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Big Four Auditing Firm PwC Releases Cryptocurrency Auditing Software (#GotBitcoin?)

Big Four auditing firm PwC announced the release of a cryptocurrency auditing software solution in a press release published on June 19. Big Four Auditing Firm PwC Releases Cryptocurrency Auditing Software (#GotBitcoin?)

Per the release, the tool newly added to PwC’s Halo auditing suite can be used to “provide assurance services for entities engaging in cryptocurrency transactions.” The firm claims that, with the new addition, the Halo suite permits PwC to provide independent evidence of private-public key pairing (to establish crypto asset ownership), and gather information about transactions and balances from blockchains.

PwC further notes that it is already employing the new tool to support audits of clients involved with cryptocurrencies, and assisting companies for which the firm is not the auditor in implementing processes and controls necessary to obtain assurance reports from their auditors. Still, the company notes that the tool is not without its limitations:

“Our ability to audit an entity engaged in cryptocurrency activities is very much influenced by our client’s control environment, and at this stage, by the breadth of tokens supported by our Halo software. These considerations will be key when determining whether we are comfortable to accept an audit engagement.”

Lastly, it is specified in the announcement that the new addition to the Halo suite supports bitcoin (BTC), bitcoin cash (BCH), bitcoin gold (BTG), bitcoin diamond (BCD), litecoin (LTC), ether (ETH), OAX (ERC20 token) and XRP.

As Cointelegraph reported at the time, PwC was the top recruiter for blockchain-related jobs on recruitment platform Indeed at the end of March.

Also at the end of March, PwC competitor and big four auditing firm Deloitte announced that it was testing data management on the Ethereum blockchain with three Irish banks.

Updated: 9-5-2019

Big Four and Blockchain: Are Auditing Giants Adopting Yet? 

Last week, Big Four firm Deloitte unveiled a mobile platform designed to host blockchain networks on a small scale for demonstration purposes. The product is “based on client interest in understanding blockchain capabilities in live interactions,” as per the press release.

With this move, the Big Four companies — comprised of Deloitte, PwC, Ernst & Young (EY) and KPMG — continue their expansion into the field of blockchain. Combined, the firms brought in over $148 billion in revenue last year, as they handle over 50% of audits for both public and private companies. Consequently, their presence in the crypto space could be a reflection of the state of blockchain adoption.

So, how far have the Big Four gone while exploring distributed ledger technology (DLT), and can blockchain offer any particular perks for those companies?

Big Four: Consistent, But Limited Interest In Blockchain

At this point, all of the Big Four companies have at least demonstrated some interest in blockchain, albeit their approaches tend to differ. Some companies, like Deloitte, have been mostly researching how this technology has affected the general market, while EY, for instance, has focused on releasing software solutions tailored for the needs of cryptocurrency businesses.

Such diversity can be explained by the very nature of those companies — being professional services networks, they offer a variety of services, including audit, tax, consulting, enterprise risk and financial advisory. It is also the reason why the Big Four have yet to fully dive into blockchain instead of merely flirting with the technology, as Cal Evans — the founder of Gresham International, a compliance and strategy firm — opined in a conversation with Cointelegraph:

“Because the Big Four work in such a wide scope of sectors, they are unable (or unwilling) to dedicate serious time to blockchain. This makes sense, given that they cannot invest in every new technology set which comes along (although we view blockchain as different). One key thing to note is that many of the big four only got into blockchain when Crypto projects began using them to show more transparency. The Big Four are known to only get involved with something when their client base is using it, blockchain was and is no exception.”

“These appear to be just early steps,” Juan M. Villaverde, chief crypto analyst at Weiss Ratings, said. “They [the Big Four] have begun to recognize the potential of DLT, but they have not yet figured out how to leverage that potential.”

According to recruitment platform Indeed, as of March 2019, PwC had 40 blockchain-related job offerings, being the top recruiter in the field among the Big Four. EY came second with 17 vacancies, followed by Deloitte with 10 job offers.

Meanwhile, a more up-to-date search shows that PwC is still the most active professional services network when it comes to blockchain technology, but has only 13 positions directly mentioning the word “blockchain” left. EY has four job offerings, while apparently neither KPMG nor Deloitte are hunting for any blockchain talent at this point. That seems to confirm that the Big Four’s interest in the crypto space is existent, but moderate: PwC, for instance, has a total of 1,010 open vacancies on Indeed, meaning that its 40 blockchain-related job offers account for a minuscule fraction of that number.

Maurizio Raffone, CEO at crypto-focused consultancy and advisory firm Finetiq Ltd., told Cointelegraph:

“My impression is that the Big Four are keen on blockchain as an additional area where they can provide consulting services rather than audit services. There has been a trend by audit firms to move into more lucrative consulting and blockchain offers them yet another opportunity for that strategy.”

Related: How Blockchain Is Reshaping External Audit: Crypto Developments by PwC, KPMG, EY and Deloitte

Nevertheless, blockchain itself should also prove especially useful in the auditing market due to its transparent nature, as Evans told Cointelegraph:

“Blockchain is one of the few technology sets that can actually aid in most auditing respects. Financial auditing can be assisted by an end-to-end blockchain-based company as all transactions will be open and verifiable. They will also be contained within one ledger, which is one of the largest problems for an independent financial audit. Of course, there is more than one type of audit. Blockchain can be deployed across different sectors to make, for example, a service level agreement audit more effective.

Companies could be monitored using blockchain to ensure that they are meeting compliance and the clients wishes.”

Raffone agrees that auditing practices could benefit from having blockchain in place. “I see blockchain as a cost-saving technology in the auditing space,” he told Cointelegraph. “Given the public nature of financial accounts, a blockchain solution would be rather efficient.”

However, Villaverde of Weiss Ratings is wary that the Big Four can stimulate crypto adoption only in certain scenarios. If the Big Four seek to involve themselves exclusively in the support of private blockchain solutions, the expert said, then it would hardly have any effect on the market at large, because “a private, permissioned blockchain is little more than a glorified database.” He went on, saying:

“It’s only when these firms decide to leverage the power of public blockchains, such as Ethereum or Bitcoin, that we envision these initiatives having a significant impact on public adoption.”

PwC

Crypto/Blockchain Market Reports: Yes

Blockchain-Based Software Solutions: Yes

First-Hand Adoption (Bitcoin Acceptance, Crypto ATMS): Yes

Investments In The Crypto Market: No

Having started accepting Bitcoin (BTC) as a payment for a part of its services back in 2017, PwC today is arguably the Big Four company that is the most proactive in exploring cryptocurrencies and blockchain. The company even has a major training program in place to boost its employees’ knowledge on the field.

Thus, PwC is no stranger to the crypto space and its major problems: In its 2018 study entitled “Blockchain is here. What’s your next move?” the firm highlighted regulatory uncertainty and trust as major barriers to blockchain adoption among businesses.

Additionally, PwC has paid particular interest to stablecoins — another increasingly important part of the industry — and struck a partnership with decentralized lending platform Cred to advise on issuance of a United States dollar-pegged cryptocurrency.

However, the firm has not limited its blockchain presence to its advisory department. In March 2018, it partnered with leading global asset management company Northern Trust in a bid to enable real-time equity audits via blockchain and hence make the underlying transactions more transparent. Two months later, PwC invested in VeChain, a large cryptocurrency startup specializing in web services, supply chain management and anti-counterfeiting. In July of the same year, news broke that PwC was going to audit Tezos, the ambitious cryptocurrency project that was going through an internal dispute and several class-action lawsuits at the time. As per the accompanying press release published by the latter, it was allegedly the first time a “large-scale blockchain organization” had been accepted as a Big Four audit client.

Most recently, PwC announced the release of a cryptocurrency auditing software solution. Specifically, the company updated its Halo auditing suite to accommodate “entities engaging in cryptocurrency transactions” by providing independent evidence of private-public key pairing and collecting information about transactions and balances from blockchains.

EY 

Crypto/Blockchain Market Reports: Yes

Blockchain-Based Software Solutions: Yes

First-Hand Adoption (Bitcoin Acceptance, Crypto ATMS): No

Investments In The Crypto Market: No

EY has released more solo crypto-related software projects than any of its Big Four rivals. First, in April 2018, EY announced Blockchain Analyzer, becoming the first mainstream auditor to offer its services specifically for the needs of cryptocurrency companies, which allowed for the gathering of an organization’s entire transaction data from multiple blockchain ledgers. A year later, the firm followed up with a major update, introducing “the second generation” of EY Blockchain Analyzer. According to Paul Brody, the global innovation leader for blockchain at EY, the new version can be used for multiple purposes — such as audit, tax and transaction monitoring.

Moreover, in March 2019, EY unveiled another software solution — this time, for tax purposes exclusively. Dubbed Crypto-Asset Accounting and Tax, or CAAT, the tool was designed to assist its U.S. customers — both public and institutional — in filing IRS tax returns related to crypto assets.

Further, in May, EY open-sourced the code of Nightfall — its solution that enables the transfer of ERC-20 and ERC-721 tokens on the Ethereum (ETH) blockchain “with complete privacy” — and put it on GitHub. “It is an experimental solution and still being actively developed,” the company warned.

Finally, the audit titan has applied blockchain to track wine. Specifically, the platform — titled Tattoo — helps consumers across Asia determine the quality, provenance and authenticity of imported European wines. As with the aforementioned Nightall, EY’s solution enables its customers to perform secure and private transactions on the Ethereum public network by using zero-knowledge proof technology.

On top of releasing a number of blockchain-related software solutions, EY has also been supplying its regular services to crypto actors. Namely, the firm has been appointed by QuadrigaCX — a Canadian cryptocurrency exchange that went defunct under mysterious circumstances — as an independent third party to monitor the proceedings in a creditor protection case. However, some of the exchange’s former clients are not happy with how EY has been handling the case: At some point, the auditor reportedly transferred 103 Bitcoins (approximately $1 million) to the exchange’s locked-out cold wallets. According to the report released by EY in February, the loss was caused by “a platform setting error.”

KPMG

Crypto/Blockchain Market Reports: Yes

Blockchain-Based Software Solutions: Yes

First-Hand Adoption (Bitcoin Acceptance, Crypto ATMS): No

Investments In The Crypto Market: No

KPMG has not only been increasing its presence in the blockchain space, but has also been a member of the Wall Street Blockchain Alliance (WSBA) since 2017.

Over the past 12 months, it has partnered with blockchain company Guardtime to offer blockchain-based services to clients; joined forces with the U.S. Food and Drug Administration to integrate blockchain in the pharmaceutical supply chain (the initiative will reportedly speed up the process of tracking inventory and boost the accuracy of data shared between members of the supply chain); and worked with United Arab Emirates officials to successfully test a blockchain-based Know Your Customer, or KYC, application.

Additionally, KPMG collaborated with three powerful software companies — Microsoft, R3 and Tomia — to develop a blockchain-powered solution for telecom settlements. Arun Ghosh, who leads KPMG’s blockchain consultancy, said of the initiative:

“Blockchain has the potential to deliver transparency and visibility, providing the opportunity to help reduce reconciliations and increase efficiencies associated with traditional interconnect billing, roaming and partner settlement processes.”

Apart from working on blockchain-backed projects, KPMG has also studied the cryptocurrency market with an overall bullish outlook. In a November 2018 report, for instance, the auditing company invited institutional investors to “realize its potential.” which, in turn, would allegedly benefit the industry at large. “Cryptoassets have potential. But for them to realize this potential, institutionalization is needed,” the document’s authors argued.

KPMG’s latest survey on blockchain, however, suggests that most tax and finance executives are not considering adopting the technology. Regardless, David Jarczyk, innovation principal and tax leader for blockchain at KPMG, highlighted its potential benefits for the financial world:

“Blockchain is like a spreadsheet on steroids that can automate certain tasks, build greater transparency, speed and reliability, and provide a single source of transactional information.”

Deloitte

Crypto/Blockchain Market Reports: Yes

Blockchain-Based Software Solutions: Yes

First-Hand Adoption (Bitcoin Acceptance, Crypto ATMS): Yes

Investments In The Crypto Market: No

Deloitte was the earliest Big Four player to delve into the crypto space, as it announced its first blockchain lab in Dublin back in May 2016. By that time, the company had already collaborated with the Bank of Ireland to complete a joint proof-of-concept blockchain trial. Today, three of the Ireland’s four largest banks are reportedly using Deloitte’s blockchain solution (developed in its Dublin branch) to verify employees’ credentials.

Also in 2016, Deloitte installed a Bitcoin ATM on the premises of its Toronto office. Placed outside the security gates so it could be accessible to the general public, the machine showcased the firm’s interest in cryptocurrencies.

Since then, Deloitte has kept a close eye on the market, releasing several reports that have recognized regulatory uncertainty and Bitcoin’s infamous scalability problem among the main hurdles for mass adoption. Nevertheless, the company’s August 2018 report entitled “Breaking Blockchain Open: 2018 Global Blockchain Survey” predicted that blockchain technology was getting closer to a breakout moment. Meanwhile, the newest issue of that report unveiled that as much as 73% of Chinese enterprises believe that blockchain is a top-five strategic priority, highlighting the nation’s focus on the technology.

This summer, Deloitte has also begun supporting a new blockchain accelerator program called Startup Studio in partnership with 22 other companies, including Fidelity and Amazon. Startup Studio will reportedly host workshops for blockchain startups to help them enhance a variety of skills important for the industry.

Finally, the Big Four giant has just rolled out its own blockchain-based platform designed to provide users with blockchain demonstrations and experiments. Called Blockchain in a Box, the new product is described as “a mobile, self-contained technology platform capable of hosting blockchain-based solutions across four small-form-factor compute nodes and three video displays, as well as networking components that enable integration with external services, such as traditional cloud technologies.”

Are The Big Four Doing Enough?

As for now, experts seem somewhat skeptical of the Big Four’s progress in terms of blockchain, arguing that their knowledge on the subject seems limited at this point. Evans told Cointelegraph:

“There have been examples in the market where companies such as PwC have actually plagiarized and copied work from other companies within the crypto space, showing that their knowledge on the subject is incredibly limited. It is hard for a company to push something they don’t fully understand themselves.”

Either way, most accounting and auditing functions have the potential to become automated with smart contracts at some point in the future, and the Big Four would have to drastically increase their presence to stay relevant, according to Weiss Ratings’ Villaverde, who continued:

“The main question is: Will the Big Four lead in the creation of this new technology? Or will smaller, potentially more nimble, players jump into the space and take over significant market share from the Big Four?”

Whether or not the Big Four will adopt blockchain in their regular service offerings, the fact that all four firms draw up regular reports on the crypto and/or blockchain market shows that they are interested and are closely following the developments in the industry.

Updated: 9-13-2019

Ex-KPMG Partner Sentenced To A Year And A Day In ‘Steal The Exam’ Scandal

Auditors got advance information from oversight board about which audits would be reviewed.

The former No. 2 auditor at KPMG LLP will go to prison for one year and one day for his role in a “steal the exam” scandal that exposed serious weaknesses at one of the Big Four accounting firms.

David Middendorf, the former second-in-command of KPMG’s U.S. audit practice, was convicted for his role in a scheme to steal the names of the firm’s clients whose audits were going to be reviewed by the nation’s accounting regulator.

“As the trial made clear, there were systemic problems at KPMG regarding the use of confidential [regulatory] information,” the government said in a court filing this month. The scheme “could have corrupted KPMG to its core,” prosecutors said.

Mr. Middendorf, 55 years old, said at his sentencing hearing that “never in my wildest imagination” did he imagine that what he did might be criminal conduct. He said what had already happened to him was enough to deter any auditor in the world from similar conduct, adding he’d been arrested at 5:45 a.m., taken to court in leg shackles “and been in this nightmare ever since.” His lawyer told the court the case had ended Mr. Middendorf’s 30-year career at KPMG, tarnished his reputation, damaged his finances and left him unemployable as a certified public accountant.

In relaying the sentence, U.S. District Judge J. Paul Oetken said the criminal conduct was serious because it involved the corruption of a regulatory process. “It did involve cheating by employees…to give their company a leg up,” he said. He added that be believed Mr. Middendorf “knew what he was doing was wrong.”

The punishments imposed on the firm’s former auditors are unusual in their severity. Mr. Middendorf is the second former KPMG partner or employee sentenced to prison time because of the scheme; another two have pleaded guilty and await sentencing. One former partner, who denies wrongdoing, is due to go on trial this fall.

“It’s very rare for a Big Four audit partner to face any kind of criminal penalty,” said Stephen Sorensen, a Venice, Calif.-based attorney who specializes in suing accounting firms. “This is an extreme case: they were trying to defraud a regulator.”

The year-and-a-day sentence means Mr. Middendorf is potentially eligible for early release on the grounds of good conduct. “He was probably fortunate to have received the sentence he did, given the unprecedented conduct he was convicted of and the prosecutors’ recommendation he serve at least 37 months,” said Michael Shaub, accounting professor at Texas A&M University.

Mr. Middendorf’s lawyer, prosecutors and accounting-industry observers agree problems at the firm were widespread. Some said the $50 million penalty KPMG was ordered to pay by the Securities and Exchange Commission, while one of the highest imposed on an audit firm, was too little.

Dozens of KPMG auditors saw emails based on stolen data that discussed which audits the firm’s main regulator, the Public Company Accounting Oversight Board, was likely to analyze as part of its annual inspections, according to testimony at Mr. Middendorf’s trial earlier this year. Mr. Middendorf’s lawyer, Nelson Boxer, told jurors he’d “counted them up—47 recipients of these predictions and gossip emails…and no one yells fire.”

In its settlement with the SEC in June, KPMG admitted that former auditors at the firm improperly accessed regulatory information. It also admitted that dozens of its auditors also cheated on internal exams. The firm has since added two independent directors to its board; invested in technology designed to improve its audit quality; and undertaken a firmwide “culture assessment.”

Lynne Doughtie, KPMG’s U.S. chairman and chief executive, said in an interview, “People think of culture as soft stuff, but it’s the hard stuff. Our brand is based on trust and this is some of the most important work we’ve ever done.” She added that the firm “is stronger as a result of the steps we’ve taken.”

But KPMG still has a way to go to comply with government-imposed conditions for cleaning up its act. It has missed a 60-day deadline to appoint an independent consultant, imposed as part of the settlement. The consultant will oversee KPMG’s internal investigation into the cheating, as well as reviewing the firm’s quality controls.

KPMG will next year elect a new chief executive and chairman, whose tasks will include signing an SEC-required certificate of compliance with ethics standards for 2020 and 2021. The firm’s current head, Ms. Doughtie, isn’t seeking a second term when her five-year term ends in June. “We have dealt with significant challenges, learned important lessons and we are well positioned for the future,” Ms. Doughtie said in the interview. “After serious reflection I believe it’s the right time to transition.”

The accounting regulator has expressed concerns about the quality of KPMG’s audits since 2015. The publicly available results haven’t improved since then: in 2017—the most recent data available—half the 52 audits inspected by the PCAOB had serious deficiencies.

The regulator chooses higher-risk audits for inspection, so the 50% failure rate isn’t representative of the firm’s overall audit work, a KPMG spokesman said. He added that the firm “expects its PCAOB inspection findings to show improvement for the 2018 inspections year as a result of the changes it has made.”

Prem Sikka, accounting professor at Sheffield University in England, said “paying fines has become part of the cost of doing business” for the Big Four. He questioned why KPMG wasn’t charged criminally, saying financial sanctions appeared to have no deterrent effect. For example, KPMG in 2005 reached a deferred prosecution agreement with the Justice Department over its alleged involvement in a tax fraud. “They were fined $456 million—and what did that do?” Mr. Sikka asked.

An SEC spokesman declined to comment.

The $50 million SEC fine is 0.5% of KPMG’s $9.5 billion revenue for the year to September 2018, and equates to about $23,000 for each of the approximately 2,200 partners, according to the most recent data available for the U.S. firm. “Fifty million dollars is chump change to a Big Four firm,” said Jim Peterson, a lawyer and former partner at accounting firm Arthur Andersen LLP, which collapsed after being criminally convicted in the early 2000s. While scandals can affect a Big Four’s firm’s reputation, he said, their business model is protected by the virtual monopoly they enjoy on audits of big companies.

“The Big Four own the large-company audit franchise,” Mr. Peterson said. “They can absorb almost anything thrown at them.”

 

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