PWC Launches Audit Software

Article 1
Issues that will arise from Cryptocurrencies

For Accountants and
Auditors
By Ng Kean Kok

Introduction

This represents the first of a series of articles relating to ‘cryptocurrencies’, in particular how it will affect the:

1.     Accountants who will be required to record the transactions, and apply subsequent measurements as per accounting                standards. Many questions will arise from here, for example, what would be the accounting standard(s) to apply and what        exactly would be the double entry?
   
   
2.     Auditors , in particular as to the impact on the internal and external audit. Similarly, there would be many questions that          would require to be answered, and one of them would be: are the SMPs in the right position to promote themselves to              offer the appropriate audit services (as would be seen in the writeup below)?

Recent news release:

It was reported in The Star (dated 20 June 2019) that PwC had launched a solution to support audit of cryptocurrency.
[link:https://www.thestar.com.my/business/business-news/2019/06/20/pwc-launches-solution-to-support-audit-of-cryptocurrency] 

PwC had launched a new software tool to provide audit and other assurance services to its  clients holding or transacting in cryptocurrency. It is supposed to be part of its ‘Halo’ suite of auditing tools that may be used to provide assurance services for entities engaging in cryptocurrency transactions.

On top of that, PwC has said that it is able to engage with companies that are not their audit clients, to assist such companies to address the opportunities and challenges of blockchain and cryptocurrency, including the area of implementing processes and controls that they will require tin order to obtain assurance reports from auditors.

What has the other three of the Big Four been doing in recent years?

Deloitte
Deloitte has attempted to employ similar technologies for cryptocurrency, which in turn has led to the creation of Blockchain Lab and Blockchain Centre of Expertise. These entities in turn have created a Deloitte blockchain application that can be used in auditing and supply chain services

Ernst and Young (EY)
EY is noted for being the first of the Big Four to accept Bitcoin. It has several initiatives and on 24 April 2018, it launched the EY Blockchain Analyzer, that gathers a firm’s cryptocurrency transaction data from multiple blockchains, thus allowing auditors to assess the data and identify transaction outliers. This proved especially useful as they experienced increasing number of clients engaging in the use of cryptocurrencies as a payment option and salary option.

KPMG
KPMG has also been active in testing and refining blockchain services, and in particular, has been successful in helping banks build their own blockchain services, known as Digital Ledger Services (in collaboration with Microsoft)

Issues at hand:

This article does not serve to promote the Big 4 accounting firms (see above).

Rather, it can serve to highlight several matters that members of MAFA ought to consider.

In general, there is a need to appreciate Blockchain technologies and what would be the impact on:

1.  Operations of companies – transactions will certainly take place in a different manner from what many are  traditionally           used to
   
   
2.  Accounting issues will surely arise, namely:
   

   a.  What double entry(ies) shall take place?

   b.  Is the accounting treatment the same for all businesses?
   This certainly cannot be the case as companies may use such digital assets differently (for e.g. investment purpose as opposed to another that holds cryptocurrencies as a  way to make transactions.
   
   c.  Which accounting standard(s) shall be applied? Is a cryptocurrency cash? Inventory? Financial asset? Intangible asset? Readers would appreciate that if there exists accounting issues behind cryptocurrency, at a later point, it will certainly be an audit issue

3.  Auditing issues will be the next to follow: Firstly, there would be the impact on internal audit, with the  basic issues being:
   

   a.  What skills should internal auditors have?

   b.  Do internal audit staff understand blockchain technologies in the first place?

   c.  Is there a need for IT specialists to be employed within the internal audit team?

   d.  What audit steps should be applied?

   e.  Would third party(ies) that host the cryptocurrency allow for audit through their system

   f.  What audit technologies are there for internal auditors to apply?
   And many more

   Secondly, similar concerns may also be raised with regards external audit.

   a.  What skills should internal auditors have?

   b.  Do external audit staff understand blockchain technologies in the first place?

   c.  Is there a need for IT specialists to be employed within the internal audit team?

   d.  What audit steps should be applied?

   e.  What confirmation(s) is(are) required and how shall such confirmation(s) be obtained?

   f.   What audit technologies would be required to be employed?

   g.  Are there any engagement issues?

   h.  What are the different types of audit risks that exist?

   Additionally, there is a need to understand what internal auditors would do or have done if some degree of  reliance is placed on the work performed by the internal auditors.

4. Tax issues
   This in itself would also present its own set of issues, in particular, when shall it be taxable as income or deductible as expenses, depending on the nature of the transaction as income or expense.

Conclusion:

Through the trainings that I have conducted thus far, I note that there appear to be increasing frequency of SMPs in Malaysia having come across cryptocurrency transactions in their clients’ books of accounts. Hence, the need to prepare for the accounting and auditing issues.

It is therefore imperative for accountants /auditors in general to better understand the blockchain technologies and the different types of cryptocurrencies that are in existence (which unfortunately will continue to evolve and develop).

The Big 4 have made strides towards preparing themselves in the increasing use of cryptocurrencies in their clients and such announcement also serve as marketing efforts for the Big 4 firms. What of the member firms of MAFA?. .

Future articles shall cover areas such as:
1.  Basics of blockchain technologies and their applications

2.  Accounting issues (including proposed double entries and treatments)

3.  Audit considerations

4.  Tax lessons from other jurisdictions

By Ng Kean Kok
Trainer