Blockchain technology represents nothing less than the second generation of the internet; every single company is going to need a blockchain strategy; be the first to take the lead! Blockchain technology can assume part of an auditor`s role. Blockchain audit tools start off by giving auditors access to a specially designed node on the bank’s permission blockchain. Fully automated audits may be a reality with blockchain technology!
The opportunities blockchain bring to the audit process
By design, blockchains are inherently resistant to modification of any stored data. Functionally, a blockchain can serve as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way]. Blockchain can be used as a source of verification for reported transactions. An example might be where, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify the transactions on publically available blockchain ledgers. The automation of this verification process will drive cost efficiencies in the audit environment.
The days of sample-based substantive testing will soon be challenged, as auditors will resort to blockchain technology to test the whole population of transactions within the period under observation. This extensive coverage will drastically improve the level of assurance gained in affected audit engagements.
In blockchain, a transaction of low value currently takes approximately 10 minutes to be validated as a single block verification is deemed appropriate. The more blocks elapse before a transaction is considered as verified, i.e. the further in the chain, the more the related transactions are immutable. Typically a high-value transaction will take approximately 1 hour to be verified. Contrast this with traditional financial transactions where information might take up to a month or more to be cleared. This pseudo real-time verification blockchain characteristic could also impact the audit process. Instead of assessments at year end (or interim), audit firms will be in a position to perform continuous on-line assessments throughout the period under audit.
The assessment of financial statement assertions such as existence, occurrence, accuracy and completeness of information, are amongst the prime candidates for audit automation as well as potential benefits from a timing perspective.
The future of audits in the blockchain generation
Key to the technology is its record of transactions, which enables something akin to real-time auditing by default. Indeed, blockchain has been dubbed “digital era double-entry bookkeeping” because of its similarity to old accountancy principles.
Blockchain might also be able to replace random sampling by auditors, by making it easier and more effective to check every single transaction using code. This would also make it easier to investigate fraud since real-time systems could highlight and investigate anomalies.
Blockchain’s potential effect on auditing has been likened to that of a plug-in, always-on audit. But what might this mean for finance and audit teams:
- Traceable audit trails
- Automated audit processes
- Authentication of transactions
- Tracking ownership of assets
- Development of “smart contracts”
- Registry and inventory system for any asset, ranging from raw materials to intellectual property
Early adopters of Blockchain in the Audit arena
An early mover to actually adopting blockchain in accounting is New York-based Libra, which partnered with PwC to launch its own enterprise blockchain auditing software in 2016. Most recently, PwC itself has announced a new auditing tool reportedly being used by an unnamed stock exchange and a digital wallet provider.