For those following the continuing Brexit crisis in the UK, there have been many issues not least of which is solving the "Irish border" issue. If you need more context on this issue, see the following video by Vox Atlas which does an amazing job of summarizing the issues in about 7 minutes:
What does this have to Blockchain?
Well, it seems that blockchain was identified as a possible solution for this situation. I came across this idea from an article in CCN, which stated the following:
"According to Phillip Hammond, UK’s finance minister, the best way to ensure trade across the Irish border remains frictionless after Britain leaves the EU lies in the use of blockchain technology.
“There is technology becoming available (…) I don’t claim to be an expert on it but the most obvious technology is blockchain,” Reuters reported Hammond as having answered after being asked what the government was proposing to do to ensure smooth trade after Brexit."
I followed the Reuters link but it didn't add much context to the quote; how can blockchain offer any relief from the issues related to the customs union and hard border?
But then I found an article on FT, which stated the following:
"It is safe to say technology used at the border is a red herring, as even the best database can't poke its nose inside a lorry. Here, for instance, is one of the IT experts quoted in the Irish Times calling the idea of technological solutions to the border question “complete nonsense”...
Wired also looked at tech solutions for dealing with 6,000 heavy goods vehicles per day crossing the border, and decided that they were “untested or imaginary”. Blockchain as a border solution is both.
So what inspired Hammond to jump on the blockwagon? It might have been a “white paper” literally called “Blockchain for Brexit”, released last week by Reply Ltd, a consultancy which promised a “solution that could save global businesses billions of pounds through seamless border checks and virtually infallible tracking systems for their goods”."
Although I have commented that blockchainthusiasts need to be careful about overstating the capabilities of the blockchain (such as replacing the need for financial audits), we can hardly blame blockchainthusiasm here. Rather it's the Wizard-of-Oz trick of hiding behind the magic curtain. But this time it's not a magic trick but rather the complexity of technology that some are attempting use to gloss some key issues that have emerged in the aftermath of Brexit.
Technology at the end of the day is just a tool fashioned by human beings and is not God. It can't magically solve complex business problems let alone extremely complex political issues that have been simmering for centuries.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Wednesday, October 3, 2018
Sunday, September 30, 2018
Google Traffic, Time zones and Train Travel: What's the connection?
Had an interesting conversation about Google Traffic with my step-daughter the other day. Originally, my wife was supposed to pick her up, but the way things worked out was it made more sense for me to intercept her at the bus station and then bring her back from home. We were able to calculate timings and distance using Google Traffic.
I was explaining to her "life before Google": those days that I would work late at the client only to be stuck in traffic because a game just got out. We don't know how to avoid these jams because we didn't have Google traffic in those days and so we just had to wait it out.
She was a bit bewildered at the prospects of having to plan one's journey without having the benefit of being able to use Google Traffic. She compared to an era when trains didn't have the benefit of centrally coordinated time zones. As explained in this PBS clip, both trains and cities independently maintained their time based on the sun. Consequently, a train passenger had no way of knowing when they would arrive at their destination because the cities didn't coordinate on time. Hence, the invention of time zones.
And that's the connection.
We can no longer can we blame traffic for being late for an engagement, as we should have checked Google Traffic before we left to make sure we are on time. Google Traffic has now become essential to coordinating with others. Even for getting things done more efficiently requires us to leverage such information. For me, it helped me pick up my step-daughter and made me realize that I hailed from a pre-historic era ;)
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.
I was explaining to her "life before Google": those days that I would work late at the client only to be stuck in traffic because a game just got out. We don't know how to avoid these jams because we didn't have Google traffic in those days and so we just had to wait it out.
She was a bit bewildered at the prospects of having to plan one's journey without having the benefit of being able to use Google Traffic. She compared to an era when trains didn't have the benefit of centrally coordinated time zones. As explained in this PBS clip, both trains and cities independently maintained their time based on the sun. Consequently, a train passenger had no way of knowing when they would arrive at their destination because the cities didn't coordinate on time. Hence, the invention of time zones.
And that's the connection.
We can no longer can we blame traffic for being late for an engagement, as we should have checked Google Traffic before we left to make sure we are on time. Google Traffic has now become essential to coordinating with others. Even for getting things done more efficiently requires us to leverage such information. For me, it helped me pick up my step-daughter and made me realize that I hailed from a pre-historic era ;)
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.
Monday, September 24, 2018
To appreciate blockchain, do we need to appreciate accounting and auditing first?
As an accountant, we can often forget the importance of the craft of accounting and what it meant for not just business but society.
But going back to accounting, this is how he and Paul stated the importance of accounting:
"Fibonacci’s new numbering system became a hit with the merchant class and for centuries was the preeminent source for mathematical knowledge in Europe. But something equally important also happened around this time: Europeans learned of double-entry bookkeeping, picking it up from the Arabians, who’d been using it since the seventh century. Merchants in Florence and other Italian cities began applying these new accounting measures to their daily businesses. Where Fibonacci gave them new measurement methods for business, double-entry accounting gave them a way to record it all. Then came a seminal moment: in 1494, two years after Christopher Columbus first set foot in the Americas, a Franciscan friar named Luca Pacioli wrote the first comprehensive manual for using this accounting system.
Pacioli’s Summa de arithmetica, geometria, proportioni et proportionalita, written in Italian rather than Latin so as to be more accessible to the public, would become the first popular work on math and accounting. Its section on accounting was so well received that the publisher eventually published it as its own volume. Pacioli offered access to the precision of mathematics. “Without double entry, businessmen would not sleep easily at night,” Pacioli wrote, mixing in the practical with the technical—Pacioli’s Summa would become a kind of self-help book for the merchant class.
...The Medici of Florence came first, turning themselves into vital middlemen in the matching of money flows around Europe. The Medici’s breakthrough was made possible because of their consistent use of double-entry ledgers. If a merchant in Rome wanted to sell something to a customer in Venice, these new ledgers solved the problem of trust between people who lived at great distances from each other. By debiting the payer’s bank account and crediting that of the payee—with double-entry practices—the bankers were able to, in effect, move money without having to ship physical coins. In so doing, they transformed the whole enterprise of payments, setting the stage for the Renaissance and for modern capitalism itself. Just as important, they also established the 500-year practice of bankers creating an essential role for themselves as society’s centralized trust bearers.
The value of double-entry bookkeeping, therefore, wasn’t merely in dry efficiency. The ledger came to be viewed as a kind of moral compass, whose use conferred moral rectitude on all involved with it. The merchant was pious, the banker had sanctity—three popes in the sixteenth and seventeenth centuries came from the Medici family—and the trader discharged his business with veneration. Businessmen, previously mistrusted, became moral, upstanding pillars of the community. Aho writes: “Methodist Church founder John Wesley, Daniel DeFoe, Samuel Pepys, Baptist evangelicals, the deist Benjamin Franklin, the Shakers, Harmony Society, and more recently, the Iona Community in Britain, all insist that the keeping of meticulous financial accounts is part and parcel of a more general program of honesty, orderliness, and industriousness.”
Thanks to mathematical concepts imported from the Middle East during the Crusades, accounting became the moral grounding for the rise of modern capitalism, and the bean counters of capitalism became the priests of a new religion. Most (though certainly not all) people today have a hard time seeing the Bible as literal truth; but they had no trouble seeing Lehman Brothers’ books as literal truth—until the gaping inconsistencies were exposed.
The great irony of 2008 was that our belief in a system of accounting, a belief woven so deeply inside our collective psyche that we’re not even aware of it, made us vulnerable to fraud. Even when done honestly, accounting is sometimes little more than an educated guess. Modern accounting, especially at the big, international banks, has become so convoluted that it is virtually useless. In a comprehensive dissection in 2014, the Bloomberg columnist Matt Levine explained how a bank’s balance sheet is almost impossibly opaque. The “value” of a large portion of the assets on that balance sheet, he noted, is simply based on guesses made by the bank about the collectability of the loans they make, or of the bonds they hold, and the prices that they might fetch on the market, all measured against the offsetting and equally fuzzy valuation of their liabilities and obligations. If a guess is off by even 1 percent, it can turn a quarterly profit into a loss. Guessing whether a bank is actually profitable is like a pop quiz. “I submit to you that there is no answer to the quiz,” he wrote. “It is not possible for a human to know whether Bank of America made money or lost money last quarter.” A bank’s balance sheet, he said, is essentially a series of “reasonable guesses about valuation.” Make the wrong guesses, as Lehman and other troubled banks did, and you end up out of business.
Our goal here is not to trash double-entry bookkeeping or the banks. Were we to, you know, add up all the debits and credits, double-entry bookkeeping has done more good than harm. The goal really is to show the deep historical and cultural roots behind why we trusted this kind of accounting. The question now, in the wake of our fall, is whether a particular technology that allows a different kind of bookkeeping will help us renew our trust in our economic system. Can a blockchain, which is continuously open to public inspection and guaranteed not by a single bank but by a series of mathematically secured entries into a ledger that’s shared and maintained by many different computers, help us rebuild our lost social capital?"
Source: Vigna, Paul and Casey, Michael The Truth Machine: The Blockchain and the Future of Everything (p. 26-29). St. Martin's Press. Kindle Edition.
Reading this, a few things jumped out:
And was it an accountant who pointed this out to me?
No, it wasn't. It was actually blockchain enthusiasts who drew a straight line between the role accounting plays and the role blockchain could play.
No, it wasn't. It was actually blockchain enthusiasts who drew a straight line between the role accounting plays and the role blockchain could play.
In preparation for a presentation on blockchain, I wanted to refresh my mind around all things blockchain and so I was going through the audiobook, The Truth Machine, by Paul Vigna and Michale Casey. These are the two same authors who wrote the Age of Cryptocurrency. (At that time, both were Wall Street Journal reports, but Michael Casey since that publication actually decided to leave his 23-year career in journalism to focus on blockchain full time at MIT.)
And it was during this book that I was reintroduced to how important accounting was in terms of societal governance as it relates to the administering resources.
Michael Casey in this lightning talk speaks to how blockchain now offers the possibility to deliver the necessary accounting to deal with the "tragedy-of-commons-type problems" that emerge in Capitalist societies that promote self-interest above the common good and all else.
But going back to accounting, this is how he and Paul stated the importance of accounting:
"Fibonacci’s new numbering system became a hit with the merchant class and for centuries was the preeminent source for mathematical knowledge in Europe. But something equally important also happened around this time: Europeans learned of double-entry bookkeeping, picking it up from the Arabians, who’d been using it since the seventh century. Merchants in Florence and other Italian cities began applying these new accounting measures to their daily businesses. Where Fibonacci gave them new measurement methods for business, double-entry accounting gave them a way to record it all. Then came a seminal moment: in 1494, two years after Christopher Columbus first set foot in the Americas, a Franciscan friar named Luca Pacioli wrote the first comprehensive manual for using this accounting system.
Pacioli’s Summa de arithmetica, geometria, proportioni et proportionalita, written in Italian rather than Latin so as to be more accessible to the public, would become the first popular work on math and accounting. Its section on accounting was so well received that the publisher eventually published it as its own volume. Pacioli offered access to the precision of mathematics. “Without double entry, businessmen would not sleep easily at night,” Pacioli wrote, mixing in the practical with the technical—Pacioli’s Summa would become a kind of self-help book for the merchant class.
...The Medici of Florence came first, turning themselves into vital middlemen in the matching of money flows around Europe. The Medici’s breakthrough was made possible because of their consistent use of double-entry ledgers. If a merchant in Rome wanted to sell something to a customer in Venice, these new ledgers solved the problem of trust between people who lived at great distances from each other. By debiting the payer’s bank account and crediting that of the payee—with double-entry practices—the bankers were able to, in effect, move money without having to ship physical coins. In so doing, they transformed the whole enterprise of payments, setting the stage for the Renaissance and for modern capitalism itself. Just as important, they also established the 500-year practice of bankers creating an essential role for themselves as society’s centralized trust bearers.
The value of double-entry bookkeeping, therefore, wasn’t merely in dry efficiency. The ledger came to be viewed as a kind of moral compass, whose use conferred moral rectitude on all involved with it. The merchant was pious, the banker had sanctity—three popes in the sixteenth and seventeenth centuries came from the Medici family—and the trader discharged his business with veneration. Businessmen, previously mistrusted, became moral, upstanding pillars of the community. Aho writes: “Methodist Church founder John Wesley, Daniel DeFoe, Samuel Pepys, Baptist evangelicals, the deist Benjamin Franklin, the Shakers, Harmony Society, and more recently, the Iona Community in Britain, all insist that the keeping of meticulous financial accounts is part and parcel of a more general program of honesty, orderliness, and industriousness.”
Thanks to mathematical concepts imported from the Middle East during the Crusades, accounting became the moral grounding for the rise of modern capitalism, and the bean counters of capitalism became the priests of a new religion. Most (though certainly not all) people today have a hard time seeing the Bible as literal truth; but they had no trouble seeing Lehman Brothers’ books as literal truth—until the gaping inconsistencies were exposed.
The great irony of 2008 was that our belief in a system of accounting, a belief woven so deeply inside our collective psyche that we’re not even aware of it, made us vulnerable to fraud. Even when done honestly, accounting is sometimes little more than an educated guess. Modern accounting, especially at the big, international banks, has become so convoluted that it is virtually useless. In a comprehensive dissection in 2014, the Bloomberg columnist Matt Levine explained how a bank’s balance sheet is almost impossibly opaque. The “value” of a large portion of the assets on that balance sheet, he noted, is simply based on guesses made by the bank about the collectability of the loans they make, or of the bonds they hold, and the prices that they might fetch on the market, all measured against the offsetting and equally fuzzy valuation of their liabilities and obligations. If a guess is off by even 1 percent, it can turn a quarterly profit into a loss. Guessing whether a bank is actually profitable is like a pop quiz. “I submit to you that there is no answer to the quiz,” he wrote. “It is not possible for a human to know whether Bank of America made money or lost money last quarter.” A bank’s balance sheet, he said, is essentially a series of “reasonable guesses about valuation.” Make the wrong guesses, as Lehman and other troubled banks did, and you end up out of business.
Our goal here is not to trash double-entry bookkeeping or the banks. Were we to, you know, add up all the debits and credits, double-entry bookkeeping has done more good than harm. The goal really is to show the deep historical and cultural roots behind why we trusted this kind of accounting. The question now, in the wake of our fall, is whether a particular technology that allows a different kind of bookkeeping will help us renew our trust in our economic system. Can a blockchain, which is continuously open to public inspection and guaranteed not by a single bank but by a series of mathematically secured entries into a ledger that’s shared and maintained by many different computers, help us rebuild our lost social capital?"
Source: Vigna, Paul and Casey, Michael The Truth Machine: The Blockchain and the Future of Everything (p. 26-29). St. Martin's Press. Kindle Edition.
Reading this, a few things jumped out:
- Double-entry accounting actually was invented by "Arabs": As the authors noted above, "Europeans learned of double-entry bookkeeping, picking it up from the Arabians, who’d been using it since the seventh century". Going through accounting, this was the first that I heard of this, but it's not surprising given the Islamic world led the globe in terms of science and technology for a few centuries.
- The link between ethics/integrity and accounting was established at the inception: "The value of double-entry bookkeeping, therefore, wasn’t merely in dry efficiency. The ledger came to be viewed as a kind of moral compass, whose use conferred moral rectitude on all involved with it. The merchant was pious, the banker had sanctity—three popes in the sixteenth and seventeenth centuries came from the Medici family—and the trader discharged his business with veneration. Businessmen, previously mistrusted, became moral, upstanding pillars of the community. Aho writes: “Methodist Church founder John Wesley, Daniel DeFoe, Samuel Pepys, Baptist evangelicals, the deist Benjamin Franklin, the Shakers, Harmony Society, and more recently, the Iona Community in Britain, all insist that the keeping of meticulous financial accounts is part and parcel of a more general program of honesty, orderliness, and industriousness.”" Although it's quite far to say that accountants are any kind of priest, there is a level of "financial asceticism" in terms of abstaining from investments to be able to have the objectivity required to complete financial audits. Furthermore, the profession needs to assess to the degree we are investing in this cornerstone of the profession. More thought needs to be given as to how much of threat the "post-truth era" is on the profession. If society continues to feel there is no such thing as truth, then the ability to act as an anchor of integrity is limited.
- Pervasive importance of accounting to the functioning of society: When expressing the value of financial accounting and auditing, people seem to take it for granted forgetting that if there was no way to inspect the confidential books of companies that "game theory" would take over. In a sense, the "tragedy of the commons" that is addressed by financial audits is ensuring managers don't lie when claiming that they made profits of this much and have assets of that much. That is, without audits there would be no way to trust management as the financial fraud that we see wouldn't be limited to a few players but be much more pervasive.
- People will blame accountants even though we are just recordkeepers: The authors call out accounting stating that: "Modern accounting, especially at the big, international banks, has become so convoluted that it is virtually useless". Accounting is the art and science of communicating the economic reality of entities to allow people to make investment decisions. It is a complex function of navigating competing opinions on how to accurately report on things. I think it's ironic that the book notes a few pages later on how Bitcoin Classic had to separate (or fork) from Bitcoin Cash because the two factions couldn't agree on the memory size of the protocol. When it comes to accounting standards there is no forking: all must agree on a common set of accounting standards to be used for financial reporting. Furthermore, the problems that lay with the banking system really can't be blamed on financial reporting but stem from the reality that capital runs the world - even if it means running over the truth once in a while.
With respect to the last point, it is important for blockchainthusiasts to keep in mind that standards are really at the heart of blockchain. Traditionally, setting the standard has always been hard because Capitalism promotes freedom, and so people are incentivized to get away from standards! It's hard enough when you have people trying to simply codify something, let alone trying to create decentralized distributed ledger that will be intolerant of any unauthentic interpretations. But we will delve into this in future posts.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Monday, July 16, 2018
Blockchain: Can it make marriage easier?
According to this article on Wharton, the argument was that blockchain can fill the "trust deficit" that exists. Although the merits of this argument go beyond the post, what can be agreed is that - at its core - blockchain facilitates trust in a trustless environment.
The central feature of the bitcoin blockchain is that it allows anyone to confirm that the person sending the bitcoins actually has those coins in their wallet and they haven't sent it to someone else.
However, how can this help with marriage?
Well, it's actually more about issuing the actual marriage certificate and not actually resolving actual marriage disputes.
I recently discovered the intricacies involved in issuing a marriage certificate, which I needed in a timely manner. The following must happen before the certificate gets issued:
So how can blockchain help with this process?
To be a bit more specific, this is the permissioned blockchain (unlike bitcoin which is a public blockchain) that is implemented between trusted parties. As noted in the process described above, there are many parties involved - the bride and groom, the municipal clerk, the officiator and the government - all these parties would need to be on-boarded through a KYC process that would give each participant a private key that enables them to "sign" the "digital paperwork" at each phase of the process.
This would then allow "digital marriage certificates" to be issued instantaneously at a Service Ontario instead of having to wait for the mail to arrive from Thunder Bay.
Ultimately, the use case illustrates that the blockchain can facilitate a processing of "decentralized paperwork" in a more timely manner. Such an approach would also encourage people to get their digital IDs, which then could be leveraged for other processes.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
The central feature of the bitcoin blockchain is that it allows anyone to confirm that the person sending the bitcoins actually has those coins in their wallet and they haven't sent it to someone else.
However, how can this help with marriage?
Well, it's actually more about issuing the actual marriage certificate and not actually resolving actual marriage disputes.
I recently discovered the intricacies involved in issuing a marriage certificate, which I needed in a timely manner. The following must happen before the certificate gets issued:
- Get a marriage license: The municipality must issue a marriage license. To get this license, the municipal clerk needs to verify your identity.
- Get someone to officiate the ceremony: Another person must then officiate the marriage ceremony. Normally, this is a religious person. But it could also be anyone who is recognized by the province to officiate such ceremonies. Let's just call them "officiator" for the purposes of this post.
- Send documentation to the government: the "officiator must send the documentation to the government.
- The government then issues the marriage certificate to the marriage couple: This is actually not issued by the municipality but a government office in Thunder Bay, which can't be accessed in a reasonable time by a land vehicle from the Greater Toronto Area. (Rumour has it there are a handful of people that process thousands of certificates a day)
So how can blockchain help with this process?
To be a bit more specific, this is the permissioned blockchain (unlike bitcoin which is a public blockchain) that is implemented between trusted parties. As noted in the process described above, there are many parties involved - the bride and groom, the municipal clerk, the officiator and the government - all these parties would need to be on-boarded through a KYC process that would give each participant a private key that enables them to "sign" the "digital paperwork" at each phase of the process.
This would then allow "digital marriage certificates" to be issued instantaneously at a Service Ontario instead of having to wait for the mail to arrive from Thunder Bay.
Ultimately, the use case illustrates that the blockchain can facilitate a processing of "decentralized paperwork" in a more timely manner. Such an approach would also encourage people to get their digital IDs, which then could be leveraged for other processes.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Wednesday, March 28, 2018
Audit, Audit, Audit harked Mark: Can CPAs come to Facebook's rescue?
In an investigation by the Guardian and the New York Times, the alleged misdeeds of Cambridge Analytica were revealed.
As noted in the Guardian article:
"Christopher Wylie, who worked with a Cambridge University academic to obtain the data, told the Observer: “We exploited Facebook to harvest millions of people’s profiles. And built models to exploit what we knew about them and target their inner demons. That was the basis the entire company was built on.”... Documents seen by the Observer, and confirmed by a Facebook statement, show that by late 2015 the company had found out that information had been harvested on an unprecedented scale. However, at the time it failed to alert users and took only limited steps to recover and secure the private information of more than 50 million individuals."
The following video from TheVerge sums up the issue:
There was an ensuing backlash (as noted in the video above and here) that forced Facebook CEO, Mark Zuckerberg to respond. He both had a written response and gave the following interview on CNN:
"[Theodore] Vail died in 1920 at age 74, shortly after resigning as AT&T's president, but by that time, his life's work was done. The Bell system had uncontested domination of American telephony, and long-distance communication was unified according to his vision. The idea of an open, competitive system had lost out to AT&T's conception of an enlightened, licensed, and regulated monopoly. AT&T would remain in this form until the 1980s, and it would return in not so substantially different form in the 2000s. As historian Milton Mueller writes, Vail had completed the "political and ideological victory of the regulated monopoly paradigm, advanced under the banner of universal service."" [emphasis added]
As Tim points out in his book, the move enabled AT&T didn't always use their monopolistic powers for good. They charged high long distance rates and even stifled innovation suppressing the answering machine due to potential conflict with its main business.
Regardless, it shows that Facebook could be an early advocate for CPAs offering privacy related assurance services around its algorithms.
"...it is also worth noting that there are other experts who hold that algorithms - from a privacy perspective - need to be regulated. Bruce Schneier, a well-known information security expert who helped review the Snowden documents, in his latest book, Data and Goliath ... also calls for "auditing algorithms for fairness". He also notes that such audits don't need to make the algorithms public, which is it the same way financial statements of public companies are audited today. This keeps a balance between confidentiality and public confidence in the company's use of our data."
Big Data versus Privacy: The monetization paradox
Such an algo-audit could leverage the work done by AICPA and CPA Canada in the realm of privacy, specifically the Generally Accepted Privacy Principles. That being said, privacy audits have been a hard sell in the past. But what distinguishes the service here is that it would be auditing the algorithm for compliance with privacy "regulations".The reason regulations need to be put in quotes is that in substance privacy legislation is effectively eliminated if the consumer consents to use the service.
The challenge, therefore, is balancing the drive to monetize big data with the privacy needs of the people who use the service. For example, people who identify with the "left" may not want Steve Bannon or Trump accessing their data. Similarly, people who identify with the "right" may not want Obama accessing their social media data. The end result is that no one can access meaningful data due to privacy restrictions - resulting in a standard so restrictive that it eliminates that ability of companies like Facebook to monetize the treasure trove of data that they have collected.
As noted in an earlier post, there is an inherent highlight the conflict between privacy and profiting from big data. The value of big data emerges from the secondary uses of big data. However, privacy policies require the user to consent to a specific use of data at the time they sign up for the service. This means future big data analytics are essentially limited by what uses the user agreed upon sign-up. However, corporations in their drive to maximize profits will ultimately make privacy policies so loose (i.e. to cover secondary uses) that the user essentially has to give up all their privacy in order to use the service.
As noted in the Guardian article:
The following video from TheVerge sums up the issue:
Although such allegations have received attention (in my opinion due to the association with Trump's campaign), the reality is that these allegations against Facebook are actually not new and reported in both the Intercept in early 2017 and the Guardian way back in 2015.
There was an ensuing backlash (as noted in the video above and here) that forced Facebook CEO, Mark Zuckerberg to respond. He both had a written response and gave the following interview on CNN:
During the CNN interview, he mentioned the word "audit" 3 times[emphasis added]:
- "So we're going to go now and investigate every app that has access to a large amount of information from before we locked down our platform. And if we detect any suspicious activity, we're going to do a full forensic audit"
- "And we're now not just going to take people's word for it when they give us a legal certification, but if we see anything suspicious, which I think there probably were signs in this case that we could have looked into, we're going to do a full forensic audit."
- "We know how much -- how many people were using those services, and we can look at the patterns of their data requests. And based on that, we think we'll have a pretty clear sense of whether anyone was doing anything abnormal, and we'll be able to do a full audit of anyone who is questionable."
Can CPAs come to Mark's rescue?
Zuckerberg's repetitive use of the word audit should be read in conjunction with his "welcoming" of regulation:
"I actually am not sure we shouldn't be regulated. You know, I think in general, technology is an increasingly important trend in the world, and I actually think the question is more what is the right regulation rather than yes or no, should it be regulated?"
Zuckerberg would not be the first tech giant to opt for regulation as a business strategy.
In Tim Wu's Master Switch, Theodore Veil also advocated for the concept of a regulated monopoly in the arena of telephones:
In Tim Wu's Master Switch, Theodore Veil also advocated for the concept of a regulated monopoly in the arena of telephones:
As Tim points out in his book, the move enabled AT&T didn't always use their monopolistic powers for good. They charged high long distance rates and even stifled innovation suppressing the answering machine due to potential conflict with its main business.
Regardless, it shows that Facebook could be an early advocate for CPAs offering privacy related assurance services around its algorithms.
AlgoTrust: A new service offering for CPAs?
The concept of AlgoTrust is something I have previously discussed in this post.
The idea actually has support from multiple angles not least of which of comes from information security expert, Bruce Schneier:
The idea actually has support from multiple angles not least of which of comes from information security expert, Bruce Schneier:
Big Data versus Privacy: The monetization paradox
Such an algo-audit could leverage the work done by AICPA and CPA Canada in the realm of privacy, specifically the Generally Accepted Privacy Principles. That being said, privacy audits have been a hard sell in the past. But what distinguishes the service here is that it would be auditing the algorithm for compliance with privacy "regulations".The reason regulations need to be put in quotes is that in substance privacy legislation is effectively eliminated if the consumer consents to use the service.
The challenge, therefore, is balancing the drive to monetize big data with the privacy needs of the people who use the service. For example, people who identify with the "left" may not want Steve Bannon or Trump accessing their data. Similarly, people who identify with the "right" may not want Obama accessing their social media data. The end result is that no one can access meaningful data due to privacy restrictions - resulting in a standard so restrictive that it eliminates that ability of companies like Facebook to monetize the treasure trove of data that they have collected.
As noted in an earlier post, there is an inherent highlight the conflict between privacy and profiting from big data. The value of big data emerges from the secondary uses of big data. However, privacy policies require the user to consent to a specific use of data at the time they sign up for the service. This means future big data analytics are essentially limited by what uses the user agreed upon sign-up. However, corporations in their drive to maximize profits will ultimately make privacy policies so loose (i.e. to cover secondary uses) that the user essentially has to give up all their privacy in order to use the service.
There is a lot of potential in attempting to create an assurance service to address Facebook's predicament, but as they say, the devil is in the details.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Friday, November 3, 2017
Big Data Auditing Revisited: Context is King
It has been a few years since I wrote up on Big Data and the Audit. It was one of the more popular posts with over a 1,000 hits to date.
The post looks at Big Data: A Revolution That Will Transform How We Live, Work, and Think by Kenneth Cukier and Viktor Mayer-Schönberger. I enjoyed the book as it really broke down the business impact of big data without getting in technical details of the underlying technology.
The post looks at Big Data: A Revolution That Will Transform How We Live, Work, and Think by Kenneth Cukier and Viktor Mayer-Schönberger. I enjoyed the book as it really broke down the business impact of big data without getting in technical details of the underlying technology.
Why take a second look at big data auditing?
Big data and the accompanying analytical models are key a precursor to artificial intelligence. Machine learning algorithms that power the AI bots requires the users to analyse the problem and teach the underlying algorithm.Part 1: Context is King
To make things a bit more digestible, I thought it would be good to divide the post into two parts. The first post is more palatable as I want to explore the second use case in a bit more detail and its relevance to today. The second post will be a bit more controversial as I will take a look at the difficulty of applying fraud or cancer-fighting algorithms in the realm of (external) financial audit.
But let's look at the first issue: how can big data analytics give us better context?
In the original post, I spoke discussed the use case used in Cukier and Mayer-Schönberger's work around Inrix. The book gives the example of how an investment firm is using traffic analysis, from Inrix, to determine the sales that a retailer will make and then buy or sell the stock of the retailer on that information. In a sense, the investment is using vehicular traffic as a proxy for sales. In an audit context, auditors can develop expectations of what sales should be based on the number of vehicles going around stores. For example, if sales are going up, but the number of vehicles are going down then the auditor would need to take a closer look.
What I realized from this example is that what big data can give auditors better context around things and assess reasonability of things. That is as more sensor data and other data are available to auditors to integrate into statistical models, the more they will be able to spot anomalies.
What I realized from this example is that what big data can give auditors better context around things and assess reasonability of things. That is as more sensor data and other data are available to auditors to integrate into statistical models, the more they will be able to spot anomalies.
One of the issues with Barry Minkow's ZZZBest accounting fraud was the lack of context. For more on the fraud, check this video:
I actually studied this case in my auditing class at the University of Waterloo. One of the lessons we were take away from this case was that the auditors didn't know how much a site restoration would cost on average (see the first bullet in this text on page 129). But how would an auditor be able to access such data? Even with the advent of the internet, it is not simply a matter of Googling for the information.
More recently, an accounting professor was found to have generated data fraudulently. The way he got caught was that a statistic he used didn't correspond to reality. Specifically:
"misrepresented the number of U.S.-based offices it had: not 150, as the paper maintained (and as a reader had noticed might be on the high side, triggering an inquiry from the journal)" [Emphasis added]
More recently, an accounting professor was found to have generated data fraudulently. The way he got caught was that a statistic he used didn't correspond to reality. Specifically:
"misrepresented the number of U.S.-based offices it had: not 150, as the paper maintained (and as a reader had noticed might be on the high side, triggering an inquiry from the journal)" [Emphasis added]
Again, the reader had the context to understand what was presented was unreasonable causing the study to unravel and exposing the academic fraud perpetrated by Hunton.
What will it take to make this a reality?
What's missing is a data aggregation tool that can connect to the private, third party, and public data feeds that an auditor can leverage for statistical analysis. Furthermore, for this to be useful to clients and the business community large are visualized depictions that enable the auditor to tell the story in a better way rather than handing over complex spreadsheets.
Of course for auditors to present such materials requires them to have deeper training in data wrangling, statistics and visualization tools and techniques.
In the next post, we will revisit the first use case that I presented in the original post that explored how the New York City was better able to audit illegal conversions through the use of big data analytical techniques. Originally, I had thought this would be a good model to apply in the world of audit. However, I am revisiting this idea.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else
Sunday, October 15, 2017
What's missing from this Top 5 uses of Blockchain list?
TechRepublic's Tom Merritt walks us through the "Top 5" uses of blockchain in the following video. The accompanying post lists the following 5 use cases:
- Stocks
- Shipping
- Diamonds
- Livestock
- Law
What's missing?
Stocks use case is actually limited to Initial Coin Offerings (ICOs). For more on an overview of ICOs, check this article. However, the post excluded Linq's blockchain that allows for the settlement of private securities.
But on a broader note, the post excluded the financial industry altogether in terms of being a forerunner for the use of blockchain. Following the hype-cycle, one of the early areas of interest for the use of the permissioned blockchain were financial institutions. It seemed like every week that a company joining the R3 Consortium.
However, since that initial fervor, a number of players, such as Goldman Sachs, Santander, Morgan Stanley and the National Australian Bank, have left the consortium.
Why?
The problem lies in understanding the actual business case for the permissioned blockchain (for the differences between public and private/permissioned, see this post). The permissioned blockchain helps parties to have a common view of transactions that they have transacted with each other via a shared ledger database. With the use of digital signatures, it incorporates authorization into this as well, so in addition to sharing information, it also enables the ability to "sign-off" on that information.
The banks could decide that they would use such a framework to make it easier to settle payments, however, how do they keep things private such as pricing and other data? This is something that needs to be sorted out but points to a bigger question as to what is the strategic advantage of blockchain for FIs. That is, this exponential technology doesn't lead to cost savings like robotic process automation or strategic insights like big data analysis.
And that's why I think something like shipping or supply chain more broadly is a much better beachhead for blockchain. With multiple partners involved in supply chain, have a shared database enables the partners to see where things are at between the wholesaler, shipper, and retailer, enabling each partner to get better insights into movement of goods and other business information. Such a system would allow for creative ways to settle payments or even enhance the ability of retailers to design consignment contracts with wholesalers. For example, BestBuy is marketplace (e.g. Brainydeal is one such retailer) within its retail front requiring such coordination. The one caveat, however, is to ensure that (cheaper) existing technology doesn't actually do this already. After all, shared databases are not a novel concept.
I would contend that legal would be a great place for the blockchain to expedite paperwork - more so than supply chain. However, such technology would be fought tooth and nail by lawyers. And they have unlimited resources to fight such technology in the courts. Also, politicians have little incentive to look into such advances as most of them are lawyers, depend on lawyers or have friends who are.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.
But on a broader note, the post excluded the financial industry altogether in terms of being a forerunner for the use of blockchain. Following the hype-cycle, one of the early areas of interest for the use of the permissioned blockchain were financial institutions. It seemed like every week that a company joining the R3 Consortium.
However, since that initial fervor, a number of players, such as Goldman Sachs, Santander, Morgan Stanley and the National Australian Bank, have left the consortium.
Why?
The problem lies in understanding the actual business case for the permissioned blockchain (for the differences between public and private/permissioned, see this post). The permissioned blockchain helps parties to have a common view of transactions that they have transacted with each other via a shared ledger database. With the use of digital signatures, it incorporates authorization into this as well, so in addition to sharing information, it also enables the ability to "sign-off" on that information.
The banks could decide that they would use such a framework to make it easier to settle payments, however, how do they keep things private such as pricing and other data? This is something that needs to be sorted out but points to a bigger question as to what is the strategic advantage of blockchain for FIs. That is, this exponential technology doesn't lead to cost savings like robotic process automation or strategic insights like big data analysis.
And that's why I think something like shipping or supply chain more broadly is a much better beachhead for blockchain. With multiple partners involved in supply chain, have a shared database enables the partners to see where things are at between the wholesaler, shipper, and retailer, enabling each partner to get better insights into movement of goods and other business information. Such a system would allow for creative ways to settle payments or even enhance the ability of retailers to design consignment contracts with wholesalers. For example, BestBuy is marketplace (e.g. Brainydeal is one such retailer) within its retail front requiring such coordination. The one caveat, however, is to ensure that (cheaper) existing technology doesn't actually do this already. After all, shared databases are not a novel concept.
I would contend that legal would be a great place for the blockchain to expedite paperwork - more so than supply chain. However, such technology would be fought tooth and nail by lawyers. And they have unlimited resources to fight such technology in the courts. Also, politicians have little incentive to look into such advances as most of them are lawyers, depend on lawyers or have friends who are.
Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.
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