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Blockchain and its potential impact on the audit profession

New challenges and opportunities for audit and assurance

While traditional audit and assurance services will remain essential, blockchain business applications and new accounting technology are likely to have a significant impact on the way auditors execute engagements.

With more companies exploring blockchain business opportunities—including the blockchain audit trail—many accounting firms have undertaken blockchain initiatives to further understand the implications of this important and versatile technology. Audit and assurance professionals should stay abreast of developments and continue to learn more about blockchain business applications, blockchain in accounting, and blockchain audit technology.

In December 2017, Chartered Professional Accountants of Canada (CPA Canada), the Association of International Certified Professional Accountants (the Association), and the University of Waterloo Centre for Information Integrity and Information System Assurance (UWCISA) published "Audit & Assurance Alert—Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession," a paper focused on explaining blockchain technology and how it could potentially impact the financial statement audit, introduce possible new assurance services, and create new roles for the Certified Public Accountant (CPA) auditor in the blockchain ecosystem.

Some highlights:

  • Blockchain technology has the potential to impact all recordkeeping processes, including the way transactions are initiated, processed, authorized, recorded, and reported.
  • Changes in business models and business processes may impact back-office activities such as financial reporting and tax preparation.
  • Both the role and skill sets of CPA auditors may change as new blockchain-based techniques and procedures emerge. For example, methods for obtaining sufficient appropriate audit evidence will need to consider both traditional stand-alone general ledgers as well as blockchain ledgers. Additionally, there is potential for greater standardization and transparency in reporting and accounting, which could enable more efficient data extraction and analysis.

Independent auditors will need to understand blockchain technology as it is implemented at client sites, whether clients are pursuing blockchain business opportunities, implementing blockchain business applications, or applying blockchain in accounting.

To read the full paper, download the PDF, "Audit & Assurance Alert—Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession."


An example of a bitcoin transaction which is a public/permissionless blockchain: peer-to-peer payment over the Bitcoin network

A blockchain is a digital ledger created to capture transactions conducted among various parties in a network. It is a peer-to-peer, internet-based distributed ledger which includes all transactions since its creation. All participants (i.e., individuals or businesses) using the shared database are "nodes" connected to the blockchain, each maintaining an identical copy of the ledger. Every entry into a blockchain is a transaction that represents an exchange of value between participants (i.e., a digital asset that represents rights, obligations or ownership). In practice, many different types of blockchain are being developed and tested. However, most blockchains follow this general framework and approach. A properly functioning blockchain is immutable despite lacking a central administrator. As a near real-time and distributed digital ledger, a blockchain has several unique and valuable characteristics that, over time, could transform a wide range of industries:

Near real-time settlement—A blockchain enables the near real-time settlement of transactions, thus reducing the risk of non-payment by one party to the transaction.

Distributed ledger—The peer-to-peer distributed network contains a public history of transactions. A blockchain is distributed and highly available and retains a secure record of proof that the transaction occurred.

Irreversibility—A blockchain contains a verifiable record of every single transaction ever made on that blockchain.This prevents double spending of the item tracked by the blockchain.

Censorship resistant—The economic rules built into a blockchain model provide monetary incentives for the independent participants to continue validating new blocks. This means a blockchain continues to grow without an “owner.” It is also costly to censor.

Some publications have hinted that blockchain technology might eliminate the need for a financial statement audit by a CPA auditor altogether. If all transactions are captured in an immutable blockchain, then what is left for a CPA auditor to audit?

While verifying the occurrence of a transaction is a building block in a financial statement audit, it is just one of the important aspects. An audit involves an assessment that recorded transactions are supported by evidence that is relevant, reliable, objective, accurate, and verifiable. 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 (e.g., that an asset recorded on the blockchain has transferred from a seller to a buyer). For example, in a bitcoin transaction for a product, the transfer of bitcoin is recorded on the blockchain. However, the auditor may or may not be able to determine the product that was delivered by solely evaluating information on the Bitcoin blockchain. Therefore, recording a transaction in a blockchain may or may not provide sufficient appropriate audit evidence related to the nature of the transaction. In other words, a transaction recorded in a blockchain may still be:

  • Unauthorized, fraudulent, or illegal
  • Executed between related parties
  • Linked to a side agreement that is "off-chain"
  • Incorrectly classified in the financial statements

Furthermore, 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.

Widespread blockchain adoption may enable central locations to obtain audit data, and CPA auditors may develop procedures to obtain audit evidence directly from blockchains. However, even for such transactions, the CPA auditor needs to consider the risk that the information is inaccurate due to error or fraud. This will present new challenges because a blockchain likely would not be controlled by the entity being audited. The CPA auditor will need to extract the data from the blockchain and also consider whether it is reliable. This process may include considering general information technology controls (GITCs) related to the blockchain environment. It also may require the CPA auditor to understand and assess the reliability of the consensus protocol for the specific blockchain. This assessment may need to include consideration of whether the protocol could be manipulated.

As more and more organizations explore the use of private or public blockchains, CPA auditors need to be aware of the potential impact this may have on their audits as a new source of information for the financial statements. They will also need to evaluate management’s accounting policies for digital assets and liabilities, which are currently not directly addressed in international financial reporting standards or in US generally accepted accounting principles. They will need to consider how to tailor audit procedures to take advantage of blockchain benefits as well as address incremental risks.

There are still many unknowns with respect to how blockchain will impact the audit and assurance profession, including the speed with which it will do so. Blockchain is already impacting CPA auditors of those organizations using blockchain to record transactions and the rate of adoption is expected to continue to increase. However, in the immediate future, blockchain technology will not replace financial reporting and financial statement auditing. Financial statements reflect management assertions, including estimates, many of which cannot be easily summarized or calculated in a blockchain.

Furthermore, the process of an independent audit of financial statements enhances the trust that is crucial for the effective functioning of the capital markets system. Any erosion of this trust may damage an entity’s reputation, stock price and shareholder value, and can result in fines, penalties, or loss of assets. Users of financial statements expect CPA auditors to perform an independent audit of the financial statements using their professional skepticism. CPA auditors conclude whether they have obtained reasonable assurance that the financial statements of an entity, taken as a whole, are free from material misstatement, whether due to fraud or error. A blockchain is unlikely to replace these judgments by a financial statement auditor.

That said, CPA auditors need to monitor developments in blockchain technology—it will impact clients’ information technology systems. CPA auditors will need to be conversant with the basics of blockchain technology and work with experts to audit the complex technical risks associated with blockchain.

In addition, CPA auditors should be aware of opportunities to leverage their clients' adoption of blockchain technology to improve data gathering during the audit. They should also consider whether blockchain technology will allow them to create automated audit routines. The auditing profession must embrace and "lean in" to the opportunities and challenges from widespread blockchain adoption. CPA auditors and assurance providers are encouraged to monitor developments in blockchain technology because they have an opportunity to evolve, learn, and capitalize on their already proven ability to adapt to the needs of a rapidly changing business world.​

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