Vol. 32 I No. 1 I January 2018 accountingtoday.com

TAX SEASON KICKOFF P.9 Shifting regs and continued security threats set the scene for an opportunity-� lled year

2017 IN REVIEW P.14 The year’s most signi� cant tax developments will continue to impact in the coming months

TIME TO CONSULT? P.25 CPAs should transform into future-minded advisors by harnessing new skills and tech

Brace yourself for AI & blockchain

At � rst glance, the threats seemclear: One type of software will learn how to perform all manner of business functions, particularly in � nance and accounting, while another will continuously validate any set of data or information.

Between them, artificial in-telligence and blockchain seem poised to disrupt — or even de-stroy — many of the core busi-nesses of the accounting profes-sion, automating or rendering irrelevant important traditional services like the audit. But while there can be little doubt that they will eliminate the need for human beings to perform many of the in-dividual functions traditionally as-sociated with accountants, both in public practice and in industry, they will certainly not eliminate the profession’s overall role, or its importance.

In fact, both AI and blockchain

have the potential to help accoun-tants actually boost their revenue, their relevance and their value — provided they’re willing to develop the necessary skills, and change their mindsets.

Understanding why each of these two emerging technologies is less of a threat and more of an opportunity than they might seem requires a separate, deeper dive into each, as they’re going to have different impacts on the profes-sion, over di� erent time horizons.

ARTIFICIAL INTELLIGENCEIt’s only partially accurate to de-scribe AI as an emerging technolo-gy; it has already emerged in some forms and some applications. It’s at the core of IBM’s Watson, for in-stance, which Big Four � rm KPMG is applying to its professional ser-vices o� erings, with a focus on au-

BY DANIEL HOOD

See BRACE YOURSELF on 30

HORSEY, BUCKNER & HEFFLER CREATED A NEW MODEL FOR DIVERSITY See page 6

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hyWith the complexity of the TaxCuts and Jobs Act passed in mid-December, taxpayers are likely either to be confused or to think they know more than they know about their own tax situa-tion. This presents professional preparers with the opportunity to build client loyalty, while lowering their client attrition rate.

When a client leaves your o� ce after having their taxes prepared,

it’s important that they have a positive feeling about the experi-ence, according to Chuck McCabe, president of Peoples Income Tax and � e Income Tax School. Part of that feeling comes from con� -dence that the preparer took note of their personal situation in ap-plying the law for their bene� t.

“We take a look at their total situation, especially if there have

Client loyalty in a year of uncertainty

See LOYALTY on 29

BY ROGER RUSSELL

� ere’s less threat and more opportunity in emerging technologies than many think

001_ACT0118 1 12/29/2017 5:21:44 PM

accountingtoday.com January 2018 | accounting today 31 30 accounting today | January 2018 accountingtoday.com coverstoriescoverstories

diting. H&R Block is adding Watson’s artificial intelligence to its tax prep process, while the Maryland Association of CPAs is working with IBM to train accountants in technology skills like AI and cognitive computing.

All this begs the question: What, exactly, is AI? Pop culture gives us HAL from “2001” as one example, Skynet from the “Termina-tor” movies as another, and Scarlett Johans-son’s disembodied voice in “Her” as another, friendlier one, but those are fictional char-acters, not models for AI. “A computer that thinks like a human being” comes close to the overall goal of the field, but that’s an idea that’s both nebulous and fairly far off (to say nothing of not necessarily worth pursuing, given the quality of most human thinking).

A more useful definition, and certainly one more in keeping with the current state of the field, is that AI is software that can draw con-clusions from large quantities of data, and adjust its activities based on those conclu-sions — that can, in effect, learn. Leon Kats-nelson, director and chief technology officer for strategic partnerships for data science at IBM, cites the example of an elevator compa-ny having AI go through reams of data from all of the sensors on its individual cars, iden-tifying from that data the characteristics of an elevator car that is about to have problems. The AI can then keep an eye on all the com-pany’s elevators going forward, and dispatch maintenance crews as soon as they exhibit any of the pre-problem characteristics.

Essentially, AI is about software that can learn and adapt, which is why one subset of it is called machine learning. “Machine learn-ing is like a rocket engine and data is the rock-et fuel,” Katsnelson explained. “In traditional programming, we’re teaching the machine how we do the job — we’re telling it, ‘Repeat what I do.’ AI is about teaching the machine to learn how we learn — to learn from data.”

That means that it can learn without hu-man input, and that it can act without human direction. It can also analyze far, far greater amounts of data than a human being ever could — and make useful decisions and rec-ommendations based on that data. Given all that, it’s not hard to see why it’s considered the next big thing. IBM, Google and the gov-ernment of China have all made significant investments in it, according to Katsnelson, who also quoted a famous tweet from Wired founder Kevin Kelly: “The business plans of the next 10,000 startups are easy to forecast: Take X and add AI.”

Some of those startups will no doubt be in the accounting space, attempting to realize the potential in software that knows the entire Tax Code by heart and can see trends across

literally millions of tax returns, or that can learn how to characterize and treat new fi-nancial transactions based on how millions of similar transactions have been characterized and treated before.

“What can AI do?” Katsnelson asked. “Just about anything. Where can you apply it? Just about anywhere.”

“Most people think audit is the first field in accounting that will benefit from AI,” he continued. “It allows auditors to dig deeper into the data by processing much larger vol-umes of data. Machines are much better than auditors at processing huge amounts of data.” AI can also process, analyze and incorporate all sorts of structured and unstructured data and information that auditors can’t — and it will be able to consider all the available data, without the need for sampling. “With AI and machines, you won’t need to sample — the machine can check all the transactions, which human auditors couldn’t,” Katsnel-son explained. “That’s where the power of the machine is.”

Nonetheless, Katsnelson still sees a criti-cal role for accountants. “I don’t believe for a second that the auditors will be replaced by machines — the human touch, and hu-man thinking, are critical,” he said. “Human judgment is still paramount.” To operate at its best, though, that judgment will need to be paired with data science skills, and accoun-tants will want to make sure that they’re ready and able to leverage the opportunities that artificial intelligence, cognitive computing and machine learning offer.

Erik Asgeirsson, the president and CEO of CPA.com, the technology subsidiary of the American Institute of CPAs, is bullish on the implications of artificial intelligence for those who are ready to leverage it. “Auditors are go-ing to become better with AI. They’re going to provide more value,” he said. “The firms that are leveraging technologies like AI are going to win in the end.”

BLOCKCHAINThe idea of machines that think goes back at least a century, so it’s no surprise that AI is fairly well advanced. Blockchain, on the other hand, is still in its relative infancy, with few applications. It’s not likely to have more than a theoretical impact on the profession for at least a year or two, but its eventual impact will be significant, which is why Ron Quaranta, the chairman of the nonprofit industry group the Wall Street Blockchain Alliance, says it’s important to make 2018 “the year of educa-tion” about the young technology.

That can start with a clear definition of what blockchain is: a technology that creates a da-tabase that’s distributed across the Internet but can only be accessed by users with heavily encrypted, highly secure keys. Those users

can post individual transactions, or “blocks,” to the database, and when those transactions are accepted, they become part of the “chain” — and are both completely unchangeable, and irrevocably associated with their creator. A later block in the chain may record a change to the status of the assets or the information in the original block, but that original block remains permanently in the chain.

Before exploring what the means for in-formation — essentially, that the structure in which the information is kept automatically audits and validates the information — it’s worth defining what blockchain is not:

It is not bitcoin. Though it is often asso-ciated with the famous crypto-asset, block-chain is an entirely separate technology, with applications that go far beyond alternative digital currencies.

It is not a single database. There are al-ready multiple blockchains, and if it lives up to its promise as a self-validating, self-au-diting form of database, there will be many, many, many more in the future. There will be public blockchains (for real estate records, for instance, or the provenance of different types of collectibles), but the vast majority are expected to be private, maintained by in-dividuals or companies for their own purpos-es. Your bank account might be a blockchain, and you might have an individual blockchain for your interactions with the IRS; a company might keep its books in one blockchain, in-teract with suppliers through another, and manage its sales tax obligations in another (and that one might be accessible to various levels of state or local tax authorities).

Once you have a clearer picture of what blockchain is, multiple implications for the accounting profession begin to present them-selves — and it’s only fair to note that many of the first ones are negative.

For instance, by creating pools of instantly verifiable data, it can transform assurance functions. “We may not need audits if we can access automatically validated information,” explained Jon Baron, the managing director of the professional segment for Thomson Re-uters’ Tax & Accounting business. “The Big Four firms are hiring fewer accounting grads — we won’t need these armies of auditors.”

There may be fewer auditors, but that doesn’t necessarily mean fewer audits.

“Blockchain does not mean that the au-dit will go away,” said CPA.com’s Asgeirsson. “There are going to be huge opportunities in private blockchains for audits. There are going to be assurance needs. Over the next couple of years, you’re going to see some real-ly interesting assurance opportunities arising around blockchain.”

It will be a different kind of audit — the auditors won’t be sampling and waiting by

fax machines; instead, they’ll be checking on the security of keys, and pursuing fraud much more aggressively, since they’ll be able to review every single transaction (with a lit-tle help from artificial intelligence) — but it will still be an audit, and as the number of individual blockchains climbs, the number of potential audits will, too, creating a large pool of work for future-enabled firms.

Some of this opportunity is already rising from an unexpected source: “The creators of crypto-assets actually want regulators and auditors to show up,” said Asgeirsson: They want trusted CPAs and accountants to put their seal of approval on their innovations, confirming their value for the public.

“The auditing role is not going to go away, and in the near future, it’s going to be more important than ever to help demonstrate the value in these areas,” said Quaranta.

Blockchain’s impact won’t be limited to changing the audit, though. “Internal pro-cedures will become streamlined as block-chain-enabled ‘smart contracts’ execute automatically,” explained Greg LaFollette, a strategic advisor at CPA.com. “Both internal and external processes will be impacted as transpositions, coding errors and misclassi-

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“We found that really only 15 percent of the companies that we analyzed in our sample population indicated in their disclosures that they were substantially complete,” said Eric Knachel, senior consultation partner with Deloitte’s national office. “If only 15 percent

BY MICHAEL COHN

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can post individual transactions, or “blocks,” to the database, and when those transactions are accepted, they become part of the “chain” — and are both completely unchangeable, and irrevocably associated with their creator. A later block in the chain may record a change to the status of the assets or the information in the original block, but that original block remains permanently in the chain.

Before exploring what the means for in-formation — essentially, that the structure in which the information is kept automatically audits and validates the information — it’s worth defining what blockchain is not:

It is not bitcoin. Though it is often asso-ciated with the famous crypto-asset, block-chain is an entirely separate technology, with applications that go far beyond alternative digital currencies.

It is not a single database. There are al-ready multiple blockchains, and if it lives up to its promise as a self-validating, self-au-diting form of database, there will be many, many, many more in the future. There will be public blockchains (for real estate records, for instance, or the provenance of different types of collectibles), but the vast majority are expected to be private, maintained by in-dividuals or companies for their own purpos-es. Your bank account might be a blockchain, and you might have an individual blockchain for your interactions with the IRS; a company might keep its books in one blockchain, in-teract with suppliers through another, and manage its sales tax obligations in another (and that one might be accessible to various levels of state or local tax authorities).

Once you have a clearer picture of what blockchain is, multiple implications for the accounting profession begin to present them-selves — and it’s only fair to note that many of the first ones are negative.

For instance, by creating pools of instantly verifiable data, it can transform assurance functions. “We may not need audits if we can access automatically validated information,” explained Jon Baron, the managing director of the professional segment for Thomson Re-uters’ Tax & Accounting business. “The Big Four firms are hiring fewer accounting grads — we won’t need these armies of auditors.”

There may be fewer auditors, but that doesn’t necessarily mean fewer audits.

“Blockchain does not mean that the au-dit will go away,” said CPA.com’s Asgeirsson. “There are going to be huge opportunities in private blockchains for audits. There are going to be assurance needs. Over the next couple of years, you’re going to see some real-ly interesting assurance opportunities arising around blockchain.”

It will be a different kind of audit — the auditors won’t be sampling and waiting by

fax machines; instead, they’ll be checking on the security of keys, and pursuing fraud much more aggressively, since they’ll be able to review every single transaction (with a lit-tle help from artificial intelligence) — but it will still be an audit, and as the number of individual blockchains climbs, the number of potential audits will, too, creating a large pool of work for future-enabled firms.

Some of this opportunity is already rising from an unexpected source: “The creators of crypto-assets actually want regulators and auditors to show up,” said Asgeirsson: They want trusted CPAs and accountants to put their seal of approval on their innovations, confirming their value for the public.

“The auditing role is not going to go away, and in the near future, it’s going to be more important than ever to help demonstrate the value in these areas,” said Quaranta.

Blockchain’s impact won’t be limited to changing the audit, though. “Internal pro-cedures will become streamlined as block-chain-enabled ‘smart contracts’ execute automatically,” explained Greg LaFollette, a strategic advisor at CPA.com. “Both internal and external processes will be impacted as transpositions, coding errors and misclassi-

fications fade into distant memories.”And over the long term, he predicts both

ubiquity and enormous value for the profes-sion: “By 2027 the ‘trust protocol’ (enabled by blockchain) will be an integral part of every-day life. It will be as deeply ingrained in our personal and business lives as the Internet is today. CPAs in public practice will see huge time savings as the necessity of testing, au-thentication, verification and substantiation procedures are virtually eliminated. That time will allow the profession to center more on becoming the ‘trusted advisor’ that our cli-ents want and need.”

DON’T PANIC!By this point, it should be clear that both AI and blockchain could radically change what the accounting profession does and how it does it, but if past technological innovations are any guide, they’re more likely to shift jobs than to eliminate them.

“Even when machines do take over an ac-tivity, that doesn’t mean that jobs don’t re-main in those areas. In fact, sometimes they grow,” Baron said. “And new methods of do-ing traditional accounting work can bring us explosive growth.”

To participate in that growth, however, accountants will need to readjust their skill sets somewhat, and be open to new ideas, ap-

proaches and methods. Among other things, they’ll want to work on their data science skills, Katsnelson suggested.

LaFollette had some simple, valuable ad-vice for those who want to prepare for the advent of AI and blockchain: “Read. Avoid getting caught up in minutia — remember to focus on the tool, rather than the code that powers the tool. Most of us do not understand the computer code that makes spreadsheets work — nor should we. However, we do un-derstand how to use the tool!”

He also warned against diving in without adequate preparation. “Shy away from the ‘bright, shiny object’ syndrome. Don’t chase after every new product or service that claims to be ‘blockchain’ or ‘artificial intelligence,’” he said. “Work carefully with your culture leaders and influencers to make sure your staff are fully informed that the firm is aware, studying and planning. And encourage each and every staff member to do the same.”

For now, education may be the profession’s first order of business, if a recent Accounting Today poll is any guide. When asked how well they understand blockchain, 16 percent of the responding CPAs and accountants claimed that they were experts or knew as much as they needed to, 34 percent acknowledged that they had more to learn — and 50 percent an-swered, “What’s blockchain?” AT

Brace YourselfFROM PAGE 30

Two years ago, the Financial Accounting Standards Board decided to defer the ef-fective date of its new revenue recognition standard for a year until Dec. 15, 2017, for public companies, to give them more time to adjust to the new standard and to work out some kinks in the far-reaching rules. The deferred effective date arrived, and many companies still aren’t ready, according to a recent analysis by Big Four firm Deloitte of a random sample of third-quarter filings by Fortune 1000 companies, which found that only 15 percent of companies had disclosed that they were substantially complete with their implementation activities. That was a slight improvement from the 10 percent that disclosed in the second quarter that they were substantially complete.

“We found that really only 15 percent of the companies that we analyzed in our sample population indicated in their disclosures that they were substantially complete,” said Eric Knachel, senior consultation partner with Deloitte’s national office. “If only 15 percent

say they’re substantially complete, obviously that means that 85 percent are not.”

Companies will still have until next year to actually file their financial statements, so they don’t have to be all ready to go as of Dec. 15. But they at least need to be disclosing to investors where they are in the process. Those disclosures do provide some level of comfort.

“What’s interesting is that we’ve been mon-itoring the interim disclosures, and I would say at a high level what we’re seeing is that companies are making progress with their readiness,” said Knachel. “But I think it’s one of those situations where you can choose to see the glass half full or half empty. By that, I mean that slightly half of the companies in our analysis indicate that the impact is not material, and another 10 percent has quan-tified the impact of the transition to the new standard. But the flip side is that almost 40 percent of the companies we’ve surveyed have not quantified the impact or given any indication of whether the impact will be ma-terial or not. That’s a big number.”

Companies have been dragging their heels on getting ready for the new standard, even as the effective date approached and FASB and the Securities and Exchange Commission sounded warnings.

“It’s amazing how long it took many public companies to really start focusing on it,” said Chris Mann, managing partner of Morgan-Franklin Consulting. “But we’re in the back stretch right now for companies as we get in to the end of the year. I think we’re starting to turn our focus from a marketing standpoint towards that set of private companies that now are going to have the benefit of their pub-lic company brethren having implemented a year in advance.”

Deloitte also found that the vast majority of companies are using the modified retrospec-tive method of adoption of the new revenue standard. “It’s looking like roughly 80 percent of the companies will be applying the modi-fied retrospective method of transition, with only 20 percent applying the full retrospective method,” said Knachel. AT

BY MICHAEL COHN

Companies scrambling on rev recThe effective date for the new standard found many unprepared

See BRACE YOURSELF on 31

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