Impact of Blockchain Technology Series: Part 1 - Accounting & Auditing

I think it is important to step back and be reminded of why blockchain technology has been the conversation of many since 2017. By now we all know that blockchain technology has the potential to transform and disrupt a number of industries globally due to its many characteristics. In this series I intend to start, I will provide some potential impacts of industries due to the development and growth of blockchain technology by its participants.

As a basic understanding, Blockchain is a list of data deployed across a peer-to-peer network of computers (nodes) without any central authority establishing rules. The technology allows users to secure and distribute data and transactions on an encrypted distributed ledger without a third party. Therefore, the benefits of the technology are that it is:

• Decentralized
• Transparent
• Immutable
• Secure
• Efficient
• Trusted

The accounting and auditing profession has many goals that align with the benefits of blockchain technology which make it an interesting use case. Accounting is the role in a business to record financial transactions into a ledger so that financial reports can be compiled for the benefit of key stakeholders of the entity. Accounting should be transparent and trusted as it is relied upon to make important business decisions such as employ workers, purchases, investments, amongst many others. Auditing is the review by a third party of the entity’s financial statements to obtain reasonable assurance that they are free from material misstatements, whether due to fraud or error. Auditors should be independent and trusted.

Blockchain implementation may come in multiple ways into the role. First, the full process of individual transactions may be changed. The way transactions are initiated, processed, authorized, recorded and reported can be impacted. This will in turn impact back office activities such as tax preparation and financial reporting. Second, the recording of transactions into a blockchain like ledger would make it immutable with near real-time posting. This will enable greater standardization and transparency in the reporting process. Next, the previous items would improve efficient data extraction and analysis making processes more timely. In turn, these items will help auditors with the availability of data in their assurance processes. Confirmations, reconciliations, among other processes would be streamlined as part of the audit process.

If we include the additional layer of smart contracts in the technology, additional processes could be sped up as well which would lead to improved cost efficiencies and reduced operational errors. Given that smart contracts can execute actions under specified circumstances, transactions can fulfill end-to-end accounting process on an automated basis. It will improve monitoring and enforcement of key contractual processes such as invoicing, cash receipts and other financial transactions.

Most would say that these benefits would reduce the need for assurance services (i.e. audits). Given the irreversible nature, if implemented, why would we need them to audit? However, recorded transactions into a distributed ledger does not necessarily guarantee the accuracy of those transactions regarding important factors such as:

• unauthorized, fraudulent or illegal transactions due to collusion
• Side agreements that may no be on any transaction yet
• Related party transactions that should be disclosed
• Incorrectly classified into the chart of accounts
• Estimated values that differ from historical values

Auditors would need to review for these factors as they audit to ensure the accuracy of financial statements.

Another key area auditors will still need to review are the internal controls for the processes related to recorded on the blockchain. They must ensure data integrity remains given any changes in processes in the recording of such transactions. They must also assess the risks related to providing access and authorization levels provided to the blockchain as the old saying of “garbage in / garbage out” can still apply in any accounting technology.

Therefore, rather than saying that auditors are no longer needed, we would have to say that their roles must be transformed. Auditors will be able to leverage the technology to streamline their review process as well as having powerful real-time analytics to review data in order to improve audit planning while auditing. This makes the process much more efficient in the long run. It would also transform their views on focus from assurance of historical financials to assurances of people and processes. They will begin to add value in forecasting and monitoring rather than backward looking reviews.

Given these changes, risks and opportunities exist for auditing firms. The skill set needed for this transformation will evolve the profile of students and candidates in the near future as more technology focus would be needed. This could potentially lead for firms needing to consolidate in order to meet the demand of existing clients in the space. Demand for skilled human capital may also add to the costs for these firms. However, opportunities also exist. There may be a new niche of services for auditing firms. For example, organizations may need auditors to review smart contracts to ensure business logic and internal controls are adequate for their intended use. They may also consider providing services for administrating blockchain to ensure user access and use is adequate.

Therefore, while the industry can be definitely transformed and disrupted, it also allows for great opportunities in the efficiencies provided in the space. I think it is clear that the benefits that blockchain brings outweighs the impacts of all key stakeholders. It will be interesting to see how these developments play out in the near future.

What are your thoughts on this industry? Is Blockchain needed, wanted, required or not worth it here? Let me know your thoughts! I look forward to your engagement.

References:
(1) Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession by CPA Canada, AICPA, Deloitte
(2) Decrypting Blockchain: Unlocking The Internet of Value by Sharespost Research

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