Blockchain Technology in Auditing
Blockchain solutions are gradually infiltrating finance, supply chain, and healthcare fields, ensuring transactions' unalterable, transparent, and secure representation (Bonyuet, 2020). Therefore, for the audit profession, blockchain provides a unique chance to improve and strengthen data accuracy, minimize fraud, and optimize different audit stages. With companies shifting to blockchain systems, internal auditors are challenged to identify and validate blockchain transactions. According to Charles (2019), blockchain has the potential to change the notion of auditing and provide better reliability in terms of financial and other reports since no one can alter the entries in the list.
How Blockchain Can Revolutionize Auditing
The help of blockchain technology can also revolutionize auditing as it prevents alteration of the transactions and makes them transparent and safe. Each transaction recorded in a blockchain cannot be reversed or even erased in any way, thus providing a permanent record. It has been established that immutability makes it easy for auditors to work with any data for review, giving confidence that received entries will not be altered. According to Silva & Marques (2021), the principle of blockchain enhances the immunity to fraud since no single individual controls the whole record. This eliminates centralized control whereby many parties verify transactions, and thus, it is difficult for the wrong people to alter records.
In auditors' cases, this change assists them in the action verification. Auditors can receive the same ledger with all the transaction information indicated instead of performing time-consuming manual checks or working with several unconnected sources of information. Since operations conducted on the Blockchain are transparent, they can include real-time verification, thus making processes faster and minimizing the possibility of an error (George, 2021). This technology also creates more trust from the participants as everybody has equal access to the information.
Improving Data Integrity and Reducing Fraud
Compared to conventional systems, the decentralized nature of the Blockchain makes it easier for everyone with ill intentions to tamper with or modify data (Silva & Marques, 2021). Every node in the blockchain network stores a copy of a transaction, and for anyone to change that transaction, they need the consensus of more than half the participants. This feature goes a long way in minimizing fraud and promotes data accuracy and integrity.
Charles (2019) emphasizes that internal auditors should evaluate the governance and control structures related to blockchain systems. There are no risks of security breaches when using blockchain technology, but they do exist. An auditor must assess the measures implemented in the organization's systems to prevent unlawful access and check the conformity to the legislation on using blockchain (Bonyuet, 2020). Also, auditors need to evaluate the efficiency of smart contracts, which are digital contracts that contain the conditions of the contract coded and self-executed. Smart contracts can optimize compliance processes while minimizing the predisposition to human error; nevertheless, their effectiveness has to be checked and validated before implementation.
The Role of Internal Audit in Blockchain Verification
As blockchain technology is finding its way into business processes, internal auditors must adapt to how to audit blockchain-based systems. According to Charles (2019), to evaluate information in the blockchain clients, auditors must be conversant with how blockchain functions, the option consensus models, for instance, the Proof of Work or Proof of Stake, and the cryptographic hashes that secure and underpin the transaction. Understanding these technicalities is essential for the auditors to determine the extent of security and reliability of the underlying blockchain solutions.
Apart from understanding the technicalities, internal auditors must be aware of the framework and controls surrounding blockchain systems. Auditors should consider whether these structures are appropriate in the context of the organization’s risk management framework and broader business strategies (Tušek & Halar, 2021). This will help avoid situations where blockchain implementations are technically feasible yet not a good fit for the organization's level of risk tolerance.
Blockchain experts agree that internal auditors have a critical role in confirming the validity and consistency of transactions registered on the blockchain. Some of the tasks of an auditor involve evaluating the data for completeness, signifying that all transactions passing through the system have been authorized, and confirming that the distributed ledger is immutable. Auditors must also assess the blockchain operation and compliance with the set policies and standard procedures as dictated by the leading practices in the market and the regulation. This way, internal auditors protect blockchain systems' accuracy, security, and legal compliance.
Challenges and Future Directions
There are numerous potential benefits that Blockchain technology and implementations bring along with it, but auditing Blockchain-based systems is a challenging prospect. According to Charles (2019), one of the most significant obstacles concerning blockchain is the delicate nature of the technology. Therefore, audio tors must have specific technical knowledge of how blockchain works, its distributed characteristics, the use of cropland topography, and consensus mechanisms to assess blockchain systems in organizations (George, 2021). This requirement stresses that there must be experience gained through training since the application of blockchain technology is a complex affair that many auditors have not fully grasped.
Another significant issue is making blockchain systems scalable and resilient enough to meet future demands. However, based on the number of transactions to be recorded in the blockchain, the blockchain's performance and security can be tested. Blockchain platforms are increasingly arising, and auditors must determine if these platforms will remain efficient, secure, and effective when dealing with high volumes of transactions (Tušek & Halar, 2021). This includes looking at the structure and how well the system will work and the interrogation of how the system will work under stress, significantly when the business expands.
Further, auditors need to assess the adequacy of the contingency measures in case of a blockchain breakdown or a cyber threat. It is now necessary to note that flaws like 51% attacks or smart contract hacking can occur despite the security of blockchain systems. This means that auditors should always check that the organizations have the proper backup and disaster recovery plans to deal with the failure (Charles, 2019). In the future, auditors must be aware of the further development of the blockchain and its implications for effectively monitoring organizations and spotting fraud in the modern world.
Conclusion
Blockchain technology is expected to revolutionize the auditing profession due to its capability to offer solid records that increase the credibility of the information, decrease fraudulent activities, and simplify the verification process. However, the effective functioning of the blockchain systems can only be managed with attentive and constant monitoring by internal auditors. Several studies highlight the need for auditors to acquire new competencies and realize the essence of blockchain technology in organizations while avoiding misuse. As blockchain is gradually impacting the business world, internal auditors shall adjust and primarily focus on the accuracy, security, and compliance of blockchain-based operations.
References
Bonyuet, D. (2020). Overview and impact of blockchain on auditing. International Journal of Digital Accounting Research, 20, 31-43. https://www.uhu.es/ijdar/10.4192/1577-8517-v20_2.pdf
Charles, S. (2019). Charles Financial Strategies LLC. Charles Financial Strategies LLC. http://charlesfs.com
George, K., & Patatoukas, P. N. (2021). The blockchain evolution and revolution of accounting. In Information for Efficient Decision Making: Big Data, Blockchain and Relevance (pp. 157-172). https://doi.org/10.1142/9789811220470_0006
Silva, R., Inacio, H., & Marques, R. P. (2021). Effective and potential implications of blockchain technology for auditing. In Trends and Applications in Information Systems and Technologies: Volume 4 9 (pp. 435-451). Springer International Publishing. https://link.springer.com/chapter/10.1007/978-3-030-72654-6_42
Tušek, B., Ježovita, A., & Halar, P. (2021). The importance and differences of analytical procedures’ application for auditing blockchain technology between external and internal auditors in Croatia. Economic research-Ekonomska istraživanja, 34(1), 1385-1408. https://hrcak.srce.hr/file/434633