Blockchain’s Potential

In today’s world, it is almost impossible to not have heard about blockchain, let alone the term crypto currencies. Although the ideas are innovative themselves, there is much speculation regarding the usefulness of these two new technologies. However, some public accounting firms are still looking to get into the technology regardless of the risks because it may just be the next revolutionary advancement for both auditing and financial reporting. The technology known as blockchain has so much potential and presents an ideal end-goal for today’s world, but what exactly is it?

In relationship to more commonly known BitCoin, blockchain is the core technology behind crypto currencies that has been proposed since 2008 and only recently has started appearing in national news’ headlines.

Essentially, the appeal of the blockchain technology is the idea of a peer-to-peer network technology combined with a term known as cryptography, which allows two parties to perform transactions without have to know each other or require a third, intermediary party (Bible et al. 2017, 4).

Without a third party required, transaction costs and time spent can be reduced without harming the quality of work being performed. With this in mind, it can be determined that blockchain would have innumerable disruptive capabilities on both the financial reporting and auditing industries, both domestically and internationally, due to a more efficient and effective method of acquiring data and analyzing it (Bible et al. 2017, 4).

Additionally, simply obtaining the sufficient and appropriate evidence for audits will also require both traditional methods with general ledgers and also newly introduced blockchain ledgers (Bible et al. 2017, 3). Furthermore, this is why many venture capital firms and large public accounting firms are investing in blockchain technology research in efforts to re-configure outdated practices and business models (Bible et al. 2017, 1-2).

Furthermore, blockchain is essentially a digital ledger that can record transactions among different parties within a network (Bible et al. 2017, 3). Again, it is all peer-to-peer and is Internet based that would include all transactions since the day of inception. In essence, all participants or parties would be nodes connected to an over-arching blockchain, each with it’s own individual copy of the ledger and within ledgers are blockchain entries that are representative of transactions using digital assets between two users (Bible et al. 2017, 3).

Moreover, these nodes are able to re-affirm new transactions through the peer-to-peer transaction system. For example, when there is a new transaction, all other nodes within the network check if the transaction is valid, known as the consensus algorithm (Bible et al. 2017, 3). When the nodes accept the new transaction, only then is it added to the overall blockchain and the ledger is updated with the new information. Each of these new information pieces is considered blocks and attaches to the previous block, creating a link together of transactions.

As for the characteristics of a blockchain, it is a very unique piece of technology that provides many benefits. To begin with, it provides a real-time settlement of transactions, which essentially means that it reduces the risk of one party not being paid by a transaction (Bible et al. 2017, 4). Moreover, it is also a distributed ledger, due to the history of recorded transactions, that are highly available and proof that is secured by evidence (Bible et al. 2017, 4).

This peer-to-peer distributed network is a public history of all transaction, is highly transparent, and is secure in regards to the transactions and proof of occurrence. Moreover, these blockchains are irreversible and cannot be edited or destroyed after the transaction is accepted by the network and is very costly to censor any (Bible et al. 2017, 4). Basically once a transaction is verified it cannot be deleted and reduces the chances that a transaction is recorded twice. Lastly, there is simply no one owner due to the monetary incentives for individuals to mine blockchain, which makes it a decentralized technology.

The main incentive to converting to this technology would be the way it distributes value (Bible et al. 2017, 4). For example, banks or credit card networks are often necessary third parties when transferring value between two parties due to the trust needed. This is why there were arguments for implementing blockchain technology in Argentina, due to the trust issues between the public and the government, or two parties.

Furthermore, these third parties not only produce more costs and time constraints, but also have an individual general ledger that they create, which the parties rely on for the transaction to occur (Bible et al. 2017, 4). Due to this ledger being created by the third party, there is a costly fee. On the other hand, blockchain would allow parties to work directly with each other through an individually recorded ledger, which would make centralized transactions meaningless and unnecessary.

In addition, blockchain is unique because it creates reliable because all nodes in the network actively making copies of the blockchain ledger (Bible et al. 2017, 4). So, it is decentralized and not dependent on a single node. For example, if a single node goes offline then the other existing nodes would still support the ledger (Bible et al. 2017, 4). Also, blockchain blocks in the chain refer to the one that exists before them, which keeps deleting or reversing transactions impossible once they are accepted by the network of nodes (Bible et al. 2017, 4). In all, this integrity and reliability will exist as long as it’s being used and there is no single party who can control or own the blockchain.

With all these benefits, it is only natural to wonder where blockchain technology can be applied. With so many benefits to offer, the technology has the ability to impact a wide range of industries. Those who benefit the most are those where the work regards value or assets between parties, especially where there are large expenses for third, centralized parties. For example, securities settlements that involve multi-day clearing and settlement processes between multiple financial intermediaries would likely benefit from the timesaving and cost reducing abilities that the implementation of blockchain would have on their industry (Bible et al. 2017, 9-10).

Today, there is much speculation of blockchain technology in the financial sector due to the speculation of the innovative technology replacing activities performed currently by humans. However, the argument that blockchain has many uses in any industry simply comes down to the fact that every businesses track information and face reconciliation issues with data, often with counterparties. If implemented and perfected, blockchain may transform traditional business processes and old legacy systems that are tedious and costly to maintain (Bible et al. 2017, 9-10).

In regards to financial statement auditing, blockchain technology can help enhance the trust that the public has in audited information by CPAs, especially in the United States where financial statement reporting is both required by the Securities Exchange Commission for the sake of shareholders. On the other side, it could also help large enterprises function with more confidence comparable to the past because audits could be done with more transparency, accurateness, and completeness (Bible et al. 2017, 10-11).

While blockchain can help out the public and corporations, it can also allow auditors to adhere to principles, regulations, professional codes of conduct, and auditing standards while remaining completely independent to the entities or clients they are auditing. This can all be due to the fact that blockchain can allow peer-to-peer transactions, even though the two parties do not have to know about one another. This allows auditors to remain skeptical and provide proper assurance on the financial statements of a corporation and in determining if material misstatement is present.

These transactions can be supported by much more sufficient evidence with the acceptance of a reliable blockchain (Bible et al. 2017, 10-11). Although many people do believe that auditors can be replaced with blockchain technology, that argument can be countered with the negative of the technologies, including transactions proving transactions occurring, but not if the service or product occurring or being delivered (Bible et al. 2017, 10-11). With this in mind, there are other issues that blockchain won’t be able to solve. Therefore, auditors must be able to adapt to determine if the internal controls of a corporation are working both effectively and efficiently, which can also require the profession to adapt and change.

Therefore, blockchain can be the reason why audit and assurance practices might evolve in the future. Currently, information for auditing practices, such as account reconciliations, trial balances, journal entries, sub-ledger extracts, and supporting spreadsheet files, are provided to auditors in many types of different formats, both manual and electronic (Bible et al. 2017, 10-11). Rather than the previous method of planning a certain amount of time, blockchain would allow auditors to obtain information consistently and reoccurring format, which allows them to complete work on schedule rather than relying on another party.

Furthermore, as time goes on and adoption becomes more widespread, it will become possible for CPA auditors to develop software to continuously audit organizations with the help from blockchain, which would eliminate menial tasks done manual beforehand. This speeding up of an audit, which is often a major complaint of financial reporting, would increase efficiency and allow management and auditors focus on much complicated and perplexing issues (Bible et al. 2017, 10-11). Additionally, this information will be unalterable audit evidence since it is recorded and confirmed to the blockchain ledger, which would also provide more sustainable proof, integrity, and save time involved in auditing (Bible et al. 2017, 10-11).

However, it is important for auditors to remember that internal controls must be tested still and for skepticism to be practiced continuously, such as the data integrity of all financial information presented by automated blockchain technology. Although blockchain adoption has not happened fully, there is much investing into the space and idea, which only means that future auditors much educate them on the technology before widespread adoption happens seemingly overnight.

In conclusion, blockchain is still a speculative, technological innovation. However, the ideas and possibilities that come with the technology are astounding. In addition, the technology can have major impacts on the industries of auditing and assurance, such as improving times for audits and the reliability of information received. Although the transition to blockchain would not be immediate, there is much interest and investing in research and development in the technology that promote the idea of a promising future for the technology.

With audited financial statements being the backbone of almost all business, it will be interesting to see how such an innovative technology would help improve the career with the benefits it could provide, such as trust. For now, it is important for CPAs and auditors to keep a close eye on the technology and learn more about it because one day it could replace the traditional method of accounting that is currently governing the career.

Since the innovation of blockchain is in it’s infancy, the uses of the technology are only speculation until the technological software is developed specifically for implementation within a firm. Additionally, adoption must be accepted before it can be used widely. For example, KPMG has their own technology, named KPMG Clara, which is a blockchain software that allows various information from sources to be obtained relatively quickly and transferred into a uniform format, which is especially when useful when performing global audits of international companies or domestic corporations.

References

1. Bible, William, Jon Raphael, Peter Taylor, and Iliana Oris Valiente. “Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession.” Deloitte. Accessed September 28, 2018. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-audit-blockchain- stechnology-and-its-potential-impact-on-the-audit-and-assurance-profession.pdf

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