Blockchain Technology’s Impact on Accounting and Auditing

The development of distributed ledger technology, also known as the blockchain, has called into question traditional business models. One of areas impacted is the role of accountants and auditors. Since accounting and auditing functions are interconnected with organizational transactions (as transactions are converted into monetary values, and assurance is provided about their value), therefore emerging technologies have an impact on them. Auditors and accountants must be able to comprehend any changes to transactions executed through emerging technologies such as blockchain otherwise they will be unable to test controls included in the technology and trace the recorded financial transactions.

The anticipated impact of new technology

The deployment of blockchain technology has no effect on the fundamentals of accounting and auditing; nonetheless, blockchain introduces new risks and controls to consider.

Take for example, during auditing, the data collected regarding supplier payments is converted from a supplier receipt to a blockchain transaction hash. External auditors must enhance their competence related to evidence available in the blockchain and how the technology is used in transaction recording, or they risk losing their positions to competing businesses with more blockchain technological experience. To prevent this, auditors should learn about blockchain technology and incorporate it into the services they provide to customers. Management makes two statements, on which auditors should provide assurance: the completeness with which all transactions and obligations are recorded, and the existence of assets or the occurrence of recorded transactions. Completeness is achieved when all transactions that occurred during the period are reflected in the financial statements and which can be verified by auditors. For example, organization’s use of cryptocurrency in its operations can be verified by tracing its transaction history in the blockchain. Similarly, auditors can certify the existence of assets in the entity by tracing the transaction hash in the blockchain to identify the asset’s receiving party within the entity and then confirming that the asset resides in the specified place. The process of confirming other statements may be done using data stored in the blockchain; the distinction is that these data have been validated and can thus be considered more trustworthy than traditional data provided by a single source.

Internal auditors, who are primarily responsible for providing assurance and consultation to improve governance, risk management, and control systems, use the same strategy as external auditors. Internal auditors can use the same techniques as external auditors to complete a financial audit. However, during a compliance audit, internal auditors may need to review the code of the smart contracts in the blockchain to ensure that they contain the terms and conditions of the original contracts, as well as take a sample of each smart contract and follow its execution on the dates specified in the original contracts. A smart contract is a code that reflects the terms and conditions of a contract between an entity and a provider and executes it without human involvement. Internal auditors conducting operational audits can analyze the flow of procedures by tracking all internal transactions in the blockchain that occurred over a certain time period and confirming that all objectives were satisfied. Furthermore, internal auditors can test for governance concerns in the blockchain by determining who is responsible for initiating transactions, who can verify transactions, and who is accountable for evaluating transactions.

In accounting, blockchain technology can help firms conduct more verifiable transactions with banks, customers, and even internal parties. This type of verification can also be valuable for external and internal auditors when they trace transactions to ensure their validity.

Due to limitations in current accounting practices, payments can sometimes be made to fraudulent suppliers or bank transfers be made to fake accounts. For example, a fraudulent person can impersonate a supplier and send the company an invoice using their own account number. Or it may hack a supplier’s email system and use it to transmit invoices and bank information to the target organizations. This danger is eliminated when payments are conducted using blockchain technology, as all payments are validated by the supplier and recorded in the block with a transaction hash for future reference. Risk is further reduced because both the supplier and the organization may view the history of all transactions in the network, allowing them to detect any fraudulent conduct.

Another area of accounting that has been impacted by blockchain is in the delivery of goods and services. Customers can now validate their receipt of goods and services by simply verifying the delivery transaction in the blockchain. Additionally, supplier contracts can now be executed via blockchain-based smart contracts. This execution is carried out in accordance with the contract terms and conditions stored in the code of the smart contract.

External and internal auditors who are inexperienced with blockchain technology will be unable to test the controls incorporated in the platform.

Conclusion

Blockchain technology is like any other new technology used by organizations: It needs that accountants and auditors expand their skill sets in order to analyze, handle, and assess new sorts of transactions. Organizations employing blockchain technology need to train accountants on how to create new transactions, be able to verify them and also to trace transaction history. External auditors need to develop relevant skills to provide new blockchain-related services and also to improve current assurance methods, otherwise they risk losing their roles to more technically competent organizations. At the same time, internal auditors should use blockchain technology to examine controls, risks, and governance processes. Failure to do so will hinder auditors and accountants from documenting and analyzing transactions when new technology replaces traditional methods for recording and verifying financial transactions. Furthermore, external and internal auditors will be unable to verify controls built in the blockchain if they lack technical proficiency; this will have an impact on their compliance with audit standards that demand auditor competency.

 

Aamir Ikhlaq | CISA, CIA, FCA

Has more than 15 years of experience in audit and accounting. He has experience across many sectors including government, healthcare and manufacturing.