What I’ve learned building a blockchain business
The assurance partner responsible for the development of blockchain services at Aprio LLP shares her insights into how the technology works and how to succeed with it.
By Jagruti Solanki, CPA, CGMA, as told to Cheryl Meyer
This article is part of the occasional series "Future Tech Today," which offers firsthand experiences from accounting firms, finance departments, and others putting cutting-edge technologies to work today.
When Aprio LLP assigned Jagruti Solanki, CPA, CGMA, MBA, as an audit manager for the firm's first blockchain client in 2014, she knew nothing about the technology. Today, Solanki is well known for her blockchain knowledge.
As an assurance partner within the technology and blockchain group at Aprio, a 500-employee firm based in Atlanta, Solanki assists clients with developing blockchain solutions for both domestic and international accounting challenges. In that role, she has won recognition for her innovative work with blockchain technology and accounting. For example, the AICPA honored Solanki with its 2018 Innovative Practitioner Award. This year, Atlanta Inno recognized her as one of Atlanta's top 50 innovators.
So how did Solanki go from zero blockchain knowledge to blockchain innovator in five years? In this article, she shares her story and some of what she has learned along the way.
In 2014, there was massive disruption in the audit and accounting world when the new revenue recognition standards were issued. Venturing into blockchain at the same time was a perfect storm, as it was an opportunity to make the leap with the new accounting standards and also to look at information in a new way. Because information has been traditionally stored on centralized servers, transactions were always subject to being altered after they had been recorded. This was a serious flaw in terms of maintaining trust for parties outside of the organization. Blockchain changes that.
Also in 2014, we picked up our first blockchain client. I didn't know blockchain existed when I was assigned to the account as an audit manager. We were expected to determine risk and, in response, design our audit procedures based on an understanding of the company and its control environment. We could not do so without first understanding the technology. We quickly realized we had to take a deep dive into blockchain and how it works. We needed to understand the nature of bitcoin and other digital assets. After we acquired the basic knowledge surrounding the technology, we then could assess the risks associated with the business. As the industry grew and matured, so did we. Today, we work with more than 35 companies using blockchain.
Blockchain is like e-commerce in its infancy, and as the financial gatekeepers, accountants don't want to be behind the game on this. I am now part of the AICPA Digital Asset working group. Today, our group is recognized nationally as thought leaders in the blockchain space, and various members have been speaking across the country sharing our thoughts on blockchain accounting, tax, cyber risk, security, and best practices in implementing blockchain solutions.
Blockchain is a distributed ledger. Transactions (such as bitcoin trades) are stored in multiple computers that are connected to a network. Every time a new entry is created, it is relayed to all of the connected computers, not to a centralized server. The network then verifies the entry using a consensus protocol built into the program. Once consensus is reached, the transaction is updated in all of the computers and sealed with a cryptographic signature called a "hash." Once a transaction is recorded and accepted by all the computers, it cannot be changed. This decentralized nature of blockchain contributes to its popularity.
It is also important to understand the difference between public and private blockchains. In a public blockchain, such as the one for bitcoin, anyone can join and participate in the network. On the other hand, a private blockchain requires an invitation to participate in the network once the party is validated. Private blockchain networks are generally permissioned networks.
A smart contract, one of the applications of blockchain, is executed by a computer program that acts as the intermediary. Imagine an environment where machines are able to interact, contract, execute, and settle contracts. Except for the initial programming and deployment, all of the actions are carried out on autopilot and by the machines that are connected to the network. Walmart announced last year that it would require its suppliers of fresh greens to be on its blockchain platform by September 2019. Walmart's blockchain, which uses smart contracts to trace fresh greens such as lettuce and spinach from their source throughout the distribution channel, is meant to more quickly and accurately pinpoint sources of food contamination so that Walmart can improve the accuracy of future recalls. This will improve public safety and help suppliers and farmers save money. Suppliers and farmers will be expected to use a web-basedportal to enter the required data needed throughout the supply chain process.
There are issues related to cryptocurrencies and exchanges. Some companies issuing tokens in exchange for cryptocurrencies have opened nonprofit organizations outside of the United States but still potentially have some U.S. tax exposure, particularly if they are based here. Also, companies that traded from one cryptocurrency to another have realized that each time cryptocurrency changes hands there is a loss or gain, which they need to track for tax purposes. Cryptocurrency is a property, and from a GAAP accounting standpoint, there is still no guidance.
Blockchain presents a significant opportunity for accounting firms. As auditors and accountants, we can now gather and verify information in real time, which further enables improved transparency and better data for analytics and business decisions. Our roles as CPAs will not go away, but they will likely change significantly. Our clients are not waiting for the various regulatory bodies to give them guidance, and as trusted advisers we need to move at their speed, or probably faster. We need to work with the standard-setting bodies and translate the issues so clients can formulate policies around blockchain.
Blockchain will create new challenges for CPAs. We will need to make sure that the information in each blockchain is complete. As auditors, we will have to drill down into the code level to see if the coding is working properly. To do that, CPA firms will need to have that in-house technology expertise or use technology partners to help us through those functions.
What it boils down to is this: Is this an industry you want to enter? Do your internal groundwork before entering the blockchain space. Ask, "What can the current database or ledger not solve that blockchain can solve?" If you are a midsize or smaller CPA firm, ask, "Is the investment going to return the value we are looking for?" But do not shy away from blockchain. It is already here, and if you want to be a firm that is ahead of the curve or at least with the curve, it is something to consider. Stay up to speed on what is going on in the blockchain space. Talk with peers. Consult with experts. Educate yourself.