One of the most critical aspects of running a business is to engage auditing and assurance services to establish the authenticity of the company’s financial records. This is necessary for maintaining the credible image of the organization in the eyes of investors as well as customers. Auditing is helpful in preventing and detecting fraud besides monitoring the company’s performance and enhance its productivity. The best audit firms in India and other nations are continuously looking at ways to improve their services. One such technological innovation that has the potential to transform financial auditing is blockchain. Organizations are looking at the technology to minimize the mistakes and improve their efficiency but there are fears that it may make accounting professionals redundant. Such fears may be unfounded but blockchain will certainly affect financial auditing and reporting in the near future. Let’s see the ways in which it can change the practice.
What Is Blockchain Technology?
Before discussing the effects of the innovation on the working of internal audit companies and other agencies, let’s know about the definition of this technology. A blockchain is a list of records, in which each record or block is joined with each other by cryptographic links. Every time a new transaction takes place, a new block containing encrypted information of the previous block is added to the chain along with a time stamp and transaction data. Existing as a distributed, decentralized, public ledger, it is managed by a group of authorized users. The main benefit of this technology is that it is nearly impossible to tamper with the information contained in a blockchain. Each system in a network will have its own separate but identical copy of the blockchain. Anyone wanting to modify a blockchain in an unauthorized manner will have to alter each existing copy. Moreover, it is extremely difficult to tamper with the content of a block which contains its unique cryptographic hash along with the hash of the preceding block.
How Blockchain Will Affect Auditing Services?
The innovative technology can affect the functioning of auditing and business assurance services in the following ways:
- Quicker Process Of Financial Reporting
One of the biggest problems associated with auditing is its time-consuming nature. Professionals use the data provided by businesses to reconcile accounts and cross-check ledger entries and balance sheets. This information can be in digital or manual formats and the time needed for its examination depends on its size and complexity. Once blockchain enters the picture, auditors will have access to real-time information stored in the read-only format. This will establish the veracity of the information and eliminate the need for manually extracting a required data element.
2. No Need For External Verification
All companies are required by the law to conduct a statutory audit in India or any other jurisdiction in the world. The auditing and assurance services hired by an organization for the purpose inspect the financial records provided by the company and verify it against information collected from external sources. This is an essential part of the auditing procedure but with the introduction of the blockchain, it may cease to remain necessary. When the data is stored in a decentralized, public ledger, then there will be no need to establish the veracity of the transactions by comparing it against external sources.
3. New Roles For Accountants
Many professional accountants feel that the revolutionary technology may make their job useless. On the contrary, the increasing use of blockchain will give rise to new ways in which the expertise and skills of accountants will be harnessed. One of the most important roles that auditors can play in a blockchain using environment is to audit smart contracts. These contracts are programs controlling transactions between parties according to specified rules of an agreement. Similar to traditional arrangements, these agreements can automatically enforce the terms of an agreement. A professional will be required to ensure that a fair logic is used in the framing of the contracts. Another new task that an accountant can be needed for is the service audit of a consortium blockchain. Such an arrangement can be used by different parties involved in a common business function. An independent examiner will be needed to assess the dependability and efficiency of the applied platform. Organizations can also hire internal audit companies or individual professionals to discharge administrative functions. An independent administrator will play an impartial role while enforcing the specified rules for granting access to new participants. No matter how advanced the technology, there is always a chance of dispute amongst parties. Certified Professional Accountants (CPAs) with knowledge of all correct accounting procedures and laws can be asked to act as arbitrators to resolve issues arising between business partners.
4. Scope For Misuse Of The Technology
As mentioned earlier, modifying the information residing in a blockchain is next to impossible. This gives rise to the argument that auditors are no longer required as the data contained in a blockchain is uncorrupted. However, there is always a possibility that incorrect or fraudulent information is entered while adding a block. This will impart technical legitimacy to wrong data and can be used by rogue elements. Auditing experts will be required to establish that a transaction taking place between two sides is according to specified laws and is not illegal.
Blockchain technology does not pose any threat to auditing and assurance services. On the other hand, the innovation opens up new avenues for accounting professionals and improves the efficiency of auditing operations.