the views expressed are the personal views of the ... pcaob - yerm… · benedetto cotrugli’s...

The views expressed are the

personal views of the

presenter and do not reflect

those of the PCAOB,

members of the Board, or the

PCAOB staff.

Will blockchains

put the auditing profession

out of business?

David Yermack

NYU Stern School of Business

National Bureau of Economic Reseach

FinTech UBS’s trading floor, Stamford, Ct., USA

2005 2016

Could this happen to auditors?

The blockchain

“Message verification and transmission

error detection by block chaining” U.S. patent granted to IBM scientists in 1976

Distributed ledgers Authenticating digital documents – Haber & Stornetta (1991)

Bitcoin’s open network of 12,000 nodes November 6, 2017

https://bitinfocharts.com/bitcoin/nodes-active/

Three major innovations that

Satoshi Nakamoto designed into Bitcoin

• Recording of new data sequentially in a write-only, indelible

ledger, the “blockchain” (IBM, 1976)

• Decentralization of the ledger to provide transparency of data

to all users and interested third parties (Haber & Stornetta,

1991)

• Validation of new data by cryptographic “consensus” proof, in

recurring 10-minute open competitions, instead of reliance

upon a trusted third party (Nakamoto, 2008)

A disruptive technology

“. . . The blockchain has been

increasingly eyed by mainstream

financial institutions as a breakthrough.

. . . it could enable financial institutions

to settle trades in seconds rather than

two or three days

. . . blockchain technology could reduce

the bank’s infrastructure costs . . . by as

much as $20 billion a year by 2022.”

What could disappear because of

blockchains?

• No more banks

• No more stock exchanges

• Far less litigation

• Decentralized government property registers

• No more accountants and auditors

• Etc…

Two kinds of blockchains

Open

• Anyone can opt in

• Decentralized governance

• Size is endogenous

• Blocks updated via

competition

– Organic rewards to miners

– Bidding by users to advance

in queue

Permissioned

• Participation restricted

• Powerful gatekeeper

• Size is limited

• Blocks updated by central

authority

– User fees charged

Daimler Benz’s blockchain bond issue June 2017

Maersk’s blockchain marine insurance September 2017

AmEx’s international remittances November 2017

Visa’s blockchain B2B payments November 2017

Self-regulating consortiums are

becoming very important in FinTech

Self-regulating consortiums are

becoming very important in FinTech

Origins of double entry bookkeeping

• Accounting systems developed organically in Europe, the Middle East, and East Asia in the middle ages.

• Double entry bookkeeping emerged by the end of the 14th century and was widely used by the time of the Renaissance, especially by Venetian merchants.

• Earliest known description appears in Benedetto Cotrugli’s Della mercatura e del mercante perfetto (1458), though it was not published until 1573. Luca Pacioli is often credited as the “father of accounting” for his intervening 1494 book.

The first public company auditor

• William Welch Deloitte in 1845

was the first independent auditor of

a public company, the Great

Western Railway

Using the blockchain for

“real-time accounting”

• “A possible future: all firms record their

external obligations and claims on a single

shared, massively replicated ledger.” – Richard Gendal Brown, IBM UK

• Is this a better way to keep financial records?

Why would this be a good idea? The obvious benefits

• Fraud would become much more difficult

– Could not create fictitious assets

– Could not backdate transactions

– Could not capitalize operating expenses

– Etc.

• Auditing could become unnecessary due to the blockchain’s

data integrity

• Accounting regulations could become unnecessary

– Anyone could make DIY financial statements from the raw data

Co-opting regulators

Owning the technology

“Accountants work frequently in the

‘verification’ business – audit and attest

and so on -- and blockchain is all about

verification...Clearly audit is going to

change dramatically -- it already is

changing… Ultimately, CPAs will be

attesting to companies’ compliance with

cyber-security standards”