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Will Blockchain Technology Disrupt Audit and Assurance Services?

Tax and Financial News

June 2018

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Will Blockchain Technology Disrupt Audit and Assurance Services?

Blockchain Technology Disrupt Audit and Assurance Blockchain technology is raising speculation over the future of audit and assurance work and the impact it could have on accountants. Originally created to serve as the foundation for cryptocurrencies, blockchain technology has developed and been adapted into many other spaces, including smart contracts. It has the power to disrupt the audit and assurance process and industry.

Specific to accounting, blockchain technology combines peer-to-peer networking technology and cryptography, which allows for a “triple-entry” ledger that can automatically record and confirm transactions in real time. Moreover, these records are distributed over the network and are extremely difficult to change after being recorded, leaving little room for fraud.

Without nearly as much work needed to analyze and verify records, there appears to be little work left for human auditors, providing a major disruption to the financial statement audit process. Blockchain is provoking anxiety for some CPAs who worry they might soon be out of a job, while others think it will change only the way CPAs work, allowing those who adapt to thrive.

Right now, blockchain technology is just a tool unto itself. Transactions recorded on a blockchain could still be unauthorized, fraudulent, or illegal. Other areas of concern that blockchain technology does not address are if transactions are executed between related parties, correctly classified in the financial statements, or linked to “off-chain” side agreements. In other words, blockchains can’t differentiate and look for all the important things auditors tend to be most concerned about. As a result, the technology is not likely to replace people – but rather supplement the auditing process.

The impact of blockchain has already been felt by larger CPA firms with clients who are implementing the technology into their enterprise resource planning (ERP) systems. One of the biggest business areas impacted is procurement and supplier management, in which blockchain enables transparency for every transaction. This decreases the auditors’ work of sampling and testing transactions. Instead, it allows them more time to focus on services such as assessing and testing internal controls and investigating discrepancies.

Blockchain technology also will allow auditors to restructure the auditing process, creating wider adoption of more real-time, continuous audit testing – which will eliminate the time-consuming and labor-intensive processes of preparing and manually testing data. Essentially, the biggest risk is to entry level and junior auditors’ jobs.

Similar to other industries, this creates a conundrum for how to groom future talent. As the bulk of entry and low level roles are increasingly automated and begin to disappear, where will budding auditors learn their trade? Accountants learn as much from job experience as formal schooling, so without the experience provided by the grunt work performed during the early years, there will be a skills and experience gap.

Aside from the talent issue, another challenge with adapting to blockchain is not only that it is new (less than 10 years old), but that it is perplexing due to its differentiation and complexity. CPA firms are looking for ways to adapt and even prosper as a result of emergent blockchain technology, focusing on expanding their assurance services to areas such as cybersecurity and sustainability.

The goal for firms is to avoid waiting until the inevitable arrives. Understanding and adapting to the role of blockchain technology now will make the change more of a transformation and less of a disruption. Finance professionals need to educate and position themselves during the run-up so that they can take advantage of the opportunities that will become available to those who have the right mindset, skills, and tools.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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