Blockchain: the auditing profession’s death nail?

Some people have said blockchain, at this stage, is like the internet in the early 1990′s. I argue it can never be too early to think about it or to jump on and particularly for auditors since it being called the “trust machine”.

For people, we have laws and regulations, including the legal systems, law enforcement authorities and lawyers. For assets or property, we have accounting principles, including financial recording/reporting systems, banks and exchanges, accountants and auditors. All of these, I have mentioned, form part of the elaborate mix of people, resources,  systems and tools that support and scale economic/financial trust i.e. they make business possible at scale.

Auditors provide assurance (trust) w.r.t assertions that companies make in financial statements and about their internal controls. The assertions are well known, existence, completeness, rights and obligations, accuracy and valuation, and presentation and disclosure. A fundamental challenge that has come to the fore, with the growth of cyberspace, global interconnectedness and data proliferation, has been the continued effectiveness of the above mentioned trust system. Privacy concerns, unsanctioned use of data, fraud, rising intermediation costs (fees from financial institutions and others) have driven a search for alternative approaches to achieve reliable and safe financial and business transactions. Other factors such as reduced confidence in central institutions (banks, big social media companies, governments etc.) have equally contributed to the search for alternatives.

This is where blockchains have come in. And to clarify any confusion bitcoin is just a digital currency and it is based on the use of blockchain technology. It is the latter that is interesting. Many other blockchain uses exist, that where the excitement come it.

Blockchain or to use the more general terminology, Distributed Ledger Technology (DLT), provides a new and formidable trust model for economic activity. Distributed ledgers maintain transactions or contracts in a decentralized manner, usually across different locations, people and computing systems. The use encryption and a concept called proof of work, so that transactions cannot be easily altered – a robust and immutable audit trail. The transactions can be of any type, for example of cash or of asset inventory. It eliminates the need of a central (trusted) authority to keep a check against manipulation. The benefits include reduced processing time, reduced transaction costs, transparency, security, low fraud and trust. Notice that in our current system we assume that the trusted party will not manipulate anything – we have been disproven, many times over on that assumption.

Like any new and major technology, it will affect jobs, career opportunities, job tasks and the value-add that current audit professionals provide. This will likely be in some unpredictable ways, hence some fear.  Some have predicted that distributed ledger technologies may eliminate 97% of the job auditors do. Others see it transforming audit work and creating new opportunities (see Journal of Accountancy article). Either way, it is clear that auditors should become familiar with distributed ledgers.

As an nonprofit auditor, I am particularly interested in what this will mean for the way we do business in the international arena and with less economically developed countries.

Has your CFO considered blockchain? Has your audit team considered what it will mean for its audit program and the skillsets to provide audits and deliver or value add? Please comment. The video link below provides a great overview.