How Blockchain will impact auditing and make it strategic at the same time
Impact of Blockchain on auditing is imminent, but are finance professionals ready? Blockchain will remove the repetitive nature of transactions and ensure auditors become more strategic.
- Blockchain will remove the repetitive nature of transactions and ensure auditors become more involved in using data-led reporting.
- Blockchain will push auditing firms to make their clients use the technology.
- Auditing will become a strategic function that will work closely with the C-Suite.
Impact of Blockchain on auditing is imminent
"A fundamental change is happening. Blockchain will eventually replace all intermediaries" says Raghav Swaminathan, CFO of Wipro Enterprises.
Auditing and compliance were, for a long time, considered the bastion of accounting. However as these subjects become the core of the study of chartered accounting, a majority of auditing is repetitive and hence can be replaced by automation.
More so with the advent of blockchain, the addition of immutability and transparency is ushering in a new generation of auditors who are too strategic to be involved in rote reporting.
This change is imminent.
"Blockchain does three things. It establishes trust, traceability, and auditability. This is the technology at a very fundamental level" says Raghav Swaminathan, CFO of Wipro Enterprises.
According to Deloitte Blockchain technology has the potential to impact all recordkeeping processes, including the way transactions are initiated, processed, authorized, recorded, and reported. Changes in business models and business processes may impact back-office activities such as financial reporting and tax preparation.
Both the role and skill sets of CPA auditors may change as new blockchain-based techniques and procedures emerge. For example, methods for obtaining sufficient appropriate audit evidence will need to consider both traditional stand-alone general ledgers as well as blockchain ledgers.
- Additionally, there is a potential for greater standardisation and transparency in reporting and accounting, which could enable more efficient data extraction and analysis.
Independent auditors will need to understand blockchain technology as it is implemented at client sites, whether clients are pursuing blockchain business opportunities, implementing blockchain business applications, or applying blockchain in accounting.
The changing times
Consider a few things of the past and how the present is changing it.
Audits used to happen at the end of the year. There is a rush to verify all transactions, balance sheets, cash flow statements, and regulatory statements. They spend hours verifying the authenticity and in that arises the complexity of a problematic audit when signed off.
With automation of audit, every transaction is scanned and recorded. The question is organisations have to move their entire capture of trade, financial, and business data onto a system where every transaction has a trace and is foolproof.
Things recorded and greenlit will now be immutable. Unfortunately, only the accounting profession needs to push their clients to change.
According to ToOLOwl, a research and consulting company:
"Combining blockchain and machine learning in financial services is especially effective for automating and monitoring finance-related procedures."
- For example, machine learning and blockchain can be used together to help auditors with real-time financial monitoring. AI and machine learning have a variety of financial uses, and employing them to conduct micro-level financial monitoring allows auditors to detect irregularities in large amounts of financial data.
- When it comes to utilising machine learning and blockchain to automate finance-related tasks, such systems can be useful for processing trade-related payments and filing tax reports for firms."
How does this change the auditor's profession?
They can track inaccuracies, errors, and fraud can be discovered faster. Three things that they need are:
- Deeper insight
- Using data efficiently
This is what CFOs believe is the strategic nature of auditing.
Aanchal Thakur is the CEO and co-founder of Spherium Finance, a decentralised finance company.
"You don't have to do an audit in the Blockchain world. But all accountants must learn decentralisation and the strategic nature of decentralisation."
For years companies worked with auditors for life because they knew the functioning of the company.
The most difficult aspect now is to embrace change in the era of automation of audit. The moment regulators enforce the use of blockchain, there is continuous reporting with the regulator and every stakeholder of the organisation's business is on the chain.
The auditor's role here is no longer limited to times of the filing in case of a private company and in times of reporting to shareholders on quarterly results in case of a public company.
Auditors will now have to force companies to continue to record on their respective private Blockchains and link the reporting to the regulator. The nature of the job becomes strategic input to the business and its finance and regulations.
Kartik Radia, the Managing Partner at Mazars, agrees with this assessment.
“In the future, you don't need the same auditing company to go through a company for a lifetime. With the automation of auditing, the power is shifting.
How? On one side you have the management and shareholders who used to make an assertion that they used to publish or give financial statements, and you had the machinery of an independent audit which used to give an audit report.
All this will change as the entire ecosystem will be dynamically responsible for the data. Blockchain will not allow you to go back and open up previous financial years and make the entries in your system because what has happened has happened, there’ll be a timestamp. It will bring transparency, it will bring security, it will bring governance."
Kartik adds that Auditors need to really understand the evolution of blockchain and they need to be a part of this evolution because regulations will make it necessary to use blockchain soon.
What are the Big 4 doing in Blockchain to save auditing?
KPMG has launched blockchain-based solutions and services for supply chain management.
Think about auditors, in this case, they have to understand how they can strategically align with the C-Suite to recommend discrepancies or recording of monetary transactions and work with the technology team to ensure that there is complete compliance in the process of immutability and traceability.
Similarly, E&Y is building something called the OpsChain, for traceability and procurement.
They have also been experimenting with the Blockchain Analyser that brings auditors back in the equation to trace transactions. E&Y is also focused on public Blockchains.
PWC is working on smart contract-based Blockchain systems.
Deloitte is working on creating a Blockchain for tax advice.
It is also working on an auditing-based Blockchain.
Deloitte is working on COINIA, a proprietary technological advancement developed by Deloitte to assist auditors in efficiently analyzing multiple types of digital assets, retrieving balances at specific block heights and dates, and verifying ownership of addresses in bulk―previously a challenge due to control of the way in which blockchains were designed.
With COINIA, hundreds of thousands of addresses can be loaded in bulk for a variety of crypto assets, and Deloitte can see 100 percent of the transactions and reconcile them to clients’ books and records.
Now with such changes happening what should auditors do? Just upskill to strategic ways of using data and consider forensic accounting to be the next big profession.