Understanding the Impacts of Blockchain Technology to Auditing

Commentators say that blockchain technology is the future of commerce, and some even claim that it may change the very way we experience capitalism. But what is it exactly? Can this disruptive technology redefine the finance and accounting industry?

What is Blockchain?

Accounting Today defines blockchain technology as “an open, distributed ledger that records and verifies transactions without any trusted central authority.” In a TEDx talk, Alex Tapscott, author of the bestseller "Blockchain Revolution," described it as a means to move, store, and manage data securely and privately.

How It Works

In a recent report, EY defined blockchain as a type of database in which users can submit a new data block that will have to be verified by other users. Each data block in this distributed ledger is cryptographically linked to the previous block. In essence, there is no central administrator controlling all the data. Each user or participant has a copy of the ledger that they share with one another, and data is synchronized across all copies of the ledger.

To better understand distributed ledger technology, imagine a bunch of books that are simultaneously updated when someone writes on one of the books. Or picture a digital cloud without a central server, but with only a network of computers connected to one another. To destroy or alter the data, one has to access all other computers maintaining this database.

Blockchain and Corporate Reporting

This technology has tremendous benefits in the transaction-based financial industry. Given its transparency and security, blockchain technology can enhance the accuracy of financial accounting reporting. Every transaction is recorded in the distributed ledger, so auditors will not have to perform random sampling—software can be developed to check on every item instead. By consequence, corporate scandals in financial institutions such as the Enron and Toshiba cases can be prevented.

Aside from ensuring data security and integrity, blockchain can impact compliance and auditing regulations and practices. For one, financial audit procedures will be revolutionized. Through blockchain technology, internal auditors can easily perform real-time reporting to CFOs and external auditors.

What’s Next?

Considering the pace by which technological advancements occur in our lifetime, it is the CFOs’ duty to keep up with these developments. Firms must develop strategies that will help them adapt to the rapidly changing business landscape.