Blockchain – what does it mean for the audit?

Blockchain, the buzz word lighting up boardrooms and headlining technology conventions across the globe. From blockchain-based vaccine passports and background vetting programmes, real-time tracking of goods from origin to consumption and companies across the world now accepting payment in cryptocurrency  – blockchain seems to have unlimited use cases and is quickly revolutionising many industries and aspects of daily life.

But what does it mean for auditors? Does the availability of unchangeable, verified information reduce the need for auditing – or just shift the focus of the auditor’s responsibilities?

What is blockchain?

First, let us quickly summarise what blockchain is. For the purposes of this article, we are confining the analysis of blockchain to its use for financial and operational information.

Blockchain is a technology that can provide real-time, permanent, and unchangeable verification for financial and operational transactions. The blockchain is a shared, digital record of transactions or information of any value between two or more parties. It is a decentralised, distributed ledger, meaning transactions are shared and replicated in real time on a wide network of computers located at every node (point in the network), providing a verifiable independent sole source of truth. Transactions are stored inside ‘blocks’ that become part of a contiguous ‘chain’, with each block ‘time-stamped’ and continuously verified by the blocks that precede and follow it. This makes the ledger permanent and virtually tamper-proof — a shared source of truth that uses public and private cryptography to sign transactions digitally.

If an organisation runs their own blockchain to record financial or operational transactions, it is ‘private’ — meaning that the organization can write its own code for the blockchain and control who has access to it.

Blockchain provides a form of assurance through independent distribution and segregated validation using complex encryption and validation protocols where independent consensus under defined parameters is obtained, thereby validating the integrity of the records kept.

What are the implications of blockchain for an audit?

On the face of it, blockchain could have major implications for an audit. Blockchain and other decentralised ledger technologies, if designed appropriately, could provide a permanent and immutable record of transactions. It has significant potential to boost the confidence and trust that a user has in the data.

A company’s management would be responsible for developing the smart contract as part of the implementation of a blockchain-distributed ledger system and need to be able to demonstrate the controls around their use, as well as any changes and updates.