How EY is investing in blockchain and auditing digital assets
EY’s Paul Goodhew and David Byrd discuss with Kris Cooper, Thematic Reporter, GlobalData how the business is responding to the growing digital asset space with its Blockchain Analyzer.
Professional services giant EY has found itself at the forefront of technology for the auditing of digital assets as the market continues to grow.
An increasing number of EY’s clients are holding digital assets – such as cryptocurrencies like Bitcoin and Ethereum, nonfungible tokens, tokenised assets and central bank digital currencies – and the company has had to keep pace as result, investing in the necessary talent and technology for auditing and assurance.
The technology underpinning these assets is blockchain, a distributed ledger linked together via cryptographic hashes. EY has been working on the audit of assets held on blockchains for some years and is continuing to invest in and develop its Blockchain Analyzer suite of tools for exploring and visualising on-chain data, verifying assets and reconciling blockchain data with off-chain books.
David Byrd, EY’s Blockchain Strategy Leader for Assurance, leads a team in leveraging distributed ledger technologies to build a digital asset ecosystem, developing practices for auditing strategies, compliance, and valuation of digital assets.
Speaking to International Accounting Bulletin, he and Paul Goodhew, the company’s Global Assurance Innovation and Emerging Technology Leader, offer insight into the considerations of blockchain's past uses within audit, its current utilisations, and the future talent necessary for continual evolution in this space.
David Byrd, Blockchain Strategy Leader for Assurance, EY.
Paul Goodhew, Global Assurance Innovation and Emerging Technology Leader, EY.
Blockchain and Audit
A decade ago, the potential of blockchain was a widely discussed topic, with its applications being considered within accounting. Goodhew says that, initially, there was a lot of hype about how the emerging technology could be disruptive to the audit business and the business of EY’s clients.
Much discussion to do with this was about how blockchain would “transform” audit itself in relation to triple-entry bookkeeping, according to Byrd. He suggests that while in many ways it has, the main area of interest for EY is to be able to account for and audit the increasing amount of digital assets being held by their clients on the blockchain.
When clients initially started to hold digital assets, audits had to determine what counted as an asset, how to classify these types of assets and how to account for them. Most pressingly on the audit side, it was necessary to obtain and confirm information about what clients were doing on blockchains.
Blockchain has subsequently become an important business for EY.
“It is a sizable number of company clients who have taken on a holding of digital assets,” says Goodhew. “It's fair to say that we've had to make a substantial investment and will continue to make a substantial investment in the people, in the process, and the technology to meet this need because it continues to grow year on year.”
He adds that, despite the cyclical nature of the blockchain space in recent years, EY’s business in the space has been growing and that there are “very significant growth levels” in the number of clients to whom they are providing assurance and audit services for digital assets.
Byrd talks of a “Cambrian explosion of activity” in the digital asset space over the last three years before activity settled down. EY saw a lot of activity in the wealth and asset management sector and in decentralised lending platforms. To meet this need, the company launched the Blockchain Analyzer: Reconciler platform, which is now in its fourth generation.
The platform is a web-based analytics tool offered alongside its other blockchain services that can bulk reconcile clients’ off-chain books and records to the public ledger. It can also identify mismatches in transactions, wallet addresses and digital signatures. This enables EY audit teams to search for specific transactions and reconcile digital assets. Audit-wise, digital assets need to be verified differently as the auditor cannot just confirm with banks, the information must be obtained from public networks. The reconciler EY has developed tools to undertake this.
The Blockchain Analyzer is no longer a standalone asset that people must seek out but, says Goodhew, is “automatically served and provided to our teams at the point of consumption when they need to use it”. EY is focused on providing a high-quality user experience interface which would be in line with consumer-facing technologies to ensure ease of use for their clients.
To navigate this expanding space, Goodhew explains that education is necessary, alongside the investment into the user experience.
“We need to train and upskill our people to be comfortable, knowledgeable and experienced in understanding blockchain technology and how we need to respond,” he explains.
“On the process side, we need to have a methodology and steps in-house able to respond to our clients developing digital assets or investing in digital assets, so that our people can use technology and follow the right steps to deliver an audit or assurance service, or help our clients get ready for an audit.”
Byrd notes that a core challenge in the audit of these assets is how to keep pace with the swift technology developments.
“It's a rapidly evolving technology and then sometimes our clients will very quickly begin to use it,” he comments. “So, when it comes time for an audit or related services, there's often not a lot of time to research and develop tests to make sure you can rely on these tools in the context of an audit.”
To navigate these challenges Byrd explains that EY tries to “look around corners, trying to anticipate what your clients might begin to use,” so that it can familiarise and ready itself for such new activity. Key to being able to anticipate new assets, he says, is “investing in the right people, in knowledge and competencies” to foresee what’s coming next and prepare.
Deciding which assets the Blockchain Analyzer will support next is approached both in terms of the needs of current clients and unlocking prospective clients looking for these functionalities in EY’s tools. Byrd’s team alongside other assurance teams at EY across the globe identify the digital assets with the biggest impact on EY’s clients, helping them to determine what should be built into the analyzer at the next generation.
EY will need people who are interested in blockchain and understand the risks associated with the technology, as well as those with a passion for building the technology internally with the blockchain analyzer as the blockchain market grows.
“Whether they are an assurance professional who wants to become a product manager or a technology professional who will help us build, engineer and deliver the solution”, Goodhew says, EY will be “reliant on having those skills in place” in the coming years.
“New digital assets can suddenly become very prominent, and we need to be able to respond quickly if all of a sudden we have a number of clients who have taken on ownership of a specific asset.”
With EY’s $1bn tech investment package, it is continuing to invest in the space, both in technology and in talent. “We need more people to help our teams and engage with clients, asking the right questions and understanding the latest developments around blockchain,” Goodhew adds.
One trend that will be of increasing concern going forward is the increasing tokenisation of real-world assets such as government bonds.
Speaking to the questions around this, Byrd comments: “The question is, how does that all work? You get the blockchain but you’ve got the stuff outside the blockchain and then we think about an audit, we need to think about okay, suppose the client is engaging in this type of stuff. If it’s real estate that’s been tokenised. What do we track? Do we track this stuff in the real world or on the blockchain?”
“What risks could lead to becoming sort of untethered to each other from a tracking perspective?”
For EY to deliver audits of these assets, it needs to anticipate the risks for the companies it serves, any forthcoming regulations and the impact of such technologies on the services it provides.
Looking forward, Byrd suggests EY needs to consider what technology it can build internally to help deliver these services, while Goodhew adds: “Our teams are seeing our clients take on an investment position with these assets and that’s where we need to build more and more connections into the Blockchain Analyzer, so we can analyse more and more assets. “
“We don't necessarily want to predict the future about what is going to happen in this space. But we want to be prepared for those different eventualities.”
How H&T’s attestation process works with Chainlink for stablecoins to ensure not too many are minted. Credit: Harris & Trotter”