Blockchain and Auditors: “Doing Nothing Is Not An Option”

By Mike Martin


Blockchain technology has the potential to make life easier for external and internal auditors by giving them access to troves of digital information that can ease risk management, compliance tracking and automation, according to audit consultant and expert Ian Kirton. 


Kirton recently hosted a Caseware webinar called “The Impact of Blockchain on Audit: Part 2: Your Guide to Auditing Blockchain.” (For a summary of Kirton’s first webinar, see Why Blockchain is Becoming Crucial for Internal Auditors.)


“Blockchain will affect how you do your risk assessment, how you conduct your fieldwork and also how you report,” Kirton said. “It will also bring some opportunities to automate the audit process because you’re able to test 100 percent of the transactions. So you should start to think about the direct impacts, threats and opportunities to existing processes.”


Blockchain’s Benefits For Auditors


Blockchain technology offers a complete, secure transaction history with timestamps, asset ownership information and links to related transactions. 


“That’s music to the ears of auditors,” Kirton said. “We’ll be able to get hold of the whole record electronically and be able to do our audit work.”


Auditors can access blockchain information for internal or external clients in two different ways, Kirton explained. One is to get direct access to a computer that contains a full copy of the blockchain record. Another is to use an Application Programming Interface (API) tool, available to users authorized by their organization, to extract the blockchain information into Excel, or a more advanced data analytics solution such as Caseware IDEA


Combining the detailed information in a blockchain with analytics and artificial intelligence opens the door to automation and real-time transaction monitoring, Kirton noted. “If you’re in compliance, you can start to automate exception reporting. We’re talking about having access to 100 percent of the data. So why wouldn’t you want to use blockchain solutions and incorporate them into your data analytics strategy?”


Blockchain: A Transformational Technology


Kirton believes blockchain has the potential to transform external audit. He noted external auditors are often reconciling records held by individual companies. And for a typical transaction, auditors have to try and reconcile records between different companies and different ledgers, which can create a barrier because the systems used by different organizations can be very different. 


“Now imagine if all those companies were sharing a common ledger and when they posted to their internal journals, it did a mirroring transaction in a shared ledger that was available to everyone,” he said. “That’s blockchain. That transparency is very beneficial to external audit. You spend less time making inquiries trying to reconcile differences between balances and you get real-time information the moment a company posts an entry.”


Blockchain also has the potential to simplify compliance for auditors. The technology’s ability to transparently show transactions from beginning to end is a huge benefit for tracking sanctions against countries, companies or individuals, as well as detecting money laundering. 


It’s also ideal for tracking Environmental, Social and Governance (ESG) factors, Kirton said. “Imagine being able to have access to the data that shows you the countries, the companies, the products, the ingredients that are passing through your company’s books and being able to use that data for wider compliance objectives.”


Assessing Risks and Process Changes


Part of an auditor’s role is understanding risk, and there are new considerations blockchain raises in this area, Kirton explained. For instance, an operational auditor might need to think about how blockchain changes processes and where the data gets stored. 


Blockchain security is also a consideration. Auditors will need to make sure encryption keys that allow users to access blockchain data are protected. And they’ll also need to audit the controls around the governance of those keys, as well as the risks involved when organizations connect new technology to existing back-end IT systems.


And auditors will need to consider how blockchain might impact their existing processes. For instance, audit committees might need to bring in additional counsel for expertise on technology. And audit charters might need to be amended to give auditors access to new records made available by blockchain.


Auditors need to start thinking now about how blockchain will impact their organizations, as well as assess the risks and opportunities, Kirton said. 


“Doing nothing is not an option,” he noted. “You will be affected directly or indirectly, eventually. Now is the time to get an understanding on how you can use it.”


Mike Martin is a Content Marketing Writer at Caseware. He is a former IT magazine editor with extensive experience researching and writing about enterprise technologies. At Caseware, Mike reports on today’s top issues affecting auditors and accountants and how advanced technologies are helping them drive better results.