Disintermediation, and the role of humans in providing assurance

Innovation, both in technology and business model, has given both enterprises and individuals the ability to perform many tasks that previously required a third-party expert.  Shopping for insurance,  sending money overseas and most recently, raising venture capital.  It is worth asking whether this can happen to the auditing profession, or to the function of assurance in general.

In one sense, the answer has to be no. Machine learning may evolve to the point where it is better at spotting compliance gaps than human auditors, but cannot make the final judgement and opinion required of an auditor.  But there is still a huge change coming. Humans may continue to have a key role in providing assurance, but the tasks a human needs to perform in fulfilment of that role are likely to undergo their most significant change since the invention of double entry accounting in the mid 1300’s.

Fundamental change in the assurance process

We tend to think of assurance as a deterministic process.  When performing an audit, you follow a well-defined process, and at the end of the process you make a yes-or-no decision about whether a company’s books are a good representation of the company’s true financial position.  Standards and compliance checks follow a similar pattern.  The advent of cloud computing, blockchain, and peer-to-peer business models make this harder: they are not only blurring the lines of data ownership, but much more fundamental concepts, such as what defines an employee or who owns a company.

There is an upside. However, data may be becoming much more disperse, but it is also becoming more granular, and there is a lot more of it.  While it becomes much harder to provide assurance via a deterministic process, it also becomes much easier to provide assurance via a stochastic process. In other words, it is harder to provide a categorical statement of compliance, but easier to quantify a level of confidence that compliance has been met.

This change poses both threat and opportunity.  The threat is that a good portion of the tasks that auditors perform today will become automated.  The opportunity is that there is a huge unmet demand for guidance and thought leadership that accountants are uniquely well qualified to provide.

Huge unmet demand for leadership

For all the benefit they provide, disruptive forces also generate friction (not to mention considerable publicity) by skirting regulatory frameworks. In time, they are almost always called back to account, as we see happening now with such disruptors as Uber, Airbnb and Bitcoin. Investors react to this with uncertainty, and capital that could be used to spur innovation is held back.

If assurance professionals could provide reliable principles and guidance on how new solutions could secure approval, the world would beat a path to their door.  Regulation might be seen to stimulate business rather than stymying it. This is more than just philosophical musing; there are opportunities are available here and now.  Here are a couple concrete examples:

Blockchain

Blockchain solutions are easier to implement than the solutions they replace.  But modern architectural best practice is to protect sensitive customer data by keeping it inside a firewall; blockchain solutions fundamentally and radically defy this principle by distributing a copy of this data to every other participant in the trading network, typically the enterprise’s direct competitors.  Architects therefore have no sound basis for approving blockchain solutions for production use, even if the solution would actually improve the safety of the customer data.  Assurance professionals who could give architects a fundamental set of business principles upon which to approve blockchain solutions would find themselves in great demand.

ICO’s

Initial Coin Offerings have raised more money this year than all traditional venture funding sources combined.  Unfortunately, the characteristics of this investment boom resemble pretty much every investment bubble in history, and the utter lack of due diligence with which people are throwing money into ICO’s is appalling.  If assurance professionals were to provide a framework of proper due diligence, both companies and investors would welcome such a framework now; Once the bubble does burst, regulators will be actively looking for a set of principles to adopt in order to protect people going forward.

Assurance professionals, like many other financial services providers, run a significant risk of being disintermediated. But they also have a huge opportunity to make themselves incredibly relevant to current and future waves of innovation.  The difference is getting involved.

Areiel Wolanow is the managing director of Finserv Experts, an independent consulting firm offering advisory and solution delivery services in blockchain, machine learning, and innovation adoption.

1 COMMENT

  1. First off, thank you for an interesting and thought provoking article. What are the tax implications for business and those how audit, as globally, governments gain understanding of this unchangeable blockchain leger? How do you think this will evolve as geography becomes less and less relevant to transactions? I would think that governments view disintermediation as a threat to tax revenue streams. I look forward to seeing your thoughts on this important topic.