Global expertise, local knowledge
03 Jan 2019
Blockchain: the new technologies at the service of auditing
There isn’t a shade of doubt: the world has changed, it has developed, and it has evolved. The new technologies have affected how we carry out our daily tasks, simplifying how we interact with the environment.
As regards professional scope, these issues are easily evidenced. How difficult it was to carry out an accounting entry when we did not have a computer? How much time did it take to change an accounting variable of a projection model when we only had a calculator (which keys did not always work correctly)? All these that seems from other times, is recent history. And these changes, inevitably, seem to be routed to change the manner in which audits are performed.
From some years ago, auditing methods without papers have multiplied based on electronic data repositories that allow from storing the evidence of the auditor works up to the issue of reports based on pre-established parameters. These tools facilitate the work documentation, improve the efficiency of the time employed and assure a higher control of the tasks to be performed to assure the fulfillment of the technical rules of auditing, though these are not much more than the possibility to store electronically what, up to now, was shown in the physical documentation (which used a lot of space and made it difficult to perform specific enquiries).
However, audit is aiming to a new era in which the concept of “big data” seems to ease the order of the information in entities. What would it happen if all the operations were registered in computing systems and could be validated by means of a simple click? Technologies based on artificial intelligence and blockchain are a possible response to this new challenge.
What is the purpose of blockchain?
Blockchain is a technology that enables the safe transference of digital data with a sophisticated coding. Blockchain appeared in a relatively massive way as the central technology behind the Bitcoin, the fashion crypto-coin. However, its use goes much more beyond data mining to create virtual coins of doubtful real use.
The attraction of blockchain technology rests in the appliance of “peer to peer” network technology that enables parties that do not know each other, to carry out transactions without the traditional reliable agent like a bank or a payment processing network. When avoiding the agent and taking advantage of the power of “peer to peer” networks, blockchain provides opportunities to diminish transaction costs and to decrease the time of operations’ liquidation. Moreover, the development of this technology has evolved to the point that many entities are making investments in blockchain technology, imagining possible applications to transform traditional practices and conventional commercial models. In this sense, the accounting profession and auditing techniques, in particular, are in front of the huge challenge to adapt and take advantage of blockchain, to improve processes and make tasks more efficient.
Blockchain-based auditing: utopia or reality?
Blockchain technology has the potential to affect the entries maintenance processes, and how transactions are started, processed, authorized, registered and informed.
Tendency is aimed, presently, to a change in processing models in the sense that, back-office activities, such as the preparation of financial reports and tax liquidation, shall be nearly totally automated. If so, the use of blockchain technology could have a fundamental role, ensuring the validation of the cited processing systems. Then, independent auditors will simply need to understand this technology and should analyze and verify how it is implemented with their clients.
If some years ago (not so many), we tried to imagine how technology would change our lives, we could not surely consider the way it would happen. Therefore, we cannot disregard possible scenarios facing the future on how in this case new methods can impact on public accountants and auditors tasks. In this sense, in a near future it could be the case that all entities have systems to enable the “peer-to-peer” interconnection and thus, blockchain allows the validation of transactions, for instance, among an entity, its clients and its suppliers. And, in turn, these would connect with their own clients and suppliers by means of nodes… and so forth, not only in a country but around the world. Even at a local level, a nexus could exist with some central “certifying entity” as the tax authority or a professional association or council. Thus, the new technology could have positive externalities for the tax system, making the task of the tax entity easier and contributing to reducing evasion.
Blockchain operation as the procurer of internal and external transactions of an entity could be resumed in the following chart, in which it is shown how the abovecited could work in a typical entity that performs purchase and sale operations and processes its own information:
As well as there exist standard languages for programming, which have to be adjusted to consider the effect of certain rules or standards (like the IFRS), why wouldn’t say systems be compatible with blockchain? If so, maybe the nature of the auditor’s work would be altered. Even manual records would not be an obstacle: as these are accounted for, they are recorded in accounting books and blockchain would enable the corresponding traceability.
Certainly, the aforementioned does not mean that the auditor should not review the documents, records or perform substantive or control tests any longer. In fact, a limitation for the auditor, even using modern technologies, could be the assurance of information integrity. All records that go through the blockchain nodes could be duly validated, but, what if there are operations that never go through accounting systems? The auditor should emphasize this aspect.
The new technologies: a challenge for the accounting profession
Consequently, the role and the abilities, as well as the expertise of public accountants, shall be changing as new techniques and procedures based on blockchain arise. For instance, the methods to gather enough and appropriate auditing evidence, as required by the International Standards of Accounting (ISAs) shall consider ledgers and traditional accounting entries as those that arise, precisely from blockchain. Additionally, there exists the possibility to facilitate a higher standardization and transparency in the accounting processing, which can enable the auditor to extract and analyze data more efficiently.
Anyway, can technology replace, completely, professional judgment and the auditor’s work? It seems not to be the case, as it was stated before. Even if the proof of the occurrence of a transaction is a basic element in a financial statements’ audit, this is only one of the important aspects. The acceptance of a transaction in a reliable blockchain (that is to say, the nodes on which blockchain bases) can be sufficient appropriate evidence for certain assertions of financial statements such as the occurrence of a transaction (for instance, that an asset, as the bitcoin, recorded in blockchain, has been transferred from a seller to a purchaser). However, the auditor can or cannot be capable to determine the product delivered only by evaluating information on the bitcoin blockchain or, could use his professional criteria so that the gathered evidence is not enough to issue an opinion in its regard.
Regarding the aforementioned, the fact to record a transaction in blockchain can or cannot provide enough auditing evidence related to the nature of the transaction. A recorded transaction and validated by blockchain could be automatically verified, but could have the following limitations or features (among others) that affect the auditor’s possibility to issue a statement to approve such operation:
As it was already stated, even if the audit process can be more fluid or agile as from the use of blockchain, auditors, however, should have to use their professional criteria when analyzing the accounting assessments and the reasonability of the transactions and financial statements. Furthermore, and mainly in a first phase, in the environments that have not been automated yet, they should evaluate and test the internal controls on data integrity of all the sources of relevant financial information.
Limitations to use blockchain in auditing
Beyond the need to keep professional skepticism and the use of criteria on the part of the professionals of the accounting profession, there exist other enquiries regarding the potential use of this technology in the field of auditing. It should not be forgotten the main risk that the auditor faces as regards his work: that there are mistaken assertions in the financial statements that are being audited.
On the basis of the previous statements, even for automated transactions, the auditor should consider the risk of mistaken information due to possible errors or fraud, as it is provided by ISA 240. This constitutes new challenges because blockchain will not be surely controlled by the entity being audited. The auditor will then need to extract the data from blockchain and also determine if it is reliable, taking into consideration mainly the general controls of information technology related to the blockchain environment.
Advantages of using blockchain
As a higher number of businesses, entities and processes migrate to blockchain solutions, the access to the information based on data blockchain would probably become more efficient. For instance, if a significant class of transactions for an industry starts to be recorded in a blockchain (to name a case, payment to suppliers in the public sector), it could be feasible for an auditor to apply a specific software to continually audit the organizations using blockchain. This could make it easier the deletion of numerous manual activities to extract data, which are costly and complex. Moreover, the processing speed of these tasks could help to reduce the mismatch between the transaction and the verification. On the other hand, it would not be complex any more to review the 100% operations: the size of the sample could become immaterial.
Time diminishing, in general, could put forward the opportunity to increase efficiency and effectiveness of financial reports and auditing, enabling the administration and auditors to focus on more risky and complex transactions, while the routine verifications are developed in real time.
As it was already stated, blockchain-based technology seems to entail new challenges and opportunities for auditing and assurance professional tasks. Even if traditional auditing services will still be material so that third parties involved could trust the entities’ financial statements, innovation could alter necessary methods and abilities to develop assignments regarding the accounting profession.
On the basis of the aforesaid, a key challenge for auditors will be to be qualified, focusing on the use of technology to obtain the knowledge and be able to offer his services in accordance with the society’s demand and the evolution of computing tools. Blockchain, in that sense, is a new paradigm of information verification that is here to stay.
It has to be made clear that the use of professional criteria will still be fundamental, and, for that reason, the auditor’s skills should go on developing. Anyway, the ability to learn the information systems, with the evolution of artificial intelligence is a daily astonish. In nanoseconds a computer can process information that enables it to search databases of millions of cases to analyze possible similar situations that may have occurred in the past; then, even if the auditor’s ability to understand a situation will still be material, technology can find similar experiences in which the solution has been tested. With reviews digitalization through blockchain, auditors could base on databases to automatically detect and alert the important parties on unusual transactions or operations, nearly in real time and not ex post. Let’s imagine that the support documentation of a traditional audit, such as contracts, agreements, purchasing orders and invoices, could be encrypted and stored safely or linked to a blockchain. If auditors can instantly access the review of said transactions, knowing, as well, that the evidence is virtually unchangeable, the outcome will be a higher level of auditing reliability, a simplification of the tasks and, consequently, a more effective and efficient work. It is clear then, that regarding audit, the future has already come.
Julian Pablo Laski
PKF Audisur -International Liaison Partner
PKF AUDISUR | LA MISMA PASION, MAS CERCA
Tel: +54 11 5235 6393
Fax: +5411 5235 6300
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