The Blockchain and the future of audit

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Introduction

The rise of the Blockchain over the last few years has created a space where many industries will most likely be completely or partially disrupted by the Blockchain. The future of audit is also fundamentally impacted by the Blockchain. This is evident from the growing popularity and use cases of the Blockchain. More and more audit engagement teams must consider this technology as part of their audit planning.

We have seen a growing number of use cases in the Financial Services industry, The Healthcare Industry, the Public Sector, and Manufacturing. Some are of the opinion that the Blockchain can ultimately erode the need for an Auditor completely. It is therefore worth having a look at the functioning of the Blockchain and the purpose of an Auditor.

The Role of the Audit in the Blockchain

The role of the auditor is to express an opinion on the Financial Statements. Our role as Auditors is to establish if the financial statements are materially misstated, whether due to fraud or error. On the other hand, the management of a company makes certain statements about these financial statements e.g., that the transactions in the financial statements occurred and are accurate, or that certain balances are valued correctly. The auditor needs to be able to obtain sufficient appropriate evidence about these statements, so the Auditor is able to express an opinion.

Some considerations

The first question is then, can The Blockchain fundamentally support all these statements made by management, at any particular time? In some cases, it may and in other cases it may not. Take for example where a buyer sends a seller Bitcoin for a product purchased. We can certainly establish that the transaction occurred on the Blockchain. But do the goods pass hands? When should the company recognize the transaction? i.e., when the goods were delivered by the seller, and is the value of the goods correct?

Secondly, another fundamental concept that the Auditor makes management aware of, is any weakness in their control environment. Therefore, how were the transactions on the blockchain initiated, processed, authorised, and recorded. Fraud can still very easily be perpetrated by a company. If the necessary company internal controls have not been in place or have been overridden. This has a direct impact on the financial statements.

Thirdly, much of what management reports in the financial statements are based on estimates. Once again, the Blockchain may not report on estimates that management is making about certain elements in the financial statements. Estimates are of particular importance to investors. Especially. in making their investment decision or being able to get a sense of the outlook of the business.

Conclusion

There is no doubt that the Blockchain will enhance efficiency and enable real-time information to be available for decision makers. It may even eradicate much of the current reporting requirements out there. The role of the Auditor will evolve around the Blockchain system and the Auditor will have to adapt and learn new skills. If anything, the Blockchain has the potential to enhance the robustness of the capital markets, a place where the Auditor plays an integral role. 

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