As blockchain has transcended beyond a fuzzword, a lot of research is being performed on the impact this shift in cultural paradigm will have on the traditional audit process. Facilitating audits and improving accountability is one of the major benefits of blockchain technology.
The major current use of blockchain appears to be in the field of cryptocurrency. Three types of entities determine the state of a blockchain namely bank or group of banks in a financial ledger or the insurance agencies in an insurance registry, etc., and external users who do not participate in the consensus but would like to verify whether the data is correct. The third-party consists of the auditors and regulators. The benefits of external audit of Blockchain Auditing Services align it with Web 2.0 which shifts applications from being service-centric to user-centric.
When using blockchain, accountability is verified as a part of timestamps established by the system. This allows every user to confirm whether the service operates in an intended way. If the service fails the verification process, then the user has proof of malicious behavior which could be used to hold the service accountable. The ability of each user to choose a trust model that operates within their comfort zones such as a full node, a lightweight node, a non-custodial multi-signature wallet, or a trusted third party provides bitcoin with a substantial advantage. This causes the users of the blockchain to trust it rather than trust the processors of the blockchain. This increased trust causes increased third-party development and integration of this technology.
Another useful feature of blockchain is to verify the authenticity of each recorded statement. Non-repudiation is achieved with a combination of digital signature and public key infrastructure. The public key infrastructure is important to prevent anyone, including the blockchain maintainers, from backdating the transactions and to ensure that verification of authenticity is not widely dependent on the security of the utilized public key system.
Audits can come in many forms. They could be in the form of financial audits, compliance and regulatory audits and blockchain technology can be applied to all of them. An audit generally involves an examination of the financial statements, or in case of compliance or regulatory audit, of a set of requirements or standards. The audit team is generally trying to select accounts or activities to confirm accuracy with supporting proofs of evidence. With blockchain, the evidence lies in the transaction i.e. the hash. Blockchain allows users to make judgments based on all transactions that have occurred in past and not just based on some random samples. This increases the assurance the auditors can give to the public regarding the audit result.
Data Analytics in the picture
Blockchain technology will solve many problems with the current audit structure. Companies will not be able to change their records or reverse engineer their financial documents for audit purposes. Data analytics will come into the picture since visualizing the data without the use of data analytics will be difficult owing to the large amount of data that will be provided by a blockchain. The data will also allow consulting firms to assist in planning and making critical decisions required for the development of the company.
In the near future, auditors will need to cultivate new skills to confirm audit integrity. Auditors will have to develop into analysts who read the data provided by the blockchain and verify the sanctity of the chain. Auditors who handle compliance issues will, in the future, have to assist with handling identities so as to confirm how assets are linked to individuals, organizations, or companies. Additionally, traceability of raw materials as they move through the company’s supply chain across the world will allow auditors to trace what happens with raw material or even the end product produced by a company over time while at the same time providing proof of transactions.
Bitcoin from an Audit perspective
Whenever we send a bitcoin, the associated hash does not only refer to the transaction but also provides us the audit trail that we need in order to perform the audit. Some of the details that it provides us are:
- Did the transaction really occur?
- Does the balance exist?
- Do we own the bitcoin?
- How is the balance viewed? Let us assume that it is viewed in BTC.
- Is the balance and transaction cut-off period recorded in the correct period?
- How will the transaction be presented and disclosed?
Since no rights or obligations arise due to the transaction, the situation is simpler. A payment either happens or it doesn’t. In most cases, a public key, a digital signature, and a Pay2PubKey Hash are all that is required to verify the new bitcoin transaction at a basic level.
The balances between accounts will be observable in real-time. A Hash code that is specific to a single transaction will be used to verify the transaction by auditors. The unique alphanumeric signature shall connect the payment done by one company and the corresponding entry in the supplier’s records as well. This same hash shall prove that the transaction did occur between the individual parties at the time-stamped point. With such proof fudging the numbers will become impossible.
What opportunities does Blockchain bring to the auditing process?
Blockchain can be used to serve as a distributed ledger that can be used by two parties to record transactions in a verifiable and permanent way. For example, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can log onto a website and confirm the transactions on publically available blockchains. The automation of this process can increase cost efficiency within the audit process.
This can also bring about a major change in sample-based testing. Instead, the auditors can access the whole database to test the whole population of transactions within the period under observation. This extensive coverage will ensure tremendous improvement in the level of trust obtained from the audit process.
In the blockchain, a low-value transaction takes a lot of time to be validated as a single block verification is deemed enough. The more blocks elapse before a transaction is verified, the more it becomes immutable. Typically a high-value transaction can be verified within 1 hour. The traditional financial transactions take a month or more to be verified. This quick turnaround time in blockchain verification, allows transactions to be confirmed intermittently through a period instead of final end-of-year assessments or audits. This benefit could be easily applied to assessing ‘smart’ audits of financial and risk positions of banks and other financial services clients.
Benefits of Blockchain Auditing Services
1. Greater transparency
Transaction histories are becoming more transparent through the use of blockchain technology. Because blockchain is a type of distributed ledger, all network participants share the same documentation as opposed to individual copies. That shared version can only be updated through consensus, which means everyone must agree on it. To change a single transaction record would require the alteration of all subsequent records and the collusion of the entire network. Thus, data on a blockchain is more accurate, consistent, and transparent than when it is pushed through paper-heavy processes. It is also available to all participants who have permission to access. To change a single transaction record would require the alteration of all subsequent records and the collusion of the entire network. Which can be, you know, a headache.
2. Enhanced security
There are several ways blockchain is more secure than other record-keeping systems. Transactions must be agreed upon before they are recorded. After a transaction is approved, it is encrypted and linked to the previous transaction. This, along with the fact that information is stored across a network of computers instead of on a single server, makes it very difficult for hackers to compromise the transaction data. In any industry where protecting sensitive data is crucial — financial services, government, healthcare — blockchain has an opportunity to really change how critical information is shared by helping to prevent fraud and unauthorized activity.
3. Improved traceability
If your company deals with products that are traded through a complex supply chain, you’re familiar with how hard it can be to trace an item back to its origin. When exchanges of goods are recorded on a blockchain, you end up with an audit trail that shows where an asset came from and every stop it made on its journey. This historical transaction data can help to verify the authenticity of assets and prevent fraud.
4. Increased efficiency and speed
When you use traditional, paper-heavy processes, trading anything is a time-consuming process that is prone to human error and often requires third-party mediation. By streamlining and automating these processes with blockchain, transactions can be completed faster and more efficiently. Since record-keeping is performed using a single digital ledger that is shared among participants, you don’t have to reconcile multiple ledgers and you end up with less clutter. And when everyone has access to the same information, it becomes easier to trust each other without the need for numerous intermediaries. Thus, clearing and settlement can occur much quicker.
5. Reduced costs
For most businesses, reducing costs is a priority. With blockchain, you don’t need as many third parties or middlemen to make guarantees because it doesn’t matter if you can trust your trading partner. Instead, you just have to trust the data on the blockchain. You also won’t have to review so much documentation to complete a trade because everyone will have permissioned access to a single, immutable version.