The Institute of Chartered Accountants of India (ICAI) has announced its plans to re-skill around 1.2 lakh of its members in disruptive technologies such as Data Analytics, Artificial Intelligence and Blockchain. This is indeed a praiseworthy move by the institute. ICAI believes that Blockchain has the potential to impact auditing and accounting greatly and the members need to be prepared for these emerging trends.
Truly, Blockchain has emerged as the most talked about technologies in recent times. Since it is a distributed ledger arrangement, recording real-time transactions, the impact on auditing and quality assurance cannot be ignored.
Blockchain impact on existing auditing process:
- Saves time and efforts: Blockchain, though complex, is expected to streamline the process of financial reporting and auditing. As per current practice, reconciliation statements, ledger & sub-ledgers, journal entries, bills, vouchers, and other supporting documents are provided to the Auditors in physical or electronic formats. Auditors then invest a lot of time and energy in assessing the authenticity of each transaction. However, in the Blockchain world, Auditor will get continuous and real-time access to information in a standardized manner. This saves a lot of time and resources required for retrospective investigation.
- Effective Auditing: Auditors use random sampling method during the investigation process. This means a good portion of the investigation is based on gut instinct. Blockchain technology makes it possible to check every single transaction using encrypted codes. This will enhance effectiveness in the audit process and make it easier to detect anomalies on a real-time basis. Not just this, auditors can also integrate analytics, automation and machine-learning capabilities with the Blockchain technology to create real-time alerts about fraudulent transactions.
- Allows senior management to focus on other strategic areas: Real-time reporting on Blockchain will release the Chief Financial Officer (CFO) and other resources involved in the process to focus on other core areas. People at the leadership level can spare themselves of the mundane work such as data interpretation and pattern of transactions and channelize their energies on more creative and strategic aspects. More involvement towards core areas would ensure the faster realisation of business goals.
New roles for auditors in Blockchain ecosystem
Blockchain ecosystem not only has the power to transform the existing audit process but also to create new roles for auditors in the future. Some of these will be:
- Checking Smart Contracts: Blockchain is based on smart contracts which are used for automating business processes. However, it needs to be ascertained that these contracts are used with proper business logic, and auditors could be aptly involved in this role. Without a due-diligence at each stage, it will be difficult for Blockchain users to track errors and anomalies.
- Testing Blockchain system: Each new Blockchain platform that will be subscribed to or used will require testing of the application in terms of stability and execution. Now users would want to involve auditors as a third-party for conducting due-diligence.
- Vetting the legal and administrative aspects: A Blockchain application has to comply with certain legal, ethical and administrative standards. It would be immensely beneficial if an independent third-party, such as an auditor, vets its functionalities. An auditor could assume the role of a Central Administrator for Blockchain in future. If a participant of the platform performs this role, there could be chances of biased judgement. This could impact the trust factor within other consortium Blockchain-participants and the very purpose of the Blockchain system will be diluted.
Challenges in the adoption of Blockchain for Auditing
Auditing and assurance is a significant role for Chartered Accountants and an even more significant task for companies. It is governed by a set of a regulatory framework and statutory rules. Adoption of Blockchain technology could cause notable changes in the existing framework and could meet opposition from regulatory authorities. Therefore, Auditing companies need to work with regulators to ensure that this new technology works in tandem with the existing rules.
Blockchain technology will increase the responsibility of Auditors
It is being believed that Blockchain will render auditing redundant, but it is far from the truth. On the contrary, Blockchain is all set to increase the responsibility of auditors. Certain tasks will surely be eliminated in the process and the role of an auditor will evolve in the Blockchain ecosystem. For the tasks that will be automated, auditors will still have to use their professional judgement and scrutinise the estimates. They will also need to evaluate internal controls to test the authenticity of the data. In a nutshell, Blockchain will change the way auditors operate, it will enhance the quality of the audit, but the objective of an auditor’s job will continue to be relevant.