Since the data stored in distributed ledgers is authenticated by multiple parties and continually updated, it offers finance teams the possibility of both real-time reporting to management and external auditors, and being able to work more effectively with their external audit and tax providers.
Implications for audit
Blockchain could have considerable implications for audit as well. Tapscott says: “If, each time a company entered into a transaction, an unchangeable record was automatically reported to a distributed ledger, …you could actually have a real-time audit, because all transaction data is recorded to the distributed ledger.”
“I can see the world moving to real-time auditing,” concurs futurist Rohit Talwar, Editor of The Future of Business. “Audit firms will provide plug-ins for blockchain, do the audit in real time, spot anomalies and then send in humans to dig deeper if necessary – unless software can do it for them, of course.” Blockchain could also spell the end of random sampling by auditors, since code could perform a check on every single transaction in future.
Talwar also suggests that blockchain, together with artificial intelligence, could transform the way in which fraud investigations and forensic accounting are undertaken. “The real-time systems would highlight and investigate anomalies and unusual transaction patterns as they emerge,” he explains.
Nevertheless, many commentators suggest that auditors will always be needed to design the appropriate audit strategies in complex systems – making decisions about what level of audit is required, how data should be captured, and the type of audit analytics that should be applied. An even more crucial role will be to provide assurance in an increasingly complex control environment and, for instance, to ensure the party or entity that is entering the records on the distributed ledger does actually exist and the transaction has economic substance.
“Auditors do far more than just add up the numbers and make sure they come to the right value,” Smart adds. “They also audit control mechanisms, disaster recovery mechanisms, processes, resilience and systems. So the auditors will also need to audit whether the distributed ledger systems are working correctly.”
Too good to be true
In principle, blockchain is extremely secure. That’s because every transaction on blockchain is digitally signed, providing assurance that only a certain party could have recorded it. In addition, the data is validated by a majority of other users on the system. Having said that, if the majority of the users on the distributed ledger become corrupt, it is possible to break the chain. Blockchain can also be vulnerable to programming mistakes, as a Swiss-based DAO – actually called The DAO – discovered when it lost US$50m in virtual currency in June 2016 after someone exploited a programming mistake. The reality is that no system is flawless – not even blockchain.