Blockchain-based Auditing “Multi-chain Reconciliation"
Processes currently used by auditors for reconciling accounting and financial data proved to be inordinately labour-intensive, time-consuming and complex. Blockchain technology allows for more efficient reconciliation of accounting data, if interoperability is enabled. There are many different Blockchain protocols such as Ethereum, EOS, Stellar, or DBOS - different clients deploying different kinds of Blockchains. Different blockchains, ledgers, or DAGs specialize in different types of transactions, and handle different amounts of data and processing power.
How accounting data of client businesses will be reconciled by auditors if those data are spread across multiple different blockchains?
To effectively leverage blockchain technology to make reconciliation more efficient, a Blockchain interoperable network is needed, that allows for reconciliation of accounting information encoded onto multiple independent blockchains. Blockchain interoperability makes different blockchain architectures talk to each other.
Assets already can easily be moved from one Blockchain network to the other through atomic swaps, and enabled on some secondary trading markets. To effectively trace, audit and reconcile data multi-chain - interoperable networks are important for auditors. Several promising projects are out there working on these cross-chain functions such as Cosmos, Metronome, Aion or Quant Network.
Reconciling Accounting Data
Blockchain technology is fundamentally an accounting technology. Whereas traditional auditing requires the confirmation of transactions and balances on firms’ accounting ledgers at the end of the reporting period, blockchains provide the immutable record of transactions almost immediately. This instantaneous availability of transaction information facilitates the development of continuous auditing. For auditors, this implies a transition from a periodical or annual exercise to a continuous matter. As blockchains allow the recording of the transaction to occur at the same time as the transaction itself, auditors can obtain data in real-time and in a consistent, recurring format.
Further, due to its distributed ledger technology, blockchain technology eliminates the need of entering accounting information into multiple databases and potentially removes the need for auditors to reconcile disparate ledgers, whereby substantial amounts of time could be saved and the risk of human error be considerably reduced.
The benefits of continuous audits, real-time monitoring and less time-intensive reconciliation of accounting data, can only be realised if different blockchains used by client businesses are connected, and interoperability is enabled. Multi-chain technology allows different independent blockchains to plug into and become part of a bigger blockchain ecosystem may help auditors to make use of such benefits.
"Blockchains contain detailed and precise histories of asset movements, which has the additional benefit of being attractive to regulators” McKinsey
Opportunities Blockchain bring to the audit process
Blockchains are inherently resistant to modification of any stored data. Functionally, a blockchain can serve as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. Blockchain can be used as a source of verification for reported transactions.
For example, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify the transactions on publicly available blockchain ledgers such as http://www.blockchain.info or http://www.blockexplorer.com. The automation of this verification process will drive cost efficiencies in the audit environment.
In blockchain, a transaction of low value currently takes approximately 10 minutes to be validated as a single block verification is deemed appropriate. Verification times will improve with new scalable Blockchain solutions. Contrast this with traditional financial transactions where information might take up to a month or more to be cleared.
Deloitte envisages that, at the end of the blockchain road, fully automated audits may be a reality.
The assessment of financial statement assertions such as existence, occurrence, accuracy and completeness of information, are amongst the prime candidates for audit automation as well as potential benefits from a timing perspective.
Trust – the most expensive good
Blockchain provides a globally distributed, decentralized ledger of which everyone has the exact same copy. Once posted to the blockchain, the transaction is time stamped and exists forever. Trust of the auditor and the company still remains at the core of the auditing process, and thus is still potentially subject to fraud and manipulation. Trust in legacy database systems, storing private and sensitive data to be audited, hack-proof, is another point to consider. And, the quality of the audit still largely depends on judgement calls by the auditor, meaning that it remains subject to accuracy disputes. The redundancy of the auditor’s role, therefore, could transform the entire accounting industry.
Sources: IBM, Deloitte, McKinsey, Fortune, Fintechnews, IWS FinTech