Editor’s note: This is the first of a three-part series on how technology is affecting the accounting profession.

With business increasingly migrating out of the physical world and into the digital one, accounting firms are rethinking their practices in order to adapt to an era of big data, artificial intelligence and transactions verified through blockchain technology—changes that could have a disruptive impact on the profession as a whole. Whether these innovations are just picking up steam or are already widespread in the business world, they will have wide-reaching effects, ranging from what kind of work CPA firms do to how these firms are structured in the first place. 

Part of this phenomenon is due to efficiencies in data collection that come from business becoming more enmeshed with information technology. Think of a typical audit of a large entity. For years, such engagements required a veritable army of entry-level auditors, many of whom were necessary to collect and process massive amounts of information. Whether this meant examining invoices at an office or counting boxes at a warehouse, much of the work was made up of rote tasks that required little judgment or initiative. Today, however, more and more of these rote tasks are being taken on by machines in all areas of business.  

Robert H. Colson, a distinguished lecturer at Baruch College, where he directs the MS in Accounting program, noted that this is reflective of the increasingly data-driven environment of today’s business world. While technological advance certainly isn’t new to the profession, he said, this new environment has required firms to deploy technology in ways they never have before, which in turn has led to a changing demand for different skill sets. 

“Just keeping pace with the amount of data, the sheer amount of data, that’s new. So, there’s a lot more demand for people who are able to do data analytics, also greater demand for people to do business modeling and business valuation—or valuation of any type—because of all the Level 2 and Level 3 financial instruments everyone seems to be holding,” he said, referring to assets or liabilities whose fair value is not readily available. 

William T. Brennan, managing partner for audit transformation at PricewaterhouseCoopers LLP, said that his own company has software that can, rather than just sample information, take almost the totality of someone’s transaction flow for a particular time period, whether it’s a day, a week, a month or a year. 

“We have our teams doing that with clients today. So, rather than pulling paper, pulling invoices, we’re able to take our client’s data, and as long as you’re comfortable with the security of that data and the configuration of that system, you can extract data points, match them and contribute them to the quality of your audit,” he said. 

Brennan added that journal entry analysis—a major part of any audit—has also been largely automated. Today, he said, software can take 100 percent of populated journal entries and see where exceptions or certain risk profiles exist, which can help auditors spend more time exercising professional judgment and less time with routine data processing. 

“I can also say [to my client], ‘Do you realize that 60 percent of your journal entries are created after the end of the month?… The creation of the ultimate set of financial statements is fraught with all sorts of journal entry interventions, and that’s not a very good fact pattern’” he said. Brennan commented that he would then question the client about what was behind those suspect journal entry interventions.

But as complex as some engagements have become, and as advanced as the technology to do them is, the fundamental nature of the work is still largely the same, according to Gerald S. Silberstein, an accounting professor at Sage College of Albany. 

“The transactions themselves will be, in a large part, relatively similar to what you expect today, and the nature of a transaction hasn’t changed since the days of Luca Pacioli—the substance can, the complexity can, but the nature of the transaction itself [is the same]. Double-entry bookkeeping is a wonderfully flexible instrument,” he said. 

A blockchain revolution?

What could disrupt this stasis is blockchain. Today, it’s most well known as the technology undergirding Bitcoin and other virtual currencies. Over the past few years, though, there has been a rising interest in applying it to other areas, such as banking, inventory control and financial audits. 

A blockchain, in its simplest form, is a distributed collection of databases, called nodes, all holding the same information. Changes in one node must be confirmed as valid by the other nodes, and only then can new information be written or existing information altered. In this way, it is nearly impossible to tamper with data in a blockchain. Amanda Wilke, chief information officer at WithumSmith+Brown, PC, said that this technology will create fundamental changes to the nature of the audit. 

“I’d say in 10 years, the way we store transactional data and the way we verify and audit that data is going to change tremendously, so I think the industry will look completely different in the next 10 years,” she said. 

Deloitte, in a March 2016 report, “Blockchain Technology: A -changer in accounting?” used the term “triple entry accounting” to describe the implications that blockchain technology could have on accounting practice. As it is now, with a double-entry system, audits are a costly and time-consuming exercise that ties up a company’s accountants and other professionals for a considerable length of time. The Deloitte report said that because blockchain is very difficult to tamper with, its widespread use could make audits far more efficient. 

“Instead of keeping separate records based on transaction receipts, companies can write their transactions directly into a joint register, creating an interlocking system of enduring accounting records. Since all entries are distributed and cryptographically sealed, falsifying or destroying them to conceal activity is practically impossible. It is similar to the transaction being verified by a notary—only in an electronic way,” stated the Deloitte report. 

Deloitte & Touche LLP’s Chief Innovation Officer Jonathan W. Raphael said his firm already has a number of partners developing prototypes for blockchain applications for activities such as cross-border payments, digital banking, loyalty and reward programs, investment management, insurance and even tax planning, all in the hope that they can eventually bring this technology to bear for their clients. But he admitted that, right now, the future of blockchain and its potential applications is still open, and the impact it will have on the audit will largely depend on which sectors of the market adopt it. 

“You can get a bunch of auditors to talk about how they leverage blockchain, but the real thing will come from the market and major entities, Wall Street and Main Street using blockchain for their transactions—that is the best accelerator,” he said. 

So, if blockchain is able to collect all the information, and if that information is known to be all but impossible to alter without authorization, what exactly is the role of the auditor? Will there still be one? Wilke says yes, though she believes that the nature of the job will be different. The auditor, she said, will become more of an adviser—someone who can provide information and guidance for a client using the data collected from the blockchain. 

Raphael made a similar point, saying that blockchain use, rather than making auditors superfluous, will, instead, free up time that had previously been spent on rote tasks and allow them to focus on areas that require professional judgment, particularly areas that blockchain cannot yet account for, such as legal estimates. 

“I don’t see a future where two parties agree on what the legal outcome will be on a legal settlement before it occurs, so you still need managers making estimates and auditors reviewing that,” he said. 

Other areas that will still require human judgment, according to Raphael, include matters internal to the company like goodwill impairment—which, he said, requires a lot of entity-specific judgment—presentation of financial statements and even basic things like revenue recognition. 

“It’s complex. There [are] components and timing decisions, and some of it is quite judgmental. … I don’t see in the short term being able to standardize that in such a way it will be scalable,” he said. “But long term? Who knows?” 

The answer to that question could be IBM’s Watson and rudimentary artificial intelligence (AI) systems like it. In March 2016, KPMG announced that it had formed an agreement with IBM to apply the system—which became famous for defeating two record-breaking “Jeopardy!” champions—to its suite of professional services. 

KPMG LLP’s Cognitive Technology Audit Leader Marc T. Macaulay said that his firm sees cognitive technology like the Watson system as a way to keep up with what he said was an explosion of data in recent years; whether it’s YouTube, LinkedIn, Twitter, smart cars, smartphones or smart appliances, he said, nearly everything today produces data, and some of that data needs to be audited. 

“It’s no longer a manual ledger—a 16-column, as we used to call them—where you had professionals looking at them to make the books and records of a company. Auditors are looking to audit those records, [but] now you have this explosion of data. … We need these tools to be able to continuously improve audit quality and to provide deeper and more insightful information for our clients, for our audit committees and for our marketplace more generally,” he said. 

Macaulay said that Watson and programs like it will have a transformational effect on the industry—cognitive computing platforms are trained to recognize patterns, generate hypotheses and provide reasoned outcomes in a way that is similar to a human being. 

“It’s not simply taking structured data and applying structured routines to structured results that will differentiate and provide those insights … but to engage cognitive technology to evaluate unstructured data and provide these reasoned outcomes,” he said. 

He added that his firm expects to begin deploying this technology over the course of the next year. Macaulay believes, however, that even then there will still be a place for people in the process, as he thinks of it as what he called “supervised technology.” People will still be necessary to take those insights that Watson finds, whether risk anomalies or analyses, and do something with them. 

Brennan made a similar point, saying that his own firm has an AI platform that can scan and analyze lease agreements. By doing this, it’s possible to find which ones, out of hundreds of leases, have escalation clauses or percentage lease agreements, and detect areas where there are inconsistencies. As an example, he said, imagine that the program finds six contracts with escalation clauses that it flags as needing a closer look. 

“So, [here’s] a good example of where humans come in: I’d need to pull and focus on those half a dozen contracts and read all the words in that escalation clause. … The AI model would never look at an entire 50-page agreement, but it may direct you to what needs to be focused on because this element of a contract could cause an issue. So, it’s helping focus,” he said. 

Overall, Macaulay was excited for the future of accounting and the ways in which it will be affected by programs like Watson. 

“It’s an exciting time. This is about innovation; it’s about being able to take advantage of cognitive technology to improve audit quality, to then provide deeper and more meaningful insights to our clients and audit committees and, importantly, to provide a rewarding and differentiated career experience for our people,” he said. 

But what do these changes mean for younger accountants who either have just entered the working world or are just about to? What kind of professional landscape will they be entering? And how can they best prepare themselves to effectively navigate it? We’ll explore these questions in the second part of this series in the next issue of The Trusted Professional.