The recent initiative of the world’s four largest auditing — Deloitte, Ernst & Young, KPMG and PwC — to join a pilot of 20 Taiwanese banks to test blockchain technology for fiscal audits, confirms how developments are expected in the work of external audit.
Despite the auditors have been sometimes criticized for their lack of capacities for catching issues before they blow up, an external audit is a fundamental part of the assurance environment for international groups, both private and public.
This can be defined as the process of conducting an objective examination of an organization’s accounts, books, documents and internal processes in order to determine whether it presents a ‘true and fair’ situation of financial performance and financial position. It is based on a set of predetermined guidelines — normally the International Financial Reporting Standards or generally accepted accounting principles — to verify the accuracy of companies’ financial statements.
So what is the linkage between an audit and blockchain? What could change in the short term and what might not?
What could change
Albeit regulated by numerous standards and practices, an external audit is often a heavy process that requires a team of professionals to spend a robust amount of time to review the massive number of transactions and accounts of the client’s books. In this scenario, blockchain technology could play a really disruptive role.
As defined by the CFO of International Federation of Accountants (IFAC), Russell Guthrie:
“New technologies, such as blockchain and artificial intelligence are advancing the global profession, raising the bar and driving demand for new workforce skills and competencies.”
As blockchain has its foundation in the distributed ledger concept and cryptology — which promises transparency, immutability, security, auditability, high cost-efficiency and is ‘ever available’ — an immediate application of blockchain technology in the audit verifications is connected to external confirmation procedures.
External confirmations are a critical part of all the audit processes, as they give the audit team the ability to to check external sources of the information that are provided internally by the company. But what if the ledger of such an enterprise is in a decentralized, public blockchain?
In a scenario like that, the auditors would be able to obtain all the information related to the financial transactions of a company without the need to confirm them through an external confirmation procedure, hence saving time and resources.
An environment where all the ledgers would be easily accessible, cross-checks of transactions would be still possible. If, for example, Company A has a liability with Company B, the auditors or any stakeholders could easily verify whether that is correctly recorded, by cross-checking the respective public ledgers.
Ready-to-access information will also facilitate the review of bank details, where the external auditors examine all the information pertaining to a company and commercial banks, including bank accounts, loans, guarantees and signatory powers.
What will not change
As the scope of blockchain is wide and requires dedicated focus and time to research how best it can be used to build practical applications, the field of business estimation, and related audit activities may require more time to change and to be affected by blockchains. Examples of common accounting estimates are related to the definition of the fair value of an asset, revenue recognition and determination of accruals.
The process of determining an estimation includes elements of uncertainties that are often mitigated by the knowledge of the business, the use of market comparisons and historical data.
In a scenario where blockchain would be widely adopted, and where the transactions are accessible and transparent, the necessity of producing accounting estimate — and the related guesswork from the management of the company and external auditor — will likely decrease.
How the big players are reacting to blockchain innovations
The international audit market is dominated by the so called “Big Four”: PricewaterhouseCoopers (PwC), KPMG, Ernst & Young (EY) and Deloitte, whose revenues, thanks to the economic reprise, have been steadily increasing during the past few years.