benefit from having blockchain in place. “I see blockchain as a cost-saving technology in the auditing space,” he told Cointelegraph. “Given the public nature of financial accounts, a blockchain solution would be rather efficient.”

However, Villaverde of Weiss Ratings is wary that the Big Four can stimulate crypto adoption only in certain scenarios. If the Big Four seek to involve themselves exclusively in the support of private blockchain solutions, the expert said, then it would hardly have any effect on the market at large, because “a private, permissioned blockchain is little more than a glorified database.” He went on, saying:

“It’s only when these firms decide to leverage the power of public blockchains, such as Ethereum or Bitcoin, that we envision these initiatives having a significant impact on public adoption.”

PwC

  • Crypto/blockchain market reports: Yes
  • Blockchain-based software solutions: Yes
  • First-hand adoption (Bitcoin acceptance, crypto ATMs): Yes
  • Investments in the crypto market: No

Having started accepting Bitcoin (BTC) as a payment for a part of its services back in 2017, PwC today is arguably the Big Four company that is the most proactive in exploring cryptocurrencies and blockchain. The company even has a major training program in place to boost its employees’ knowledge on the field.

Thus, PwC is no stranger to the crypto space and its major problems: In its 2018 study entitled “Blockchain is here. What’s your next move?” the firm highlighted regulatory uncertainty and trust as major barriers to blockchain adoption among businesses. Additionally, PwC has paid particular interest to stablecoins — another increasingly important part of the industry — and struck a partnership with decentralized lending platform Cred to advise on issuance of a United States dollar-pegged cryptocurrency.

However, the firm has not limited its blockchain presence to its advisory department. In March 2018, it partnered with leading global asset management company Northern Trust in a bid to enable real-time equity audits via blockchain and hence make the underlying transactions more transparent. Two months later, PwC invested in VeChain, a large cryptocurrency startup specializing in web services, supply chain management and anti-counterfeiting. In July of the same year, news broke that PwC was going to audit Tezos, the ambitious cryptocurrency project that was going through an internal dispute and several class-action lawsuits at the time. As per the accompanying press release published by the latter, it was allegedly the first time a “large-scale blockchain organization” had been accepted as a Big Four audit client.

Most recently, PwC announced the release of a cryptocurrency auditing software solution. Specifically, the company updated its Halo auditing suite to accommodate “entities engaging in cryptocurrency transactions” by providing independent evidence of private-public key pairing and collecting information about transactions and balances from blockchains.

EY

  • Crypto/blockchain market reports: Yes
  • Blockchain-based software solutions: Yes
  • First-hand adoption (Bitcoin acceptance, crypto ATMs): No
  • Investments in the crypto market: No

EY has released more solo crypto-related software projects than any of its Big Four rivals. First, in April 2018, EY announced Blockchain Analyzer, becoming the first mainstream auditor to offer its services specifically for the needs of cryptocurrency companies, which allowed for the gathering of an organization’s entire transaction data from multiple blockchain ledgers. A year later, the firm followed up with a major update, introducing “the second generation” of EY Blockchain Analyzer. According to Paul Brody, the global innovation leader for blockchain at EY, the new version can be used for multiple purposes — such as audit, tax and transaction monitoring.

Moreover, in March 2019, EY unveiled another software solution — this time, for tax purposes exclusively. Dubbed Crypto-Asset Accounting and Tax, or CAAT, the tool was designed to assist its U.S. customers — both public and institutional — in filing IRS tax returns related to crypto assets.

Further, in May, EY open-sourced the code of Nightfall — its solution that enables the transfer of ERC-20 and ERC-721 tokens on the Ethereum (ETH) blockchain “with complete privacy” — and put it on GitHub. “It is an experimental solution and still being actively developed,” the company warned.

Finally, the audit titan has applied blockchain to track wine. Specifically, the platform — titled Tattoo — helps consumers across Asia determine the quality, provenance and authenticity of imported European wines. As with the aforementioned Nightall, EY’s solution enables its customers to perform secure and private transactions on the Ethereum public network by using zero-knowledge proof technology.

On top of releasing a number of blockchain-related software solutions, EY has also been supplying its regular services to crypto actors. Namely, the firm has been appointed by QuadrigaCX — a Canadian cryptocurrency exchange that went defunct under mysterious circumstances — as an independent third party to monitor the proceedings in a creditor protection case. However, some of the exchange’s former clients are not happy with how EY has been handling the case: At some point, the auditor reportedly transferred 103 Bitcoins (approximately $1 million) to the exchange’s locked-out cold wallets. According to the report released by EY in February, the loss was caused by “a platform setting error.”

KPMG

  • Crypto/Blockchain market reports: Yes
  • Blockchain-based software solutions: Yes
  • First-hand adoption (Bitcoin acceptance, crypto ATMs): No
  • Investments in the crypto market: No

KPMG has not only been increasing its presence in the blockchain space, but has also been a member of the Wall Street Blockchain Alliance (WSBA) since 2017.

Over the past 12 months, it has partnered with blockchain company Guardtime to offer blockchain-based services to clients; joined forces with the U.S. Food and Drug Administration to integrate blockchain in the pharmaceutical supply chain (the initiative will reportedly speed up the process of tracking inventory and boost the accuracy of data shared between members of the supply chain); and worked with United Arab Emirates officials to successfully test a blockchain-based Know Your Customer, or KYC, application.

Additionally, KPMG collaborated with three powerful software companies — Microsoft, R3 and Tomia — to develop a blockchain-powered solution for telecom settlements. Arun Ghosh, who leads KPMG’s blockchain consultancy, said of the initiative:

“Blockchain has the potential to deliver transparency and visibility, providing the opportunity to help reduce reconciliations and increase efficiencies associated with traditional interconnect billing, roaming and partner settlement processes.”

Apart from working on blockchain-backed projects, KPMG has also studied the cryptocurrency market with an overall bullish outlook. In a November 2018 report, for instance, the auditing company invited institutional investors to “realize its potential.” which, in turn, would allegedly benefit the industry at large. “Cryptoassets have potential. But for them to realize this potential, institutionalization is needed,” the document’s authors argued.

KPMG’s latest survey on blockchain, however, suggests that most tax and finance executives are not considering adopting the technology. Regardless, David Jarczyk, innovation principal and tax leader for blockchain at KPMG, highlighted its potential benefits for the financial world:

“Blockchain is like a spreadsheet on steroids that can automate certain tasks, build greater transparency, speed and reliability, and provide a single source of transactional information.”

Deloitte

  • Crypto/Blockchain market reports: Yes
  • Blockchain-based software solutions: Yes
  • First-hand adoption (Bitcoin acceptance, crypto ATMs): Yes
  • Investments in the crypto market: No

Deloitte was the earliest Big Four player to delve into the crypto space, as it announced its first blockchain lab in Dublin back in May 2016. By that time, the company had already collaborated with the Bank of Ireland to complete a joint proof-of-concept blockchain trial. Today, three of the Ireland’s four largest banks are reportedly using Deloitte’s blockchain solution (developed in its Dublin branch) to verify employees’ credentials.

Also in 2016, Deloitte installed a Bitcoin ATM on the premises of its Toronto office. Placed outside the security gates so it could be accessible to the general public, the machine showcased the firm’s interest in cryptocurrencies.

Since then, Deloitte has kept a close eye on the market, releasing several reports that have recognized regulatory uncertainty and Bitcoin’s infamous scalability problem among the main hurdles for mass adoption. Nevertheless, the company’s August 2018 report entitled “Breaking Blockchain Open: 2018 Global Blockchain Survey” predicted that blockchain technology was getting closer to a breakout moment. Meanwhile, the newest issue of that report unveiled that as much as 73% of Chinese enterprises believe that blockchain is a top-five strategic priority, highlighting the nation’s focus on the technology.

This summer, Deloitte has also begun supporting a new blockchain accelerator program called Startup Studio in partnership with 22 other companies, including Fidelity and Amazon. Startup Studio will reportedly host workshops for blockchain startups to help them enhance a variety of skills important for the industry.

Finally, the Big Four giant has just rolled out its own blockchain-based platform designed to provide users with blockchain demonstrations and experiments. Called Blockchain in a Box, the new product is described as “a mobile, self-contained technology platform capable of hosting blockchain-based solutions across four small-form-factor compute nodes and three video displays, as well as networking components that enable integration with external services, such as traditional cloud technologies.”

Are the Big Four doing enough?

As for now, experts seem somewhat skeptical of the Big Four’s progress in terms of blockchain, arguing that their knowledge on the subject seems limited at this point. Evans told Cointelegraph:

There have been examples in the market where companies such as PwC have actually plagiarized and copied work from other companies within the crypto space, showing that their knowledge on the subject is incredibly limited. It is hard for a company to push something they don’t fully understand themselves.”

Either way, most accounting and auditing functions have the potential to become automated with smart contracts at some point in the future, and the Big Four would have to drastically increase their presence to stay relevant, according to Weiss Ratings’ Villaverde, who continued:

“The main question is: Will the Big Four lead in the creation of this new technology? Or will smaller, potentially more nimble, players jump into the space and take over significant market share from the Big Four?”

Whether or not the Big Four will adopt blockchain in their regular service offerings, the fact that all four firms draw up regular reports on the crypto and/or blockchain market shows that they are interested and are closely following the developments in the industry.

from: https://cointelegraph.com/news/big-four-and-blockchain-are-auditing-giants-adopting-yet

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Will PwC’s New Software Solve the Cryptocurrency Auditing Problem?

 

Earlier this week, Big Four firm PwC announced the release of a cryptocurrency auditing software solution.

According to the multinational professional services network, its Halo auditing suite has now been updated to accommodate “entities engaging in cryptocurrency transactions.” The new tool reportedly allows PwC to establish crypto asset ownership and gather information about transactions and balances from blockchains.

While it is currently unclear whether Halo will now be picked up by cryptocurrency-related businesses, PwC’s move seems to mark another landmark step for the industry.

Specifics of auditing in the crypto space

Auditing in the crypto space is still a developing practice that varies substantially between stakeholders, as Maurizio Raffone, founder and CEO of Finetiq, told Cointelegraph. He also drew a parallel between on-chain and off-chain audits, explaining:

“On one side, crypto exchanges have historically focused on cyber-security measures, processes and procedures dealing with corporate governance and so forth, just like most other businesses. There are then on-chain audits that tend to focus on checking for bugs and correct workflow of a blockchain protocol or, more often, smart contracts.”

Indeed, the Association of Chartered Certified Accountants (ACCA) — a global body for professional accountants — believes that “robust and consistent” accounting treatment is required for different types of cryptocurrencies, as Narayanan Vaidyanathan, head of business insights at ACCA, told Cointelegraph via email:

“This is currently an on-going challenge that is still under deliberation within the accountancy profession. Is a crypto currency cash, inventory, a financial asset, or an intangible asset? Because if there are accounting issues, it therefore as a downstream implication also becomes an audit issue.”

Auditing services might also depend on how companies utilize cryptocurrencies, adds David Martin, chief investment officer at Blockforce Capital:

“It is important to differentiate how a firm is using digital assets in its business dealings. For instance, a company that uses cryptocurrency as a way to make transactions requires different services than an investment firm that is holding digital assets as a form of investment.”

Perhaps the most notable example here would be Tether, the company behind the eponymous stablecoin (USDT) and a wholly owned subsidiary of iFinex — which also owns crypto exchange Bitfinex.

Related: Tether, Bitfinex Stay Afloat Amid Controversy

In early 2018, Tether’s plans to release a third-party audit fell through, although the company had previously announced that it was undergoing a “balance sheet audit” by Friedman LLP, a New York-based accounting firm.

However, in late June 2018, a document was finally produced — although it turned out to be a memorandum rather than an audit performed by an auditing company. As Tether’s general counsel explained at the time, mainstream accounting firms would not conduct official audits on companies working with cryptocurrencies.

While it is unclear whether Tether was willing to provide all the required information to third-party auditors (which could be the reason it could not complete the inspection), the general problem seems to persist within the crypto industry. Ben Tsai, president and managing partner of Wave Financial, told Cointelegraph:

“Cryptocurrency companies definitely have an audit problem. Major players such as exchanges, stablecoins and hedge funds are not consistently providing proof of solvency despite the fact they need to.”

According to experts, the regulatory uncertainty within the space might be part of the issue. As Tsai told Cointelegraph, the current regulatory climate allows crypto businesses to turn to auditing firm only in case of emergency:

“Regulation does not currently require ‘proof of funds’ for stablecoins and for exchanges, which is the main reason these audits aren’t taking place. Mostly, the big four come in and audit companies after they ‘mess up.’”

Indeed, as Martin opines, cryptocurrencies remain in “a precarious situation” in regard to regulation:

“Regulatory systems are primarily reactive and laws haven’t necessarily caught up to the innovation of digital assets quite yet. The financial reporting standards in the US which are set by GAAP (Generally Accepted Accounting Principles) don’t currently directly address the accounting for cryptocurrencies. Nuances like this make auditing business activities involving digital assets and cryptocurrencies inherently difficult.”

The Big Four’s relationship with cryptocurrencies

The Big Four is a commonly accepted term used to refer to the four biggest auditing firms in the world: Ernst & Young (EY), PwC, Deloitte and KPMG. Handling the vast majority of audits for companies around the world, both private and public, they are considered a cornerstone of the mainstream financial world.

Notably, during the past few years, the Big Four have been showing particular interest in the crypto industry. However, all of the major auditors have established long-term blockchain roadmaps to remain relevant in the space.

Related: How Big Four Auditors Delve Into Blockchain: PwC, Deloitte, EY and KPMG Approaches Compared

PwC has arguably been the most active Big Four company when it comes to cryptocurrencies. It started accepting bitcoin (BTC) for its services back in 2017 and announced a training program to enhance its employees’ blockchain knowledge in the following year.

Further, PwC has also recognized the regulatory uncertainty, naming it one of the main obstacles on the road to mass blockchain adoption in its 2018 report entitled “Blockchain is here. What’s your next move?” The Big Four giant had also pinpointed the lack of insurance as another problem hindering crypto businesses in a separate interview with Reutres.

Moreover, PwC has not only recognized the importance of the field, but has started to explore it firsthand. First, in May 2018, the auditing firm invested in VeChain, a major cryptocurrency project specializing in the Internet of Things (IoT), supply chain management and anti-counterfeiting.

Related: PwC’s Pierre-Edouard Wahl: Blockchain Can Bring Positive Competition to Swiss Banking Space

In March 2019, PwC began conducting a trial of its blockchain-powered platform for ensuring the integrity of employee credentials. By the end of the same month, the company had become the top recruiter for blockchain-related jobs on headhunting platform Indeed, being responsible for as many as 40 blockchain-related job offers there (EY had 17, Deloitte had 10, while KPMG didn’t have any offers). PwC had 400 blockchain experts on board in 2018 to cater to cryptocurrency-related clients, according to the Financial Times, while this number could be higher at this point.

“We are devoting significant resources to how we might provide audit services in not just cryptocurrency, but blockchain,” a PwC representative told the publication at the time.

However, PwC wasn’t the first Big Four venture to adjust its auditing tools for the needs of cryptocurrency companies. In that sense, it has been outraced by the competing EY, which rolled out its blockchain analytics program called “Blockchain Analyzer” in April 2018.

So, can PwC’s new solution outshine its rivals in the crypto space and will it actually have an impact on the industry at all?

Details about the new version of Halo

As PwC stated in the press release, the tool newly added to its Halo auditing suite can be used to “provide assurance services for entities engaging in cryptocurrency transactions.”

The firm claims that, after the update, the Halo suite permits PwC to provide independent evidence of private-public key pairing, which is used to establish crypto asset ownership.

“Proof of ownership is really the main blocking point,” notes Tsai of Wave Financial. He told Cointelegraph:

“We had a California state auditor come into the office who struggled to grasp what ‘ownership’ of cryptocurrencies looks like. Auditors are used to custodial statements, paperwork and other forms of ‘proof’. With the blockchain, only your private key proves ownership, which makes it difficult to show ownership without exerting control over the funds (moving them around, etc.).”

Therefore, if Halo can actually prove ownership of funds and auditors can trust the tool, it would “speed up audits and cut costs and headaches,” Tsai concluded.

Raffone also argued that Halo might prove to be efficient, given that it focuses on a specific on-chain audit niche:

“This is a useful tool for sure, focused on transactional history and balances which seems suitable for institutional investors and fund managers, entities that normally require audits relating to financial transactions and assets ownership.”

Further, PwC’s Halo can now reportedly gather information about transactions and balances from blockchains. That, according to Martin of Blockforce Capital, is also a potentially effective feature.

“The Halo platform offers an easy-to-use way for firms to access blockchain information without having to spend manpower and resources that could be better spent somewhere else,” Martin told Cointelegraph, elaborating:

“For instance, the Bitcoin blockchain is open-source and can be viewed by anyone. However, just because the information is available doesn’t mean it doesn’t require a unique skill set to access.”

According to PwC, the upgraded version of the Halo suite is already being employed to support audits of clients involved with cryptocurrencies and assisting companies for which the firm is not the auditor in implementing processes and controls necessary to obtain assurance reports from their auditors. Theoretically, that could ease cryptocurrency-related audits not only for PwC, but the industry at large.

Still, the Big Four firm notes that the tool has its limitations: namely, client’s control environment, and, “at this stage,” the breadth of tokens supported by Halo. The software reportedly supports bitcoin (BTC), bitcoin cash (BCH), bitcoin gold (BTG), bitcoin diamond (BCD), litecoin (LTC), ether (ETH), OAX (ERC-20 token) and XRP.

“These considerations will be key when determining whether we are comfortable to accept an audit engagement,” PwC wrote in the press release.

It is currently unclear whether Halo is deployable in all 158 countries that PwC claims to be operating in. Cointelegraph has reached out to the Big Four company to clarify this, but has not heard back as of publication.

Related: Daniel Diemers From PwC Strategy& Switzerland: Adoption of New Technologies Requires More Education

Experts suggest that the vast geography should not be a problem for Halo, however. ACCA’s Vaidyanathan reminded that the international auditing standards (ISAs) apply globally when asked about potential clashes.

Raffone of Finetiq, in turn, stressed the technical nature of PwC’s solution:

“The audit function provided by Halo is purely technical and doesn’t seem driven by any regulatory requirement, therefore it seems a ‘upon request’ service that can be deployed across jurisdictions. Although I don’t think Halo fills any regulatory need per se currently, it is certainly comparable to similar investment fund audit services and once the crypto industry becomes mainstream, I would expect this sort of audit service to be required by regulators.”

Martin maintains a similar position. According to the Blockforce Capital’s CIO, PwC should be well-poised to take on the regulatory complexities, given its experience with running auditing and accounting practices in multiple countries:

“While adjusting to different jurisdictions is difficult, PwC is in a great position to take on the task. They are a highly respected accounting firm and have the resources to apply to such an endeavor.”

Do things get better as we go along?

In the end, the problem seems to come down to the aspect of adoption: While the cryptocurrency industry continues to grow, the recognition from mainstream corporations — such as the Big Four — could speed up this process. That is why PwC’s work with Halo is “validating” the institutionalization of the crypto space, in Tsai’s view.

On the other hand, the need for crypto-specific audits could be fulfilled even without the participation PwC, Deloitte and others, according to what Raffone told Cointelegraph:

“A whole host of specialist firms are emerging as leading crypto audit service providers, challenging the Big Four and their cost structure. Even IBM is getting in the game with a recently patented solution to audit blockchains.”

While time will tell if Halo turns out to be a viable solution for the crypto space, the remaining Big Four players have now been challenged to release their own software that would be on par with Halo in terms of functionality.

 

from: https://cointelegraph.com/news/will-pwcs-new-software-solve-the-cryptocurrency-auditing-problem

 

 

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