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Answers for Tax Professionals

Get ready for a massive “block” party

Jon Baron  Managing Director, Professional, Tax & Accounting, Thomson Reuters

Jon Baron  Managing Director, Professional, Tax & Accounting, Thomson Reuters

Given the power of the technology driving blockchain to promote trust and transparency via a distributed ledger on a peer-to-peer network, the potential applications are wide-ranging and far-reaching.

When you consider the multitude of legal, financial, taxation and accounting channels by which individuals and organizations interact, and apply a technology that provides disintermediated and indisputable veracity in real time, blockchain usage is certain to transform professional life in the digital age.

To understand what the advent of the blockchain revolution will mean for the tax and accounting profession, we spoke with three Thomson Reuters thought leaders: Jon Baron, managing director, Professional; Irish McIntyre, vice president, Product Management; and Keith Nichols, managing director, Government. Each works directly with our customers, and each has been closely examining blockchain and the impact it will have on the profession.

The professional accounting perspective

Dividends: What do you see as the biggest disruption that blockchain will bring to accounting?

Jon Baron: Let me start with a description of what blockchain does. In simple terms, blockchain is a breakthrough that uses technology that has been around for years, in a combined manner in very different and unique ways. The data consists of concatenated blocks of transactions that allow anyone to share a digital ledger across a network of computers without need for a central authority. No single party has the power to tamper with the records: The math keeps everyone honest.

All parties must agree that the transaction is correct before it gets added to the chain. So a blockchain is a peer-to-peer network where there is no one individual that has control. There is no central authority. And the computers are in more than one location.

Blockchains consist of three basic parts, and if you understand the general concept, you can understand how data within the chain is indisputable.

A block consists of transactions and transactions are the recording of data.

The chain is a hash that links the data together. Hashing is not a new concept. It has been around for decades. It’s used because it creates a one-way function that cannot be decrypted and is created from the previous block, which has already been “accepted.” Consider the hashing function creates a unique “fingerprint” of the data that time-stamps the data and locks the blocks in order.

The network is the third component. The network is full of “nodes,” and each node will contain a record of all transactions on a blockchain. The more robust the network, i.e., the more nodes there are and the more geographically dispersed, the better.

I don’t know what the biggest specific disruption will be, as it is such a fast-moving technology, but I can see the audit area as being dramatically different than it is today and changes will come very soon. Another area may well be tax compliance. This is currently starting to have an impact in several countries.

Think of the ability to audit a file as it is created and being able to identify incomplete files as they are being created. Record systems that have blockchain built in will have that capability. That will allow correction before a problem is recorded.

Dividends: In the age of blockchain, how should firms evolve their auditing practice?

Baron: First of all, the audit process and workflow are going to change – and rapidly at that, by the convergence of multiple technologies. Big data comes into play, as does artificial intelligence that incorporates machine learning – which has been termed “cognitive computing.” Blockchain enters the mix based on the potential of creating a private or possibly a permissioned blockchain with the client, and even accessing public blockchain or multiple public blockchains to confirm other data. A first and important step is for firms with audit practices to get some foundation of understanding about how blockchains work and how they are evolving.

“Blockchain is a rapidly developing technology that I believe will impact literally every industry and profession”

Dividends: What are the functions you see as most likely to be automated/disrupted via blockchain?

Baron: Blockchain is a rapidly developing technology that I believe will impact literally every industry and profession. Blockchain technology was a major technical breakthrough that some are calling the fifth evolution of computing. With data being permanent and indisputable, we are now in an age where business can be transacted completely digitally. We now can transact business in a way that
was not previously possible online. Transacting business tended to be offline, with a “synching up.”

The technology will impact all of us regardless of industry or profession. The truly interesting thing about blockchain technology is that its power and capability are currently astounding, and the changes – improvements to the tools – are coming so rapidly. We’ve only scratched the surface, yet governments are exploring the technology for things like land rights, voting, identity management, stock and bond transactions, trading currency, validating contracts, collecting taxes and even exploring building hardened security into the Internet of Things – which is being studied by the US Department of Homeland Security.

“You can think of any process – contracting with anyone or any business, trading currencies, the mortgage process, tracking precious gems, etc. – as benefiting from blockchain technology.”

You can think of any process – contracting with anyone or any business, trading currencies, the mortgage process, tracking precious gems, etc. – as benefiting from blockchain technology. Add to the list performing audits, and the impact on the accounting profession is evident. Most firms generate considerable revenue from tax compliance – which several governments are currently exploring automating with blockchain – and audit work. In the future, that may change dramatically.

So practices need to think about evolving into less compliance because that’s going to be automated, and focus more on advising clients on moving their businesses forward. I think firms are going to get into consulting much more and helping their clients grow rather than analyzing what has happened in the past. Firms will be doing different things, operating their practices differently, utilizing a different set of tools and possibly getting into new areas such as security. Cybersecurity is probably a big consulting opportunity for accounting firms because we’re in the digital world today, which presents challenges both for us as well as our clients.

Dividends: Blockchain will be disruptive for the accounting industry, but is there a flip side? Is adding blockchain consulting an opportunity?

Baron: I think there is a flip side. Blockchain technology can benefit any process, as mentioned previously. And business process is one of the things that accounting firms excel at. Add to that the fact that firms in the future will use the technology within their audit practices, and that is a good mixture for opportunity. Firms that can get ahead of the technology – learn it and embrace it – could be at the forefront of helping consult on potential blockchain technology for their business clients. It may very well be one of those areas to expand into, which would allow firms to truly differentiate themselves from the after-the-fact compliance generalist work.

“Blockchain technology can benefit any process and business process is one of the things that accounting firms excel at.”

The corporate perspective

Dividends: What is the biggest disruption that blockchain will bring to corporations?

Irish McIntyre: The biggest first round of disruption is likely to be the struggle to deal with the ways in which authorities implement blockchain technology and what that means for the way tax departments do work today. To some degree, corporations may get caught between their Enterprise Resource Planning (ERP) vendors and authorities.

A taxing authority may say your corporation needs to interact with them via blockchain, but is your ERP ready? The ERP might say, “I don’t do taxes; that’s not my problem.” So then you might need a partner to bridge the ERP’s systems to tax authorities.

It’s a complete shift between what sometimes gets referred to as analog or post-audit to a digital or pre-audit world. In other words, the tax authorities will see it as it’s coming in; there is no reconciling it later or explaining the difference in the future. It’s flowing through the system immediately. It fundamentally changes the way in which the tax department operates the technology it uses.

Dividends: How can corporate tax departments build blockchains into their overall business strategy?

McIntyre: I’d say that the most critical thing for corporations right now is to become literate and watch the evolution of distributed ledger technology. The tax authorities are becoming very, very active in what blockchain means, and they are getting ready to do a fair amount of experimentation with the technology. If corporations can’t interact with them, if they can’t try to find win-win situations with this technology, they’re going to wind up in a bit of trouble.

Multinational corporations should get involved with tax authorities a bit, do some experimentation and co-creation with them. That’s going to help define what’s feasible and what’s not. Anyone who thinks that this is sort of bleedingedge technology that won’t hit them for 15 or 20 years – I think their calculation is really way off.

“The most critical thing for corporations right now is to become literate and watch the evolution of distributed ledger technology.”

Dividends: How would you convince C-suite corporate executives that blockchain is not just a problem to be solved by the IT department?

McIntyre: Here’s the secret sauce of blockchain: It aspires to remove the middleman and the middleman’s cost by bringing together multiple parties in a more automated way. The reason that matters is you can look at almost any company’s business model and the promise of a pervasive blockchain future is going to reduce its operating costs dramatically. Such that if they’re not doing it but their competitors are, they’re going to be at a competitive disadvantage – or, as in the case of the financial industry, it will disrupt their entire business.

The reason it’s not an IT problem is the IT people are unlikely to be the ones who determine a company’s fundamental business model. It’s the C-suite who should be war-gaming out some of the ways in which they could become a completely defunct business and then backing into what they should be doing to experiment. The C-suite ultimately needs to determine whether they pivot their business model to incorporate this technology rather than hiding from it.

Dividends: How can corporations overcome the aversion to working in a blockchain ecosystem that encourages collaboration and transparency?

McIntyre: Well, either they do it or somebody is going to do it to them. The question is, are you going to be at the table or not? You can have an aversion to it. That’s fine. You just increase your odds that you’re one of those companies that misses the wave and that wave could be a sales wave. It could be a competitive advantage wave. It could be a lot of things.

Nobody can tell you how fast it’s going to happen. The one thing going for everybody is that it takes several people to move or an authority to dictate the movement. I think tax in particular is at risk. With tax it’s different because all it takes is a tax authority to say, “We’re deploying this or that distributed ledger. We expect all companies to basically get on board and only use software that can actually read and write from our distributed ledger.” They have the authority to do that. They can dictate it, and they’re pretty active right now.

The government perspective

Dividends: What do you see as the biggest disruption that blockchain will bring to governmental tax transactions?

Keith Nichols: Blockchain could enable taxing authorities to have real-time transparency and immutable information on taxpayers’ transactions (either corporate or individual). If you take that a step further, you could say that the tax return itself and the compliance function of government become a thing of the past. At the least, it changes pretty significantly in that, instead of filing an annual return, the government could have access to your books on a public blockchain and could take tax at the time of profit.

As you generate profits, there will be a taxable entry in the blockchain. The government would see that and say, “OK, that’s the taxable point. Let’s create a smart contract.” So the tax returns become the smart contract within the blockchain that the parties agree to and say, “OK, at the point of profit, we are just going to take the tax.” The blockchain records negate (or significantly change) the need for the tax return in the future.

Blockchain becomes a part of the transactions of a company and the transactions of a government. If you take it all the way out there, there’s a huge implication to what it does.

“Blockchain becomes a part of the transactions of a company and the transactions of a government. If you take it all the way out there, there’s a huge implication to what it does.”

Dividends: What are some blockchain use cases that governments can expect to adopt in the future?

Nichols: One obvious area is land registry because it’s a record that the government keeps and says, “Here’s who owns this piece of property.” For example, consider some developing countries where there is a significant amount of corruption. People don’t trust the government, so transferring land and proving ownership become difficult. Banks don’t want to securitize mortgages against land where there might be questionable ownership. That hinders economic development overall.

Enter blockchain. Blockchain creates transparency. When land registry is handled via blockchain, everybody sees and believes it because it is in real time and immutable, which creates transparency.

From a land rights perspective, that transparency of government matters because we’re literally building economies from the ground up. It starts with land rights.

Once you have secure and transparent land rights that all agents and individuals, as well as banks, believe in, then you can start trading the land and making its highest and best economic use. It’s those types of transactions that build economies.

There are other uses for blockchain in the government sector beyond land registry. There are countries that want to use blockchain to promote trust and transparency with their citizens via such things as birth records and death certificates – officially, your very existence as a citizen of a nation becomes immutable. It’s useful for combating things like voter fraud. Put the votes on blockchain and then it becomes this immutable, unquestionable thing that this person voted here and didn’t vote again; you can trace it back and everybody sees that all at the same time.

There are a million use cases for government. The obvious one is property and land rights. That’s the one that we’re in right now.

Dividends: Is there still a role for an intermediary between governments and corporations or governments and their citizenry in a blockchain world? If so, what is that role?

Nichols: Yes, I think it’s an empowerment thing. Human beings are always going to be doing tax strategy, tax advice, tax organization, doing that type of higher-level work and saying, “As an organization, this is how we want to structure.”

It’s probably the compliance function that will change the most. If I project into the future, those higher-level functions are always going to be with humans. It’s the compliance functions that may get simplified, and we may not have teams of people doing that. I think the audit function is still going to exist. Just because you have transparency doesn’t mean that you don’t make mistakes.

Mistakes are made on the blockchain. You see it and then you see the reversing transaction if you are somewhere else on the blockchain: “We didn’t actually make that sale or we had to reverse revenue,” or whatever. You’ll see those things in the blockchain – they don’t get erased.

It makes the auditor’s job potentially easier if you have that transparency and the immutable records to trace it back. Those functions aren’t going away in any wholesale way.

“Human beings are always going to be doing tax strategy, tax advice, tax organization, doing that type of higher-level work and saying, ‘As an organization, this is how we want to structure.’ It’s probably the compliance function that will change the most.”

Meet the interviewees

Jon Baron is managing director, professional, for Thomson Reuters. He is based in Ann Arbor, Michigan

Jon Baron has more than 40 years of experience providing technology solutions for the accounting profession in both technology development and executive management. Prior to joining Thomson Reuters in 1992, he spent 17 years with Wolters Kluwer, CCH, where he held various executive technology development and operations positions. Jon has spent more than 20 years with the Tax & Accounting business of Thomson Reuters.Jon holds a bachelor’s degree in accounting from Siena College and an MBA from Boston University.

Keith Nichols is managing director, government at Thomson Reuters. He is based in Dallas/Fort Worth.

Keith Nichols drives the global strategy and business operations of the Government practice within Thomson Reuters Tax & Accounting. From 2012-2015, he was managing director in Africa, responsible for all Thomson Reuters businesses including Financial & Risk, Legal, Tax & Accounting, and IP & Science. A former officer in the US Army, Nichols has a B.S. in Systems Engineering and an MBA from the MIT Sloan School of Management.

Irish McIntyre is vice president, product management at Thomson Reuters. He is based in Baar, Switzerland.

Irish McIntyre is vice president of Product Management for ONESOURCE® solutions. He leads a team of product managers responsible for the strategic product direction within the Corporate segment of Thomson Reuters Tax & Accounting. He has served in Product Management leadership roles at Liquid Engines, Procinct Security, Kana Communications and netDialog, and held multiple roles at Lotus/ IBM. McIntyre presents regularly at conferences and has over 20 years of leadership and software development experience.

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