Is the SVB Collapse the Start of Another Financial Meltdown? A look at what went down!

By now we have all heard about Silicon Valley Bank’s (SVB) sudden collapse and we are wondering whether we are on the precipice of a 2008 scale meltdown. After all it is the second largest bank failure in U.S. history. Even more concerning is the recent rattling at Credit Suisse. In this post we'll explore, some key takeaways from the pundits and publishers out there.

Examining the Connection Between Silvergate Bank’s Collapse and SVB’s Bank Run

A few weeks ago, the well-known cryptocurrency bank, Silvergate, suffered a sudden collapse. As a prominent institution within the world of crypto, Silvergate served as a crucial entry and exit point for individuals looking to convert their cryptocurrency into fiat currency. It also maintained substantial exposure to both Alameda Research and FTX.

 

In contrast, Silicon Valley Bank (SVB) maintains no direct connections with the cryptocurrency sector or Silvergate Bank. However, the dramatic downfall of Silvergate likely instilled enough fear among SVB depositors, prompting them to trigger a panic. For a more in-depth exploration of the Silvergate collapse, check out Wall Street Millennial’s take on the situation:

 

 

Unveiling Risk Management Flaws: What did Warren Buffett say about low tides?

Warren Buffett once said, “You don’t find out who’s been swimming naked until the tide goes out.” This sentiment rings true for SVB, which suffered from a maturity mismatch between its depositors' on-demand withdrawals and the long-term debt it held. The bank was exposed to interest rate risks but took no action, leaving it vulnerable.

 

How did things go so wrong?

 

When looking at what happened at SVB, we need to go back in time an examine the impact of the zero interest rate policy that's been in place for decades. It resulted in “the search for yield”. This search for yield funded everything from mortgage-backed securities, cryptocurrencies, investments in emerging markets as well as risky investments in the oil sector. And this is what likely prompted the executive management at SVB to lock in their money in long term debt. Specifically, SVB owned over $80bn of mortgage-backed securities with 97% of them being 10+ year duration at a weighted average yield of 1.56% (link).

 

Interestingly, SVB contemplated managing this risk but decided against it. As noted on Bloomberg:

 

“In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there”

 

Then inflation struck. This caused the Fed to aggressively reverse its zero-interest rate policy. The swift increase in interest rates led to a significant decline in the value of SVB’s debt holdings, as the value of debt falls when interest rates rise. 

To deal with this widening hole in their balance sheet, management failed to raise $2.25 billion. This left SVB unable to cover the unexpected withdrawal of $42 billion in deposits (that occurred in 1 day!), as the value of the debt they held had severely diminished and could not cover the outflows. For more on the numbers, check out Patrick Boyle’s take:

 

 

 

Furthermore, the absence of a risk officer from April 2022 to January 2023 compounded these issues. Moreover, the CAO was none other than the former CFO of Lehman! For more on this check out Cold Fusion’s take:

 

The Race to escape the Sinking Ship: Who will be left holding the bag?

Venture capitalists, known for their interconnectedness through WhatsApp groups, began to realize the bank's shortcomings. They themselves were quite vulnerable as 90% of SVB's deposits were uninsured, in contrast to the industry average of 52% (link).  As noted in this Bloomberg Odd Lots podcast, SVB was not actually dealing with a diverse set of clients. Instead, they were dealing with a handful of VCs. Consequently, the clients pulled out their funds in unison as a response to the request from their respective investors.

 

The Ripple Effect: Contagion Risks Loomed

The inability of Silicon Valley to access cash for payroll could have spelled disaster for numerous startups. This cash flow issue would have also generated incentives for customers to avoid smaller banks, potentially triggering bank runs on other vulnerable institutions. It would also lead to consolidation of customers around the “too big to fail” banks, as people will not trust banks that are the same size or smaller than SVB.

 

Questionable Timing: Bonuses and Stock Sales

The timing of bonus payouts and stock sales raised eyebrows, with bonuses ranging from $12,000 for associates to $140,000 for managing directors issued the day FDIC took over the bank. (link) Silicon Valley Bank CEO Greg Becker's stock sales, totaling nearly $30 million over two years, also drew scrutiny. Most notably, Becker sold $3.6 million worth of shares just days before the bank disclosed a substantial loss that led to its stock plunge and eventual collapse. (link)

 

Capitalism on the way up, Socialism on the way down?

The US Treasury jumped into shore up ALL deposits. The new "Bank Term Funding Program" will offer loans of up to one year to lenders that pledge collateral, which will be valued at par. Management and shareholders, however, will not be bailed out.

 

The Biden administration and other government officials have emphasized that the FDIC intervention is not a bailout, seemingly more concerned about potential backlash than addressing investors' needs. Their apprehension likely stems from the possibility of sparking a new Occupy Wall Street or Tea Party movement, as Uncle Sam's aid tends to favor those deemed "too big to fail" rather than offering support to smaller, struggling entities.

 

And the Biden Administration has good reason to be aware of this perception.

 

As reported in the Washington Post, prominent venture capitalists and tech executives, including LinkedIn founder Reid Hoffman and investor Ron Conway, leveraged their connections and influence to lobby Democratic lawmakers and administration officials for intervention in the bank crisis. As prolific donors to Democrats, including Biden, they worked with Pelosi and Gov. Newsom to pressure the White House and Treasury Department. Over 600 tech industry executives joined a call with Rep. Ro Khanna, who then emerged as a vocal advocate for the Biden administration to support the bank's depositors and prevent broader financial repercussions. Washington Post summarized the situation as follows:

 

“The lobbying blitz reflected a broader sea change in the normally libertarian tech industry — one that typically tries to ward off federal intervention. Now, many of those same voices were calling on the Biden administration to act and protect an ecosystem in which they had a large stake.”

 

Ironically, it was none other than the CEO of SVB, Greg Becker, who lobbied back in 2015 to evade the Dodd frank regulatory constraints and thereby get lighter scrutiny. Here is an excerpt from this article:

 

“Touting “SVB’s deep understanding of the markets it serves, our strong risk management practices,” Becker argued that his bank would soon reach $50 billion in assets, which under the law would trigger “enhanced prudential standards,” including more stringent regulations, stress tests, and capital requirements for his and other similarly sized banks…Becker insisted that $250 billion was a more appropriate threshold…“Without such changes, SVB likely will need to divert significant resources from providing financing to job-creating companies in the innovation economy to complying with enhanced prudential standards and other requirements,” wrote Becker…”

 

Commenting on the contradiction between this attitude and the SVB bailout demanded by the 600 tech execs, Scott Galloway, a prof at NYU’s Stern School of Business, offers a succinct and insightful summary of the underlying dynamics (see here and here):

 

 "We have capitalism on the way up and socialism on the way down."

 

Sure, this protected the depositors. And yes, it was not for the shareholders or management. However, one cannot deny that it was the special access to the powerbrokers that brought in the FDIC to save the day. In the absence of such privileged access, the account holders would have likely met the same fate as mortgage holders who were left stranded in the 2008 crisis.

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. This post was written with the assistance of an AI language model. The model provided suggestions and completions to help me write, but the final content and opinions are my own.

The Battle for AI Search Heats Up: Latest Developments from Microsoft and Google

The race for AI-enabled search is on, and the stakes are high as Microsoft and Google are competing to be at the forefront of this exciting field. Last week was a milestone in the world of AI, as both companies made significant announcements about their latest offerings. In this post, we'll take a closer look at what these announcements mean for the competition for AI-enabled search and what could have led Google to fall behind.

Microsoft's Announcement

Microsoft announced that it will be integrating ChatGPT into Bing to allow people to use Generative AI to answer questions, instead of just endlessly searching. In their demo, they showed how “BingGPT” (my term) could help users get their bearings about a topic, such as famous Mexican painters or Japanese poets. BingGPT could also develop a travel itinerary for a vacation and attempt to answer questions like "Will a sofa fit in a Honda Odyssey?"

Microsoft also unveiled the new Edge browser, which would have the productivity right in the browser. From a CPA perspective, what was impressive was how Microsoft was able to summarize a GAP press release and produce instant comparatives with Lululemon. They also demonstrated how BingGPT could instantly generate a LinkedIn post. In the demo, Microsoft showed how you can direct the AI to use a specific tone (which in this case was “enthusiastic”).

One of the other key takeaways from the unveiling was Microsoft’s positioning of BingGPT. They see it as a co-pilot: something that the user can use to augment their work. That is, they are not looking to unveil bots to replace office workers. Check out the following extracts from the announcement:

 The full presentation is available here

Google's Announcement

Google, not to be left behind, also had an announcement the next day. They chose Paris to unveil their alternative to ChatGPT, Bard.

Unfortunately, the announcement was received as underwhelming. The demonstration was cut short when they misplaced a phone, and they seemed to be more focused on incremental improvements to their existing offerings, such as multi-search (i.e. search by image and text) and augmented reality apps, which provide a Google maps overlay of the shops on the street.

With respect to Bard, there were few details provided. Google mentioned that an API would be available for developers next month, but there was no information about when the average user would be able to try it. The biggest news with Bard, however, was the mistake it made when retrieving an answer. As was widely reported, "Google's blog showing off Bard's capabilities, the AI falsely said the James Webb Space Telescope took the first ever picture of an exoplanet. It was Webb's first picture of an exoplanet, but the first picture taken occurred back in 2004."

The result of Google's stumbles?

Investors were quick to react and wiped out $100 billion of the search engine’s market capitalization.

What happened to Google’s lead?

Google is a prime example of a company that got caught in the innovator's dilemma. Their dominant position in the search engine market made them extremely profitable, but it also made them slow to respond to the rise of AI-enabled search. Google was too focused on maximizing their existing business model and the advertising revenue that came with it, which made them hesitant to invest in AI-enabled search. This is because AI-enabled search would limit the amount of searching that people would do, and therefore, would reduce the amount of advertising dollars that Google would earn.

As a result of their slow response, Google was overtaken by Microsoft, who was able to integrate ChatGPT into Bing, allowing people to use generative AI to answer questions. Google's Bard launch was a clear indication that the company is playing catch up in the AI-powered search space. In order to remain competitive and not lose market share to Microsoft, Google will need to quickly respond and make improvements to their offering.

Though their launch needed work, their panic is justified. Nadella stated during the launch of BingGPT:

"It's a new day in Search. It's a new paradigm for search. Rapid innovation is going to come. In fact, a race starts today in terms of what you can expect and we're going to move. We're going to move fast. For us every day, we want to bring out new things. Most importantly, we want to have a lot of fun innovating again in Search because it's high time."

The statement highlights Microsoft's ambitious plans to capture market share from Google in the rapidly evolving AI-powered search space.

In closing, Google's experience serves as a cautionary tale for companies that are tempted by the riches of their existing business models. In order to stay competitive, companies must be willing to take risks and invest in new technologies, even if they may disrupt their existing business. Companies that are too focused on preserving their existing profits may miss out on new opportunities and be left behind.

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. This post was written with the assistance of an AI language model. The model provided suggestions and completions to help me write, but the final content and opinions are my own.

 

The Dilemma of Zlibrary: Empowering Students or Enabling Piracy?

As the year 2022 came to a close, a significant event occurred that may have gone unnoticed by many. The famous online repository of ebooks and articles, Z-library, was shut down. This event serves as a reminder of how too much attention can have negative consequences. In this blog post, we will delve deeper into the story of Zlibrary and the issues surrounding shadow libraries, intellectual property rights, and access to knowledge.

 

The Impact of Digitized Info: The Rise of Z-library

Z-library is an online repository of ebooks and articles that provides free access to information and knowledge. The site started in 2009 and has since grown to be one of the largest shadow libraries on the internet. According to Fast Company:

"Z-Library offered more than 10 million ebooks and 86 million articles at its peak, with a limited number of monthly downloads accessible to millions of users free of charge, and more available for a small fee."

Many people around the world rely on such resources as they may need access to the expensive subscription-based services that are often required to access academic articles and books. Proponents of websites like Zlibrary, Sci-Hub, and Libgen argue that they strive to break down barriers to knowledge and education, enabling users to access the information they need to learn and grow.

The TikTok Effect on Zlibrary: More Popularity, More Problems

The rising popularity of Z-library, however, attracted the scrutiny of copyright holders and legal authorities, putting both the site and its users in a vulnerable position. The increased attention also raised legal questions about using such a resource.

 According to TorrentFreak, Z-library has emerged as a vastly popular, high-volume source of illegal ebook downloads in recent years. The site's growth can be attributed to users who openly advertise the site on social media, with TikTok playing a significant role in its popularity. The hashtag #zlibrary on the popular social media platform has 4 million views, with countless videos posted by college and high school students and others across the world promoting it as the go-to place for free ebooks.

However, the attention that Zlibrary received on TikTok was a double-edged sword. While it certainly helped spread the word about the site, it also brought more attention to its illegal activities. This attracted the attention of copyright holders and legal authorities, namely the FBI.

Starving Students vs Starving Artists: Who really benefits from the closure of Z-library?

According to the Washington Post, the FBI has charged two Russian nationals, Anton Napolsky and Valeriia Ermakova, with criminal copyright infringement, wire fraud and money laundering for operating Z-Library. The authorities took down the website on November 4th and the U.S. Attorney for the Eastern District of New York, Breon Peace, stated that the defendants profited illegally by uploading works within hours of publication and victimized authors, publishers, and booksellers in the process.

The Washington Post also noted how authors and users had a clash of opinions. Users were mourning the loss of their ability to download free textbooks, novels, and academic papers. However, authors were relieved by the shutdown as they argued that piracy harms their sales and the publishing industry and that mourning Z-library is mourning the end of theft.

But is this really a debate between starving students and starving artists? Not really.

According to a report by Citigroup obtained by Rolling Stone, in the music industry's digital streaming era, the people who make the most money from copyrighted content like books or music are not the artist/author, but the holder of the copyright. They take nearly 90% of the money.

The story of Jerry Siegel and Joe Shuster, the authors of the original Superman comic book, highlights the unfortunate reality that creators of copyrighted content may not always receive fair compensation for their work. Despite the immense success and wealth generated by Superman and the concept of superheroes, the inventors only received a small sum of $130 for signing over the rights to their creation to D.C. Comics. This has led to ongoing legal battles, with the families of the inventors seeking their fair share of the fortune generated by the invention. Of course, the copyright holders won.

The Z-library Takedown: Can we just dismiss the concern of students?  

One tweet succinctly summed up the students' feelings, stating "The closure of Zlibrary is like the burning of the Library of Alexandria in our time." This tweet draws parallels between the loss of this online library and the historical burning of the Library of Alexandria during the reign of Julius Caesar.

Burning Z-Library: Rendered by Stable Diffusion 2.1

Can we just dismiss this as students being overly emotional? Well, it's more complicated than that.

As noted in the Huntington News, a 2014 study found that the average cost of a college textbook is about $105, which is difficult to justify for most college students. In the same study, 65% of college students said they didn't purchase their required textbooks even though they knew it could hurt their grade.

The burden of student debt is heavy for many young people in Canada and the U.S. In Canada, the total amount of student loans owed to the federal government reached a staggering $22.3 billion in 2020. And this figure doesn't even consider provincial and personal loans, lines of credit and education-related credit-card debt. On average, a Canadian student graduating with a bachelor's degree holds $28,000 in student loan debt, while college grads hold $15,300 in debt. In the U.S., the situation is similarly dire. For 2023, the total amount of student loan debt (including federal and private loans) has reached $1.75 trillion. The average student borrower holds $28,950 in debt.

The situation in Canada and the U.S. has a wide-reaching social impact, as this debt load can make it difficult for young people to start their careers, buy homes, or even save for retirement. It is clear that the cost of education is a growing concern not just for students but for society as a whole.

Consequently, the Z-library debate must be connected to the economic reality that students face, such as the rising costs of education, high levels of student debt, and a lack of affordable access to educational resources. It highlights how the students' anger at the site's shutdown is a part of a broader crisis they face. It is essential to understand this context when discussing the issues surrounding shadow libraries and intellectual property rights.

Digital Tech: Innovation and the Struggle for a Knowledge Society

The Z-library debate highlights how intellectual property can be an obstacle to creating a knowledge society. From a technological standpoint, the ability to digitize text, information, and knowledge can revolutionize access to information and education. However, as demonstrated by Zlibrary, the economic realities of the publishing industry and the protection of intellectual property rights often stand in the way of this potential. Technology has advanced, but the economics have not evolved to keep pace, resulting in the same exploitative dynamics seen in other industries such as music and comics. To truly create a knowledge society, we must re-examine how intellectual property laws and systems can be adapted to enable access to information and knowledge for all rather than just protecting the profits of a select few.

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 Terminator in the Kitchen: How Robots are Changing the World of Fast Food

As we continue to digest the impact of ChatGPT on the world of work, CNBC had an interesting video on how robots are ready to replace humans in the kitchen:

As noted in the report, the industry is poised to save $12 billion in labour costs by replacing "up to 82% of restaurant positions... by robots." The video also highlights the safety benefits that could accrue to fast-food workers with the use of robots. Coincidentally, I was chatting last week with a barista at Starbucks. He mentioned an unfortunate incident where his friend fell into an oil vat while cleaning the equipment. This was not at a small restaurant, but a major one. Finally, the video speaks to the labour crunch that the industry is facing. With over half a million positions to be filled, robots could be the answer restauranteurs are looking for. 

Other advantages include the following:

• Improved hygiene: Given the impact of COVID-19, many people now view the idea of reducing human involvement in food preparation as a way to ensure a more hygienic end product.
• Consistency: By using robots for food preparation, restaurants can ensure that customers receive consistently high-quality food. This can avoid dissatisfied customers, who have had to consume burnt offerings!
• Reduced food wastage: Systems can be designed to avoid food wastage and capture excess toppings, etc., to be reused. 

In terms of cost, Miso rents these out:

"Miso’s flashiest invention is Flippy, a robot that can be programmed to flip burgers or make chicken wings and can be rented for roughly $3,000 a month."

What I found fascinating was how we have been preconditioned by sci-fi movies to expect humanoid robots. Instead, we find an awfully familiar-looking contraption: a rail-car system with a camera and mechanical arm attached. It's pretty similar to what we have seen before in terms of how robots are being used to make lattes, as discussed in this post. 

But there is more to the contraption than ‘meets the eye’. The value ultimately is in the software that can bring all the moving parts together. As noted by Mike Bell, CEO of Miso Systems, who manufactures the "frying robot" (taken from the YouTube transcript): 

"The hard thing to get right about this product is having the computer vision, the algorithms that plan the cook cycle and the software that manages the robotic motion to all work together so that it's as reliable as a refrigerator and it does the job."

In conclusion, the food industry is looking to save billions of dollars in labour costs by replacing restaurant workers with robots. Though this would save mountains of money we need to look at the society wide impact of such a monumental shift. Personally, working in the fast food industry as a young person taught me a lot before entering the CPA profession, such as the importance of hard work, humility, and empathy. Without such work, where would the youth of today or tomorrow learn such basics? Only time will tell what this means for the future generations that don't have access to such formative experiences.

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

Welcome to 2023! What are five key tech trends that CPAs should be aware of?

With the crypto-ice age in effect, there is some rethinking on crypto and NFTs path in 2023. Here is CNBC's take: 

However, there are still a number of key tech trends that Chartered Professional Accountants (CPAs) should be aware of in order to stay up-to-date and competitive in the industry. These trends include cloud computing, artificial intelligence and machine learning, big data, cybersecurity, and digital transformation. By understanding and leveraging these technologies, CPA firms can improve their operations and better serve their clients.

1. Cloud Computing: Cloud computing involves delivering computing services, including servers, storage, and databases, over the internet rather than using local servers or personal devices. CPA firms can benefit from cloud computing by being able to access data and applications from any location, as well as scaling up or down as needed. For more on cloud and the world of CPAs, check out this post. 

2. Artificial Intelligence and Machine Learning: AI and machine learning technologies can help CPA firms automate routine tasks, improve decision-making, and gain insights from data. For example, chatbots are now able to generate fully coherent posts using natural-language processing. We covered this in our last post, with the rise of ChatGPT. If you haven't checked it out, it is must read. 

3. Big Data: Businesses are generating and collecting a large amount of data from a variety of sources, including financial transactions, social media, and internet of things (IoT) devices. Tools such as data visualization and advanced analytics can help CPA firms make sense of this data and extract valuable insights. In the early days of big data, I put this post together. It captures the hope and potential - much of which still needs to be realized.

4. Cybersecurity: Cybersecurity is a critical concern for CPA firms, as they often handle sensitive financial and personal data. It is important for CPA firms to have robust cybersecurity measures in place to protect against cyber threats such as hacking, ransomware, and phishing attacks. I've always felt that Cyber is a natural extension for CPAs. We're not just versed in the concept of controls, but also the realities of auditing those controls - an increasingly important way of conveying of compliance to a variety of stakeholders. See here for CPA Canada's list of resources.

5. Digital Transformation: Digital transformation refers to the use of digital technologies to fundamentally change how an organization operates and delivers value to its customers. CPA firms can benefit from digital transformation by streamlining processes, improving efficiency, and increasing agility. This may involve adopting new technologies such as cloud computing, AI, and big data, as well as rethinking business models and organizational structures. See here for more on the topic. 

In closing, it is important for CPA firms to stay informed about the latest tech trends in order to take advantage of new opportunities and meet the changing needs of their clients. By embracing technologies such as cloud computing, artificial intelligence and machine learning, big data, cybersecurity, and digital transformation, CPA firms can improve their efficiency, effectiveness, and competitive edge. By staying up-to-date with these trends, CPA firms can continue to deliver value to their clients and succeed in an increasingly digital business environment.

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

AI and the CPA: OpenAI's ChatGPT will Blow Your Mind! Try it Now!

We previously discussed OpenAI in this post. In that post, I closed with this comment:

"We should be aware of the concept of exponential change. Technology, like AI, improves at an exponential rate and not a linear rate. Consequently, monitoring the space is key for CPAs and other to ensure that they see change coming and adapt accordingly."

And so, my fellow CPAs, you need to check out how much AI has advance in the two years since that post. It's absolutely amazing to see how advanced the technology is and how quickly it has come:

YouTube is one thing. But testing it out is another. To be honest, I was about to review the video and then summarize it. Then I thought, why not ask ChatGPT? 

Question to ChatGPT: "What are 5 key takeaways for CPAs with respect to ChatGPT?"

Answer: 

1. ChatGPT is a large language model trained by OpenAI.
2. ChatGPT has a knowledge cutoff of 2021, and it does not have access to the internet or current events.
3. ChatGPT is able to generate human-like responses to a wide range of questions, but it is important to keep in mind that it is a machine and may not always provide accurate or complete information.
4. ChatGPT is not a substitute for professional advice or guidance, and it should not be used as the sole basis for making important decisions.
5. ChatGPT is intended for general informational purposes only, and it is not a substitute for professional judgment or expertise. It is important for CPAs to consult with appropriate sources and to exercise their professional judgment when making decisions.

Reading through the takeaways, it seems like it added an extra dash of risk management. Could it have accounted for our risk-aversion?

Then I thought, why not ask it directly about the video itself? 

Question to ChatGPT: "What are 5 key takeaways from It’s Time to Pay Attention to A.I. (ChatGPT and Beyond)"

Answer:

1. Artificial intelligence (AI) is a rapidly developing field with the potential to significantly impact many aspects of society, including the accounting profession.
2. AI technologies, such as chatbots and language models like ChatGPT, are becoming increasingly sophisticated and can be used for a wide range of applications.
3. It is important for CPAs to stay informed about the latest developments in AI and to consider how these technologies may impact their profession and their clients.
4. While AI has the potential to improve efficiency and accuracy, it is important to carefully consider the risks and limitations of these technologies, including the potential for errors or biases.
5. CPAs should consider ways to incorporate AI into their practices, such as by using AI tools to automate certain tasks or by providing guidance to clients on the use of AI. However, they should also ensure that they have the necessary skills and knowledge to effectively use and understand these technologies.

Notice how I did not have to tailor this questions for CPAs? ChatGPT automatically brought the context over from the previous question.  (As for how good this summary is, you can judge for yourself.)

Then, I decided to ask it about how exponential technologies will impact the CPA profession. 

First question, "Will blockchain replace the need for financial auditors?"

Answer:

"Blockchain technology has the potential to revolutionize many aspects of the financial industry, including auditing. However, it is unlikely that blockchain will completely replace the need for financial auditors.

One of the main features of blockchain is its ability to provide a tamper-evident record of transactions. This can be beneficial for auditing purposes, as it allows auditors to more easily verify the accuracy and completeness of financial records. However, auditors still need to be able to interpret and analyze the data contained in these records, and to ensure that the data is consistent with other information and documentation.

Additionally, while blockchain can provide a secure and reliable record of transactions, it is not a substitute for the expertise and judgment of trained financial professionals. Auditors bring a deep understanding of financial principles and practices, as well as the ability to identify and assess risks and potential areas of concern.

Overall, it is likely that blockchain will augment and enhance the role of financial auditors, rather than replacing them entirely."

Notice the nuanced response? It should have spoke to validity, instead of completeness when it came to how the blockchain will assist the auditor. However, it didn't just list all the audit objectives just "to be safe". 

Then I asked about artificial intelligence:

Question: "How can AI be used to automate financial auditing?"

Answer:

"Artificial intelligence (AI) can be used to automate certain aspects of financial auditing, such as the analysis and interpretation of financial data. This can potentially improve the efficiency and accuracy of the audit process.

For example, AI algorithms can be trained to analyze large amounts of financial data and identify patterns and trends that may not be immediately apparent to human auditors. This can help auditors to more quickly and effectively identify areas of potential risk or concern.

AI can also be used to automate the testing of transactions and the evaluation of internal controls. For example, an AI system could be trained to perform automated tests on transactions to ensure that they are recorded correctly in the financial records. This can help to reduce the time and resources needed to perform these tasks manually.

Overall, the use of AI in financial auditing can help to improve the efficiency and accuracy of the audit process, while also freeing up auditors to focus on more complex and higher-level tasks that require human judgment and expertise."

Recognize the theme of "race with the machine" in both this response and the previous blockchain response? This is especially integrated into the last paragraph, which speaks to what AI can do versus what "human judgment and expertise" can do. Also, notice how it explains AI role in both risk assessment and testing of internal controls. That is, it had enough where "understanding" to breakdown the response into different aspects of the audit. 

When looking at this, we need to ask ourselves: is this inflection point for exponential rise of AI? 

Do review the last part of the video, where Samuel H. Altman, CEO of OpenAI, explains how he anticipates the impact of such technology on the legal profession. (The video earlier takes about how Josh Browder's Do Not Pay, will leverage the tech. I had previously seen Browder on a panel in 2016; see this post for the video). 

It's not quite a stretch to apply what he says to the CPA profession. There are key differences; in that we opine on financial statements, provide tax advice based on financial data, and the like. However, audit data analytics tech has been around for decades. It's just a matter of getting the different parts to talk to each other. 

Clearly, it's early days for ChatGPT and many issues need to be sorted out. For example, it has already earned the moniker "CheatGPT" for how it can be potentially used as a short-cut by students. That being said, it's clearly the biggest watershed moment for AI and the white-collar workforce, since IBM's Watson defeated Ken Jennings and Brad Rutter. 

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

Figuring out FTX (Part 3): 5 Videos You Must Watch on SBF’s Arrest!

Sam Bankman-Fried (SBF) was scheduled to testify in front of congress on Tuesday. Forbes caught a copy of his testimony, which is available here.  However, this testimony won’t be delivered. Instead, SBF got arrested in the Bahamas. The US Department of Justice (DoJ), in a joint conference with the SEC and CFTC, unveiled the following 8 charges:

• Conspiracy to Commit Wire Fraud on Customers
• Wire Fraud on Customers
• Conspiracy To Commit Wire Fraud on Lenders
• Wire Fraud on Lenders
• Conspiracy to Commit Commodities Fraud
• Conspiracy to Commit Securities Fraud
• Conspiracy to Commit Money Laundering
• Conspiracy to Defraud the United States and Violate the Campaign Finance Laws

 

CryptoSlate reported that “the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have both filed separate charges against the ex-CEO…The SEC has charged SBF with offering securities for sale and selling securities for fraud. Specifically, the charges fall under the Securities Exchange Act of 1934 and the Securities Act of 1933 pertaining to anti-fraud provisions…Further, the CFTC charged SBF with fraudulent misstatements and omissions.” 

 

The SEC complaint is available here (and here is their press release). The CFTC’s complaint is available here (and here is their press release). The full press conference is available here.

 

Video #1 – Will SBF’s Ill Advised Media Tour contribute to his Downfall?

Since the November collapse, SBF has been giving interviews (e.g. NYTimes, ABC, WSJ, BBC). This is of course against the advice of counsel.  Regardless, he has been talking up a storm, claiming to be the incompetent CEO and then apologizing for his screwups. That is, he was able to successfully bob-and-weave during these interviews and avoid admission of fraud.

 

That was until he was interviewed by Coffeezilla.

 

Coffeezilla admitted he too got outmaneuvered when he attempted to pin him down here and here. However, by reviewing his mistake and the mistake of others, he cornered SBF in this video and got him to admit to the lack of segregation of funds:

 

 

SBF, in contrast to his other interviews, got annoyed and accused Coffeezilla of monopolizing the interview time. Coffeezilla easily refutes this claim, noting SBF was factually incorrect. That being said, it would be surprising if this interview is not captured as part of the evidence that the DoJ, SEC, and CFTC will ultimately use against SBF.

 

Video #2 – WSJ Overview on the Players and Places

The following gives a good overview of what is happening. This includes the jurisdictions involved, the charges laid, and the Congressional hearings that are occurring in parallel.

 

See here for Coffeezilla’s analysis of the charges. The video also includes commentary from Legal Eagle.  

 

Video #3 – Summary of the Criminality at FTX and Alameda

 

FTX’s CEO, John J. Ray III, testified before congress about his findings so far. Ray was the same CEO that managed the Enron bankruptcy and has previously said that he has never seen “a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred [at FTX]”. This video, from the Washington Post, seems to capture the essence of the criminality that was a foot at the crypto-exchange and the hedge fund:

 

 

Video #4 – Did the multi-Billion Dollar FTX use QuickBooks and Slack?

For the poor state of governance and controls, see Ray’s opening remarks during his congressional testimony:

 

And to answer the question, yes they did!

Video #5 – The Nature of Crypto is making it hard for Ray to Locate FTX’s Assets

 

Locating assets in a bankruptcy is usually a matter of following the paper trail. Admittedly, FTX has poor records as noted in the last video. However, the problem is compounded by the ethereal nature of crypto/digital assets. See WSJ’s summary of Ray’s testimony, which highlights this unique challenge within FTX’s bankruptcy proceedings:

 

 The FTX story continues to evolve. There is definitely more to discuss, as additional details come to light. However, another story that will be explored in future post(s) is the contagion that has spread through the crypto-verse due to FTX and the other collapses in the nascent industry.

 

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.