In 2017, bitcoin, a cryptocurrency based on blockchain, skyrocketed in value and caught the eye of executives around the globe. While most of us have focused on the currency aspect, it’s no secret that blockchain, a distributed ledger technology, could see its most effective and widespread application in the corporate world, specifically in finance.
Blockchain combines the speed and openness of the internet with the security of cryptography to provide faster verification of key information. Whereas most transactions today are verified by a central party, such as a government agency, blockchain offers decentralized verification through multiple users with time-stamped links of blocks of encoded transaction data. Any alteration to recorded transactions triggers a mismatch in the public record.
The impact of blockchain on CFOs and their enterprises could be significant, from reducing the risk and effort of settling transactions to providing instantaneous glimpses of corporate performance. It’s no wonder then that finance leaders are implementing blockchain at a swift rate. According to a Forbes Insights survey in association with KPMG of 250 finance executives, almost 41% say their firm uses blockchain in some manner, and another 50% expect their organization to start using blockchain within two years. For those currently using blockchain, they’re doing so in a number of ways, including application in smart contracts (cited by 60%), operations (52%) and fraud prevention (47%). Cryptocurrency transactions were cited by only 13%.
The Benefits Of Blockchain
Blockchain’s nature as an unalterable ledger benefits CFOs and the audit process as a whole. For CFOs, blockchain grants them an instant and low- or no-cost verification of transactions stored on a distributed ledger, offering what is sometimes termed a “single source of truth.” This is because blockchain provides a single version of a contract or transaction to all involved parties, which ultimately prevents one party from altering contracts.
“As a result, market efficiency is improved, as credentials, reputation systems, provenance and other attributes of individuals, goods and services can be more cheaply tracked with higher integrity throughout the economy,” according to the Yale Journal on Regulation. On a broad level, having an almost instantaneous profile of a business’ status at any time can help shift CFOs from being seen as experts on what has happened to instead being seen as leaders involved in guiding their business forward on a daily basis.
Blockchain also has the potential to improve the auditing process. Much of the early discussion around blockchain revolved around the possibility that, since data is now digitally available and can be quickly verified, instant audits could be performed. Even if that capability isn’t reached though, blockchain could allow auditors to shift from random sampling to comprehensive transaction review during the audit. In such an environment, its likely auditors could produce more-effective audits, which in turn brings faster corporate reporting and greater comfort to counterparties, shareholders and others.
While the potential impacts of blockchain are clear, how the technology will play out in the corporate world is not so easy to predict, especially given some concerns around the technology. More than 29% of executives surveyed are most concerned about security shortcomings (e.g., unauthorized access to data, anonymity and fraud prevention) and 28% are worried about current technology limitations, such as market adoption and transactional speed. Regulatory oversight, including legal or jurisdictional issues, are also a concern for 27% of respondents.
“Blockchain is on the forefront of things to come, but my gut feeling is it’s two, three or four or more years away from being able to have a real impact on the business,” says Jim McKinney, Kemper Corporation CFO.
Despite this, the Forbes Insights survey of finance leaders indicates audit expertise on blockchain is top of mind. Almost 79% of those surveyed say they expect their auditor to provide an understanding of blockchain’s impact on their business or financial reporting.
The audit industry is rapidly exploring the use of blockchain in real-world settings. In Taiwan, for example, the Financial Information Service Co. (FISC), a public-private partnership that performs back-office services for financial institutions, is piloting a blockchain external audit system for companies’ interim financial reports—a joint venture with the big four accounting firms. According to a report by the CTEE, a Taiwan news organization, corporate transaction data that has been entered by hand, and therefore is highly prone to error, will be loaded onto a blockchain system that will be accessible by the audit firms. The goal is to accelerate confirmation times from two weeks to less than a day. While the pilot is still ongoing, the FISC is confident enough to say it expects to expand the system to 1,400 listed companies in 2019.
While companies may still be in the early stages of exploring blockchain, it’s clear from the Forbes Insights survey that the technology will become an important part of the finance function: the potential benefits are far too great for it not to.
Erich Braun, Audit Partner at KPMG LLP, agrees: “Blockchain offers tremendous upside, with a really thoughtful assessment of where the risks and vulnerabilities are to your business model and how to best protect your interests.”