The auditing profession is slowly but surely moving into a technological era with the use of data analytics, artificial intelligence (AI), data mining and now even blockchain technology. Blockchain technology does not only relate to cryptocurrencies, but has a much wider potential to disrupt various industries we operate in, including the auditing profession.
There has been an emphasis on this technology by various universities and the South African Institute of Chartered Accountants that are responsible for shaping the minds of future auditors and Chartered Accountants and quite rightly so as it is expected that the technology will have the most significant impact on the financial sector as opposed to other industries.
There are some that believe that the blockchain technology will eliminate the need for an auditor of financial statements because of the technology’s transparency and the fact that the transactions on the blockchain are captures in a ledger that cannot be altered. The truth, however, is that blockchain technology will not replace the auditor but will become tools that the auditor will be able to utilise in auditing more efficiently and enhance the reliance of the information they are issuing an opinion on. The auditor will have to remain agile in ensuring that their audit approach can be adapted to mitigate any possible risks but also to capitalise on the possible efficiencies the technology might offer.
Different assertions are used for the auditing of balance sheet items and income statement transitions such as occurrence, accuracy, valuation and existence for example. The use of blockchain technology will definitely add to the efficiency of testing certain assertions such as occurrence, completeness, accuracy and cut-off from an income statement perspective but from a balance sheet perspective, it might be a little bit more difficult due to the last mile problem the technology brings about. The reason for this difficulty is that the technology will not be able to provide any assurance of whether there is possible impairment of an item of property, plant and equipment or if the inventory on the warehouse floor actually exist, human intervention is therefore still necessary.
The blockchain technology also gave rise smart contracts that are essentially an add-on feature to the blockchain. Smart contracts are contracts housed on a blockchain that are included in the code of the blockchain. An example of this is say Company A agrees to pay Company B 5% commission if Company B sells more than 1,000 widgets, 7.5% if Company B sells more than 2,000 widgets, etc. The smart contract could then obtain information from the sales ledger or blockchain of Company B and reward Company B on the number of sales as per the electronic agreement. There is also the possibility of two parties entering into a sale of property whereby a smart contract is used instead of a lawyer. As soon as the payment is made and recorded on the blockchain the title is released or amended to show that the rights to the title is now with the new owner. Clearly blockchain as a whole aimed to resolve the issue of trust on the internet where two parties transact with each other without knowing anything about the other party. Auditors might, therefore, be required to audit these smart contracts to ensure that the code reflects the intent of the agreement and that the accounting treatment reflects the terms of the smart contract.
The application of blockchain technology including smart contracts will definitely bring new challenges and exciting opportunities to the profession. It is therefore crucial that current and aspiring Chartered Accountants broaden their skillset and knowledge to gear themselves for the evolution of blockchain technology in the business world, the auditing profession and individual businesses’ ecosystems.
Author: Wiehann Olivier, Partner, Forvis Mazars in South Africa
