Scrabble Auditor

Blockchains will make the auditing profession more interesting. Source: Pixabay

Will blockchain transform the role of your auditors?

ALTHOUGH blockchain was first introduced as the technology behind world-famous cryptocurrency Bitcoin, its proved its potential to transform other fields of business and commerce.

In the realm of finance itself, it can be used for trade processing and settlement, managing insurance claims, and support cross-border payments. In fact, some technocrats believe that blockchains will make auditors redundant in the future.

However, according to the Chartered Professional Accountants of Canada (CPA Canada) and the American Institute of CPAs (AICPA), the technology will not only make CPAs more important but also widen their role to include other functions in the future.

Their whitepaper, Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession, highlights that “an audit involves an assessment that recorded transactions are supported by evidence that is relevant, reliable, objective, accurate, and verifiable”.

Why blockchain doesn’t make auditors redundant

Therefore, although the acceptance of a transaction into a reliable blockchain may constitute sufficient appropriate audit evidence for certain financial statement assertions such as the occurrence of the transaction, the auditor may or may not be able to determine the product that was delivered by solely evaluating information on the blockchain.

The associations argue that an audit will still be necessary to look for transactions that are:

  • unauthorized, fraudulent or illegal
  • executed between related parties
  • linked to a side agreement that is “off-chain”, or
  • incorrectly classified in the financial statements, among other things

All of the abovementioned transactions are things auditors look for with a fine-tooth comb, as prescribed by the accounting standards followed by these professionals.

The whitepaper also makes the point that many transactions recorded in the financial statements reflect estimated values that differ from historical cost. Auditors will still need to consider and perform audit procedures on management’s estimates, even if the underlying transactions are recorded in a blockchain.

New opportunities for auditors in the blockchain ecosystem

According to the AICPA and CPA Canada, auditors will be able to provide assurance to users as blockchain systems standardize transaction processing across many industries.

Here are some potential roles that the whitepaper outlines:

Auditor of Smart Contracts and Oracles

When using smart contracts to automate business processes, contracting parties may want to engage an auditor to verify that smart contracts are implemented with the correct business logic.

Auditors could also be enlisted to verify the interface between smart contracts and external data sources that trigger business events. Without an independent evaluation, blockchain users might fail to identify errors and vulnerabilities.

Service Auditor of Consortium Blockchains

Prior to launching a new application on an existing blockchain platform or leveraging or subscribing to an existing blockchain product, users may get an independent auditor to test the stability and robustness of the system’s architecture.

Instead of each participant performing their own due diligence, it may be more efficient to hire an auditor, an impartial third party, to achieve this.

Administration Roles

Permissioned blockchain solutions may benefit from a trusted, independent, and unbiased third party to perform the functions of a central access-granting administrator.

This function could be responsible for verification of identity or a further vetting process to be completed by a participant before they are granted access to a blockchain.

According to the AICPA and CPA Canada, this central administrator could validate the enforcement and monitoring of the blockchain’s protocols.

Their whitepaper argues that if this function is performed by a user/node of the blockchain, then an undue advantage could exist and trust among consortium members could be weakened.

Since this role would be designed to create trust for the blockchain as a whole, due care will be needed when establishing both its function and its legal responsibilities. As a trusted professional, an independent auditor may be capable of carrying out this responsibility.

Arbitrator Roles

Business arrangements can be complex and result in disputes between even the most well-intentioned parties.

For a permissioned blockchain, an arbitration function might be needed in the future to settle disputes among the consortium-blockchain participants.

The role of an arbitrator is analogous to the executor of an estate. Participants on the blockchain may require such an arbitrator to enforce contract terms where the spirit of the smart contract departs from a legal document, contractual agreement, or letter.





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