By offering a new and more secure way to record, process, and store financial transactions and information, blockchain could significantly change the accounting and auditing landscape and reshape the ecosystem. As more and more companies are exploring blockchain opportunities, including the blockchain audit trail, many players from these fields have undertaken blockchain initiatives to see how this revolutionary technology can improve their business.
Blockchain technology offers an opportunity to streamline financial reporting and audit processes, states the “Audit & Assurance Alert – Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession” paper. This paper comes from Chartered Professional Accountants of Canada, the Association of International Certified Professional Accountants, and the University of Waterloo Centre for Information Integrity and Information System Assurance. As more and more entities and processes migrate to blockchain solutions, accessing information in the blockchain will likely become more efficient. With blockchain-enabled digitization, auditors could deploy more automation, analytics 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.
Blockchain stands for new opportunities
According to the following report – “How Will Blockchain Technology Impact Auditing and Accounting: Permissionless vs. Permissioned Blockchain” – blockchain brings new business to auditors at the application level, such as reviewing certain transactions and verifying the existence of digital assets, and attesting to consistency between information on a blockchain and in the physical world. Auditors need to leverage their expertise in IT system audits to invent novel methods to accomplish verification of ownership. Moreover, blockchain could fundamentally change the auditing process. As a complete record of transactions is stored on a blockchain, auditors will no longer need to request, and wait for trading parties to provide, data and documents. In addition, blockchain will surpass the traditional audit sampling process, and allow continuous audits for any ‘‘on-chain’’ transactions in any specific period. The adoption of blockchain will free up resources that were previously expended on evidence collection and verification.
Improving the administrator function
As per the previously mentioned paper, permissioned blockchain solutions may benefit from a trusted, independent and unbiased third party to perform the functions of a central access-granting administrator. This would come in handy for verification of identity or a further vetting process to be completed by a participant before they are granted access to a blockchain. “This central administrator could validate the enforcement and monitoring of the blockchain’s protocols. If this function is performed by a user/node of the blockchain, then an undue advantage could exist and trust among consortium members could be weakened. Since this role would be designed to create trust for the blockchain as a whole, due care will be needed when establishing both its function and its legal responsibilities. As a trusted professional, an independent CPA may be capable of carrying out this responsibility.”
Enhancing the arbitration function
This is another area where blockchain could prove its advantages. Regardless of the industry, disputes related to business agreements may arise between the involved parties. “For a permissioned blockchain, an arbitration function might be needed in the future to settle disputes among the consortium-blockchain participants. This function is analogous to the executor of an estate, a role typically filled by various qualified professionals, including CPA auditors. Participants on the blockchain may require this type of function to enforce contract terms where the spirit of the smart contract departs from a legal document, contractual agreement or letter”, reads the paper.
Blockchain-based audit trails, a new instrument for audit and compliance processes
With the ability to provide fast and secure data access, transparency and in-depth information traceability, blockchain presents itself as an interesting value proposition for companies that need to keep track of valuable business data. Because of its unique characteristics and how it stores information, blockchain provides data immutability and integrity insurance as well as a historical version of every data introduced in the system.
Compared to traditional database systems that operate under the CRUD (create, read, update, delete) paradigm, blockchain is an append-only structure. Data can only be added but never deleted. When a record is modified in a blockchain, a new version of that record is created that also incorporates the additional changes. The previous version is maintained on the data chain. Paired together with the ability to record and store any information that has value, blockchain can provide in-depth audit tracking to financial transactions, health records, RPA logs and many more.
Blockchain can be used to complement and augment existing database systems with additional functionalities like data traceability that can help companies monitor changes made to critical business data. In case of a dispute, the blockchain-based audit trail can act as an undisputed source of truth that can reduce dispute resolution times from a couple of months to a few minutes, without attracting additional costs.