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The six impacts of blockchain on the auditing profession

Published on 28 November 2022 by NEOMA

  • Our Research

Blockchain, like other new digital technologies (robotics, big data, analytics, artificial intelligence, etc.), is currently creating an upheaval in the practices of companies, including auditing firms, which aim to certify accounts and provide consulting to businesses. While the information processing and validation system, which is the subject of an audit, is changing with blockchain, this is also having an impact on the activities of auditing firms and the way in which they envision the future of their economic model. Here is a report from Riadh Manita, NEOMA Business School and Najoua Elommal, Pôle Léonard de Vinci.

Auditing firms are aware of the substantial development potential of blockchain and are investing several million dollars per year in this technology. As with other technologies, blockchain presents challenges and opportunities that auditors need to understand and take hold of, or else they may see their profession taken over by other technological companies. How is blockchain going to transform the profession? How do auditors view the possible implications of this technology on the auditing process and their profession’s development?

On the basis of a qualitative study conducted with a sample of auditors involved in this technology in the “big four,” which refers to the four major auditing firms in the world, our results show that blockchain could have an impact on auditing firms on at least six key levels.

  1. Producing a more relevant audit

Blockchain makes it easier to dematerialise accounting documents, which are no longer paper documents but electronic documents with a unique and inviolable identification marker. This process provides simultaneous and secure transmission of information and documents, which offers greater confidence in the data sent between different stakeholders.

The accounting information, which includes information specific to each company, will be transformed into a collectively certified and shared information system through blockchain.

According to our respondents, this process has a positive impact on the auditor’s job. Since all the information and documents stored on a blockchain are available, the auditors can access all of it without having to wait and ask their customers for it. An associate from one of the big four is delighted by this:

“The auditing process can be done remotely, which helps to save time and cut costs that were previously devoted to collecting and verifying documents.”

This time savings will allow auditors to focus on high added-value activities for the customer, such as analysing accounting estimates at the end of the fiscal year, evaluating blockchain control systems, estimating areas of risk, etc. This results in increasing the efficiency of the audits performed and improving audit quality.

  1. Performing comprehensive data audits

Currently, an audit is based on historic data relating to the financial records from the previous year and only provides a reasonable level of certification. The auditor’s opinion is mainly based on an approach founded on the risk analysis associated with the company, its organisation and its internal system of control as well as the use of sampling techniques in the performance of the audit. However, as the survey emphasised:

“In addition to offering authentic and encoded information, blockchain makes it possible to improve the auditing process from controlling a reasonable part of the available information to performing an exhaustive control of all the available data.”

In fact, since blockchain offers access to all the company’s data, which becomes immediately available, the auditor can, in this case, perform the audit using all this data. This is particularly possible when it is combined with other technologies, such as big data, robotics, and analytics.

  1. Creating audits centred on testing controls

Since certain fraudulent transactions can be slipped into the chain, the effectiveness of internal controls surrounding blockchain also becomes a crucial component of the auditing process. In this way, the audit will focus more on testing the control systems set up in blockchain than on testing the transactions as is traditionally done. One of those interviewed emphasised this:

“The real concern for the auditor will no longer be about verifying the authenticity of the finished transactions, but rather verifying the effectiveness of the control systems set up to safeguard them.”

When dealing with a specific blockchain, the auditor must concentrate on elements like the code quality of the blockchain, changes to protocol, distribution of power between peers, etc., rather than on inspecting direct transactions to ensure the reliability of the information stored on the blockchain.

  1. Providing continuous auditing

Today, the auditor works to verify old information connected to a closed fiscal year. The generalised use of blockchain in commercial practices will, according to our respondents, offer the auditors the possibility of expanded the audit’s scope by applying a continuous auditing process that can validate information as soon as it is produced.

In fact, several verifications of information, which is part of the traditional (post-closure) auditing process, will no longer be needed if this information is stored and can be examined on a blockchain. For example, inventory that is done manually can be done quickly and continuously with blockchain.

  1. Giving audits a more strategic role

Once blockchain technology is more widely integrated and applied, the role of auditing firms will change, according to our respondents, and become more strategic. Given the availability of data on blockchain, auditors will be able to analyse this data, interpret it so it makes sense and can be used by managers to make decisions. As an associate from the big four stated:

“Very often, our customers see audits as a low valued-added cost centre. Now, blockchain provides the profession the opportunity to make the audit more relevant, enabling customers to identify their weaknesses, improve their control systems and develop their activities.”

Auditors can move from being a simple inspector of information reliability to a strategic consultant for their customers and thus essential partners.

  1. Developing new services

Blockchain gives auditors the chance to offer new services, According to those interviewed, auditing firms can, for example, play the role of planner and coordinator of potential participants in a blockchain. Likewise, they can use their expertise in IT auditing to develop new auditing services related to the internal control of blockchains, including data integrity and security, change management and blockchain governance:

To ensure that auditing firms can meet this challenge, like the five others listed above, and succeed in this wide-scale transition, they need to step up and make massive investments to master this technology. This can be done by recruiting people with new technology skills in data analysis, acquiring a start-up specialised in blockchain or training existing staff so the companies can adapt to future challenges.

Furthermore, auditing firms must also develop a culture of innovation in all their operational departments to ensure that their service offer expands and they can adapt to the new needs of the market.

Riadh Manita, associate professor, NEOMA Business School, and Najoua Elommal, professor, Pôle Léonard de Vinci

This article is a republished version of an article from The Conversation, licenced by Creative Commonss. Read the original article here.

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MANITA Riadh

Accounting, Control & Legal Affairs

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