What does blockchain mean for audit?
December 20, 2021
Blockchain has a major role to play in the future of audit.
There’s the increasing popularity of cryptocurrencies and non-fungible tokens (NFTs) – both of which are based on blockchain technology – and we’ve talked before about the evolving standards that surround this type of asset.
Accountants and auditors alike will need to keep up with the changing guidance to accurately assess their clients’ blockchain-based assets.
But as the use of the technology becomes more widespread, it also has the potential to change the audit process itself. To prepare for the changes that lie ahead, auditors need to understand how blockchain works and the benefits it could bring to their work.
In the future, blockchain could have an impact on virtually every sector of the economy, but its main use is currently within transaction-based financial services.
One of the main benefits of this type of service is its high level of security. Because information on each transaction is cryptographically stored on a distributed ledger, it’s almost impossible to tamper with any of the information.
Blockchains can also be programmable, allowing for new transactions or controls to be automated using ‘smart contracts’.
For auditors, working with transactions and ledgers is familiar territory – and the opportunity blockchain presents, if all transactions were to be recorded through it, is that of a real-time, permanent and accurate audit trail.
If every transaction can be recorded with absolute certainty, there would in theory be no need to verify those transactions – removing the task of reconciliation altogether.
If that’s true, some might wonder if blockchain technology could render auditors’ jobs obsolete.
The International Federation of Accountants argues that this is not the case:
“Reconciliation of accounting data will not be fully automated through blockchain technology as auditors’ professional expertise and experience is required to assess the accuracy of complex accounting transactions.
“However, the ability to trust that both parties are recording the same base transaction information and the real-time availability of this accounting data offers immense benefits for the efficiency with which accounting data can be reconciled and analysed.”
To gain meaningful insight from financial data, there will still be a need for human interpretation of the way transactions have been recorded, and the business context they sit within. Blockchain should simply make auditors’ jobs faster and more efficient so they can focus on the higher-level questions.
Even on a secure system, there remains the risk of error or fraud at the point of input – but by combining blockchain with other technologies like artificial intelligence, you could analyse every single transaction and pick up discrepancies that a human could easily miss.
From there, an auditor could use their expertise to dig deeper into the problem. Compared to selectively analysing and reconciling data in retrospect, this offers a much more immediate, consistent way of carrying out an audit.
To make the most of the benefits of blockchain, auditors will need to develop their own knowledge of the technology.
They’ll need to understand it well enough to build it into their processes and advise their clients on implementing it themselves.
And because it’s still developing, auditors and accountants both have a major role to play in building the standards around blockchain – making sure it lives up to the security and transparency it promises.
Talk to us about blockchain and the future of audit