Blockchain, the decentralised distributed ledger system that records transactions, could have prevented the Steinhoff accounting scandal and nipped public sector corruption in the bud, says Monica Singer, a former World Bank consultant and director at the SA Institute of Chartered Accountants.
"For the first time in history, we have a technology that allows us to imagine a world that’s transparent and without corruption," says Singer in her new capacity as an ambassador for New York-based blockchain company ConsenSys, which powers the ethereum cryptocurrency.
Blockchain, the system that enables cryptocurrencies such as bitcoin to operate, is being used in a number of other sectors, and could even be applied to auditing.
SA’s auditing industry is not exactly in the public’s good books — to put it mildly — and it will take some time, or a drastic change, to win back lost credibility.
Bernard Agulhas, CEO of the Independent Regulatory Board for Auditors (Irba), says the past 11 months have been a testing time for the profession, which has suffered from numerous scandals — one of which claimed the auditing firm Nkonki.
"A crisis is necessary sometimes to make everyone take a good look at themselves," Agulhas says.
A good dose of introspection is exactly what the private sector, the state and auditors need, according to Singer, who was previously CEO of SA’s central securities depository, Strate, and is tasked with opening ConsenSys’s offices in SA.
"We keep trying to patch things up with sticky tape; we keep trying to fix the legacy system — but we should throw that system away and start again," she says.
It’s a dramatic proposal, yet plausible, especially as other industries are already looking into blockchain’s uses.
The SA Reserve Bank, for instance, is considering replacing its robust and well-regarded payment processing platform with a blockchain alternative. The monetary authority has concluded a pilot project that tested the technology with ConsenSys and eight banks.
The auditing profession is due for a similar shakeup, says Singer, who is punting a blockchain-based "triple-entry accounting" solution that could vastly improve transparency levels across the industry.
Rather than there being manual and delayed journal entries, the shared-records system would allow auditors, the taxman and regulators to view — and validate — ledger entries as and when they happen. "At the end of the day, when we talk about controls, I believe that an audit once a year is not good enough. Triple-entry accounting is about real-time accounting — every time an entry happens, the parties will decide [whether] the transactions are valid," she says.
In that way, "the cryptography prevents fraud", and besides, entries on the blockchain cannot be modified.
"The auditor and the taxman [if included in the system] will get real-time information about [a person’s] books because as you do a transaction, it’s recorded in the blockchain."
Other jurisdictions — including Dubai, Switzerland, Mauritius, Estonia and Malta — are already moving in that direction, according to Singer.
Though SA is way behind the curve compared with some of its developed-market counterparts, Singer plans to promote blockchain to government. "Here’s a tool that will increase the level of trust that the taxpayer has in what [the state is] doing." If transparency is improved, the state would likely benefit from improved tax collections, she says, since many people refuse to pay taxes on the premise that their money will be used inappropriately.
And to aid its efforts to reduce fraud, government should also consider speeding up the shift away from physical money, Singer says. "It doesn’t make sense that we’re still using paper money, because the only reason anyone uses paper is to avoid recording transactions ... Most people have phones, so you can digitise the whole financial market."
In Uruguay, for instance, the state encourages that shift by offering attractive tax rebates on goods and services that are paid for by debit card.
Singer’s view, undeniably utopian, is that blockchain will gradually "democratise" the financial services industry and reduce the power of big banks, while its applications in other industries are seemingly endless.
For example, the technology could disrupt industries that are heavily reliant on middlemen, including publishing, insurance and music.
ConsenSys-backed Ujo Music lets musicians license their work through ethereum — effectively cutting out middlemen and allowing artists to be paid immediately.
Anthony Hardy, a research analyst at Franklin Equity Group, agrees that blockchain has real-world applications.
For one, the technology solves "a real problem, especially within financial services, [of] multiple parties trying to track the same transaction", Hardy says.
"If you think about trading a complex financial instrument, there can be 20 banks and each maintains its own ledger of this transaction — they have to reconcile with each other and it requires people, and sometimes faxes and e-mails.
"With blockchain, it’s a shared ledger. Each of the banks can have access to this one single source of [information], and that reduces all this reconciliation that’s now needed."
Beyond financial services, some companies are using blockchain to track diamonds, for instance, to make sure that "blood diamonds" are not finding their way into the mainstream economy.
Agulhas says Irba does see "great opportunity to start embracing blockchain technology and the resultant evolving concept of real-time, or continuous, auditing".
He says the auditing profession is already being steered in that direction as it is dealing with higher transaction volumes and an increased reliance on technology.
"As part of our mandate to protect the interests of the investing public, we will continue to monitor the use of these emerging disruptive technologies among corporates and audit firms and consider how auditors should respond to the developments and the risks attached to them."
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