Blockchain Technology and its Potential Impact on the Audit & Assurance Profession

Blockchain Technology
Blockchain Technology

Blockchain technology is quite popular nowadays and being tested in a range of business and financial applications.

It offers a drastically new way to record, process, and store financial transactions, information, and has the potential to fundamentally change the landscape of the accounting profession and reshape the business ecosystem.

The blockchain technology could bring new opportunities to an audit and assurance profession.

Here we will explore what blockchain technology is and its impact on the audit and assurance profession.

What is Blockchain Technology?

The blockchain is a digital ledger created to capture transactions conducted among various parties in the network.

It’s a peer-to-peer, Internet-based distributed ledger that includes all the transactions since its creation.

Participants (i.e., individuals or businesses) using a shared database are “nodes” connected to the blockchain, each maintaining an identical copy of the ledger.

Each entry into the blockchain is a transaction that represents the exchange of value between participants (i.e., a digital asset that represents rights, ownership or obligations).

Practically, there are many different types of blockchains being developed and tested.

Yet, most blockchains follow this general framework and approach.

Where can Blockchain be Applied?

The table below illustrates industries blockchain technology’s potential transformative benefits has been high,

Financial servicesSome stock exchanges around the world are piloting a blockchain platform which enables the issuance & transfer of private securities.   In addition, multiple groups of banks are considering use cases for trade finance, cross-border payments, and other banking processes.  
Consumer & industrial productsCompanies in the consumer & industrial industries are exploring the use of Blockchain technology to digitize & track the origins & history of transactions in various commodities including supply chains.  
Life sciences & healthcareSome healthcare organizations are exploring the use of Blockchain technology to secure the integrity of electronic medical records, medical billing, claims, & other records.  
Public sector  Governments are exploring blockchain to support asset registries such as land & corporate shares.  
Energy & resourcesThe ethereum is being used to establish smart-grid technology which would allow for surplus energy to be used as tradable digital assets among consumers.  

Impact of Blockchain Technology on the Audit & Assurance Profession

Blockchain technology offers the opportunity to streamline financial reporting and audit processes.

Today, trial balances, account reconciliations, journal entries, sub-ledger extracts, and supporting spreadsheet files are provided to the auditor in a variety of manual and electronic formats.

Every audit begins with different information and schedules which require an auditor to invest significant time when planning an audit.

In a blockchain world, an auditor could have near real-time data access via read-only nodes on blockchains.

This may allow the auditor to obtain information required for the audit in a consistent, recurring format.

As more entities and processes migrate to blockchain solutions, accessing information in the blockchain will likely become more efficient.

For instance, if a significant class of transactions for the industry is recorded in a blockchain, it might be possible for an auditor to continuously audit organizations using the blockchain.

This could put an end to many of the manual data extraction or audit preparation activities that are time-consuming and labour intensive for an entity’s management and staff.

Speeding up the audit preparation activities could help reduce the lag between the transaction and verification dates.

Reducing lag time could offer an opportunity to increase the efficiency and effectiveness of financial reporting and auditing by enabling management and auditors to focus on riskier and more complex transactions while conducting routine auditing in near real-time.

With blockchain-enabled digitization, auditors could deploy more analytics automation and machine-learning capabilities such as automatically alerting relevant parties about unusual transactions on a near real-time basis.

Supporting documentation, such as contracts, agreements, purchase orders, and invoices, could be encrypted and securely stored or linked to a blockchain.

By giving auditors access to unalterable audit evidence, the pace of financial reporting and auditing could be improved.

While an audit process may become more continuous, auditors will still have to apply professional judgment when analyzing accounting estimates or other judgments made by management in the preparation of the financial statements.

Also, for areas that become automated, they will also need to evaluate and test internal controls over the data integrity of all sources of relevant financial information.

If all these transactions are captured in an immutable blockchain, then what is left for an auditor to audit?

While verifying the occurrence of the transaction is a building block in a financial statement audit, it is just one of the important aspects.

The audit involves an assessment that recorded transactions are supported by evidence which is relevant, reliable, objective, accurate, and verifiable.

An acceptance of a transaction into a reliable blockchain may constitute appropriate audit evidence for certain financial statement assertions such as the occurrence of the transaction (e.g., that an asset recorded on the blockchain has transferred from the seller to the buyer).

For instance, in a bitcoin transaction for a product, the transfer of bitcoin is recorded on the blockchain.

However, an auditor may or may not be able to determine the product that was delivered by solely evaluating the information on a Bitcoin blockchain.

Therefore, recording a transaction in a blockchain may or may not provide appropriate audit evidence related to the nature of a transaction.

That is to  say, a transaction recorded in a blockchain may still be:

  • Unauthorized or illegal
  • Linked to the side agreement that is “off-chain.”
  • Executed between related parties
  • Incorrectly classified in financial statements.

Moreover, many transactions recorded in a financial statement reflect estimated values which differ from historical cost.

The auditors will still need to consider and perform audit procedures on management’s estimates, even if the underlying transactions are recorded on a blockchain.

Final thought

Also, there are still many unknowns with respect to how blockchain will impact the audit and assurance profession, including the speed with which it will do so.

Blockchain technology is already impacting auditors of those organizations using blockchain to record transactions, and the rate of adoption is expected to continue to increase in upcoming years.