Richardson AIS3e CH12 PowerPoint

Chapter 12
Emerging
Technologies:
Blockchain and AI
Automation
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
LO 12-1 Describe the history of blockchain technology.
LO 12-2 Understand the emergent blockchain technology and its benefits.
LO 12-3 Differentiate between the blockchain applications Bitcoin and
Ethereum.
LO 12-4 Describe public blockchain, private blockchain, and consortium
blockchain.
LO 12-5 Discuss blockchain use cases.
LO 12-6 Explain the potential impact of blockchain on audit and assurance.
LO 12-7 Define artificial intelligence.
LO 12-8 Understand the differences among artificial intelligence, machine
learning, and deep learning.
LO 12-9 Appreciate the structure of neural networks.
LO 12-10 Describe the types of learning.
LO 12-11 Assess model performance.
LO 12-12 Recognize applications of AI in accounting.
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2
LO# 1
The History of Blockchain
• In 2009, Nakamoto used a distributed ledger system through

resource intensive mining to eliminate the need for intermediaries
in trustless, online, peer-to-peer digital currency transactions.
• The internal data structure of transactions in the system is packaged
in blocks and chained together, thus, this technology eventually
became popularized as blockchain.
• In 2014, blockchain 2.0 emerged as a more robust and sophisticated
technology to pull together logic and business rules into contracts
represented in code called “smart contracts” through Ethereum.
• “Smart contracts” are programmable in Ethereum. This flexibility
drew the attention of corporations and government agencies.
LO# 2
What Is Blockchain?
• There are three important concepts involved in
the traditional transactions:
– Middleman
– Delay
– Service fee
• In a blockchain system:
– The transactions are done without any middleman
involved.
– Much faster transaction time (minutes vs days).
– Lower service fee.
LO# 2
What Is Blockchain?
Traditional system Blockchain system
• System is centralized. • System is decentralized, distributed
• Requires a middleman to ledger
approve and record • No middleman needed, multiple copies
transactions. • When a new transaction occurs, all
nodes are in sync.
• Only one copy of the ledger
• Information cannot be added or
deleted without the knowledge of the
entire network.
• A write-once, read-many system.
LO# 2
Traditional vs. Blockchain
Traditional
Blockchain
LO# 2
When Is Blockchain Useful?

• Enable multiple parties that do not fully trust
each other to collaborate with a shared source
of truth.
• Accelerate transaction settlement and
verification by eliminating intermediaries.
• Help cut costs and resources that would be
spent on manual verification (help auditors
collecting and evaluating evidence to support
transactions).
LO# 2
How Does Blockchain Work?

To be characterized as blockchain, there must be a few
components that are met:
• Distributed and decentralized. The data are distributed and
synchronized among all the participants in the network.
• Consensus. All parties will be aware of transactions that take
place on the network and agree to the transactions being
written to the blockchain.
• Immutability. Once transactions are confirmed on the
blockchain, they are tamperproof and cannot be altered.
LO# 2
How Does Blockchain Work?

• Proof of work
– All miners compete to create the next block to be committed to the
blockchain. This is done by solving a complex mathematical problem.
– It requires the miners use computer power so it can prevent attacks as it
requires tons of computer powers to overcome
• Proof of Authority
– The administrator identities who creating blocks are known and reputable.
– The rest of the network can vote for admin removal in case of malicious
behavior found in the network.
• Proof of Stake
– A set of validators who propose the next block lock up an amount of their
cryptocurrency as a deposit to ensure honest behavior.
– It reduced computer costs and centralization risks
LO# 3
Popular Cryptocurrency Applications

Bitcoin – the first cryptocurrency
• A cryptocurrency that eliminates the ability to double spend.
• Anonymous peer-to-peer transactions, no middleman involved.
• Public blockchain – anyone can join or leave at any time.
• Validation through proof of work and rewards as an economic incentive
via a resource intensive computation called mining.
• Immutable history of transactions.
• Distributed ledger.
• One block is added to the blockchain approximately every 10 minutes.
• The First-Mover – the first blockchain application in production.
LO# 3
Transaction data, such as: • 32-byte hash value • the hash value from
• Sender from SHA256 the previous block.
• receiver • timestamp of the block
• quantity of Bitcoin to • the digital digest of
transaction in a
be transferred. the block. chronological order.
Proof of Work Algorithm
LO# 3

Ethereum
• Ether - cryptocurrency • Bitcoin
• One block is added every 10-12 seconds • One block is added every 10 minutes
• Transaction fees differ by computational
complexity • Transaction fees differ by block size
• Mining of Ether occurs at a constant
• Mining reduces by 50 percent every 4 years
rate
• Ethash algorithm reduces the advantage • SHA-256
of ASIC (application-specific integrated
circuit) in mining
• Mining reward is 3 Ether • Mining reward is 12.5 Bitcoin
• Lower transaction fee • Higher transaction fee
• Account is debited/credited • Unspent transaction output system
• The Ethereum virtual machine is used to (spending cash and receiving change).
run the Ethereum smart contracts.
LO# 4
Types of Blockchain
Public Blockchain Private Blockchain Consortium Blockchain
- Permissionless blockchain - Permissioned blockchain/ - Permissioned blockchain

- No access restrictions in Enterprise blockchain - Allows several organizations
viewing or participation - Requires permission to to participate in.
- Offers economic reward join the network. - Administrators establish the
for the computational - Transaction data and access rights and permissions
proof of work in mining. validation are restricted. (private channels) for each
- Not expose internal participant.
information to the public. - Executed only on a limited
set of trusted nodes.
- Permit more complicated
enterprise behaviors.
Bitcoin Ethereum Hyperledger Corda

LO# 4
Platforms Using Blockchain Technology
Corda, developed by R3
• Uses smart contracts for its business rules.

• Only relevant parties can join the network.
• Only related parties will be informed for each
transactions.
• The administrators define and restrict each

user’s access rights.
• Only a restricted set of trusted nodes execute the
consensus protocol.
LO# 4
Platforms using Blockchain Technology

Differences between Corda and Public Blockchain
Corda Public Blockchain
Known identity Anonymity
Selective endorsement Proof of work
Asset Cryptocurrency
Smart contracts Fixed business rules
Access control rules No defined roles
Appropriate privacy Public transaction information
LO# 4
Platforms using Blockchain Technology

Hyperledger, created by Linux Foundation
• Smart contracts, configurable consensus, and member management
services.
• Private channels
• Membership identify service and the access control list (ACL) provides
an additional layer of role-based access control.
• Three types of nodes involves:
 Client nodes
 Peer nodes
 Ordering nodes
• Blockchain log file: keep track the provenance of transactions
• Store current state of blockchain to facilitate the speed of verification
(SQL command)
• Assets are added, updated, and transferred with chaincode.
LO# 5
Blockchain Use Cases

• Supply Chain
Ex: transporting temperature-related goods (ice cream, milk)
• Loyalty Program
Ex: customer’s frequent flier miles
• Auto Industry
Ex: a whole process from customizing order to delivering car
LO# 5
Current Challenges with Adopting Blockchain Technology
Blockchain protocols are lacking in areas such as speed,

confidentiality, and governance requirements.
Most enterprises are opting to start with permissioned or private

blockchain networks, which require a method to govern who is
eligible to participate in the network.
Challenges in integrating private blockchain network with existing

enterprise solutions
Blockchain was not originally built to support enterprise use cases
LO# 6
The Impact of Blockchain on Audit and Assurance
Challenges on Audit and Assurance:

– Illegal, fraudulent, or unauthorized transactions can reside in the blockchain
– The records residing in the blockchain network may not provide sufficient
information for auditors.
– Complicated protocols involved in the distributed ledger system
– An auditor needs to understand how the business is implemented and how

the business uses blockchain technology in its end-to-end business
applications.
– Different blockchain platforms with different protocols and terms make it
difficult to apply traditional audit approaches to blockchain technology.
– Acquiring the skill sets to understand smart contracts is crucial to audit
blockchain use cases.
LO# 6
The Impact of Blockchain on Audit and Assurance
• Continuous Audit Becomes Possible

o Due to the distributed nature and real-time information
retrieval of blockchain technology, it is possible for auditors to
conduct a continuous audit over time.
• Opportunities for Future Roles in CPA

o Smart contracts is one of the key areas
 Understand the business rules embedded in the smart
contracts and the related libraries.
 Verify the appropriateness of tax code and regulations in
the smart contracts.
LO# 6
The Impact of Blockchain on Audit and

Assurance
• New Approaches for Future Audit Tasks
– Recruit auditors with enough understanding of
blockchain technology/ IT background and offer
training in smart contracts
– Recruit software and IT background people and do
the onsite audit training.
– Form an audit team that combines the expertise
of IT, taxation, law, accounting, and auditing.
Source: http://fintechnews.ch/blockchain_bitcoin/blockchain-auditing-revolution-real-time-audit-within-the-capabilities-of-blockchain/3864/
LO# 7
What Is Artificial Intelligence?

• Intelligence exhibited by machines rather than humans.
• The ability of computers to perform tasks that associated with human
intelligence, such as:
Thinking logically Acting rationally Visual perception
Speech recognition Language translation

• Artificial Intelligence applications are also called cognitive
technologies.
• AI can create up to $5.8 trillion annual value across all
business sectors.
LO# 7
Also Called Cognitive Technologies

• Cognitive technologies employ self-learning
algorithms that allow computers to examine
connections and notice patterns without human
intervention
• Examples of cognitive technologies include:
– Machine learning
– Neural networks
– Robotic process automation (RPA)
– Bots
– Natural language processing
LO# 8
Machine Learning
• Machine learning is a
type of AI; Deep
Learning is a type of
Machine Learning.
• Machine learning
involves the computer’s
ability to learn from
experience rather than
specific instructions.
LO# 8
Machine Learning Cycle
Virtuous cycle of machine learning: Machine learning models learn

from training cases or data. The models then make predictions for
new products or data. Those new products then generate new data,
which improves the ability to make predictions.
LO# 9
Neural Networks
• Artificial neural networks are the engines of machine
learning.
– Neural networks are mathematical models that convert inputs to
outputs/predictions, can be nested together
– A cleaned and well-defined training data set is used to optimize
predictions.
– The trained model is applied to more test data or real-world data.
• Feed-forward neural networks: information moves in
one direction.
• Recurrent neural networks: the connections between
neurons include loops.
LO# 9
Neural Networks
• Deep learning
– A form of machine
learning that involves
complex, multilayer
(deep) neural networks.
– Has more than two
nonoutput layers
– Provides more power to
solve sophisticated
problems but also
creates model
complexity.
LO# 10
Types of Learning
Most machine learning applications are designed to perform either
• Classification: seeks to assign labels, • Regression: seeks to predict real
dividing the input into output groups, numbers, such as:
such as: – The price of a house
– Yes or No
– The revenue in next quarter
– Spam or Not Spam
LO# 10
Types of Learning
AI Machine Learning Deep Learning
Neural Networks Neural Networks
• Supervised Learning • Semi-supervised Learning
• Unsupervised Learning • Reinforcement Learning
LO# 10
Supervised Learning
• Output is a known set of values.
• Neural network seeks to predict the output by using the input
dataset.
• The data includes pairs of input and output.
Unsupervised Learning
• Uses unstructured data rather than labeled data
• No input-output pairs.
• The goal usually involves:
- Clustering or dimension reduction
- Identify outliers in the input dataset
• Different parameters can result in different results.
LO# 10
Semi-Supervised Learning
• Some data are labeled, but some labels can be
incorrect or missing.
• The computer discerns values for the incorrect
and missing outputs.
– Active Learning: queries the user to discover the right
label/output.
LO# 10
Reinforcement Learning
• The machine/model learns by trial-and-error.
• The program acts and learns by feedback from those
actions as it works toward a desired goal.
• The goal is dynamic. It can change over time based
on circumstance.
LO# 11
Assessing Model Performance

• Confusion Matrix
– True positive (TP): the correct prediction of positive class.
• i.e., spam email was predicted correctly
– True negative (TN): the correct prediction of negative class.
• i.e., correct prediction of email that is not spam
– False positive (FP): the incorrect prediction of positive class.
• i.e., an email was predicted as spam but actually was not spam
– False negative (FN): the incorrect prediction of negative class.
• i.e., an email was predicted as not spam but actually was spam.
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10-34
LO# 11
Assessing Model Performance

• Confusion matrix
– Precision ratio = = = 0.80
– Recall ratio = = = 0.91
– Accuracy ratio = = = 0.99
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10-35
LO# 12
AI Applications in Accounting
• Natural Language Processing (NLP) and Natural Language Understanding
(NLU)
– Understand text
– Extract semantic meaning
– Discern sentiment from natural language
• Robotic process automation (RPA)
– A tool that can perform high-volume repetitive accounting tasks.
• Machine Learning in Audit and Assurance
– GL.ai (PWC) - replicate the thinking and decision making
– Deloitte’s machine – review contracts, identify key terms
– Helix GLAD (EY) – detect anomalies in large database
– CLARA (KPMG) – potential risks
– BDO neural networks – manage info in multiple languages globally

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Chapter 12

The History of Blockchain

• In 2009, Nakamoto used a distributed ledger system through

Traditional vs. Blockchain

When Is Blockchain Useful?

How Does Blockchain Work?

How Does Blockchain Work?

Popular Cryptocurrency Applications

Popular Cryptocurrency Applications

Popular Cryptocurrency Applications

- Permissionless blockchain - Permissioned blockchain/ - Permissioned blockchain

Bitcoin Ethereum Hyperledger Corda

Platforms Using Blockchain Technology

• Uses smart contracts for its business rules.

• The administrators define and restrict each

Platforms using Blockchain Technology

Known identity Anonymity

Selective endorsement Proof of work

Smart contracts Fixed business rules

Access control rules No defined roles

Appropriate privacy Public transaction information

Platforms using Blockchain Technology

Blockchain Use Cases

Current Challenges with Adopting Blockchain Technology

Blockchain protocols are lacking in areas such as speed,

Most enterprises are opting to start with permissioned or private

Challenges in integrating private blockchain network with existing

Blockchain was not originally built to support enterprise use cases

The Impact of Blockchain on Audit and Assurance

Challenges on Audit and Assurance:

– An auditor needs to understand how the business is implemented and how

The Impact of Blockchain on Audit and Assurance

• Continuous Audit Becomes Possible

• Opportunities for Future Roles in CPA

The Impact of Blockchain on Audit and

What Is Artificial Intelligence?

Thinking logically Acting rationally Visual perception

Speech recognition Language translation

Also Called Cognitive Technologies

Machine Learning Cycle

Virtuous cycle of machine learning: Machine learning models learn

Neural Networks Neural Networks

• Supervised Learning • Semi-supervised Learning

• Unsupervised Learning • Reinforcement Learning

Assessing Model Performance

Assessing Model Performance

– Recall ratio = = = 0.91

– Accuracy ratio = = = 0.99

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