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Mar 23, 2020

Blockchain and the Future of Audit and Attestation

Sean Stein Smith, CPA, DBABy Sean Stein Smith, CPA, DBA


Blockchain continues to develop, mature, and alter nearly every aspect of the business landscape. Accounting is certainly not immune to these changes. Cryptocurrencies by themselves already present a number of issues and headaches for CPAs from a tax position, but that is only a partial perspective. As more blockchains are implemented in an increasing number of organizations and economic sectors, it is only matter of time until audits and other attestation engagements will be radically affected.

Bitcoin and Digital CurrenciesActually, this impact is already underway: blockchain is being refined, augmented, and improved to serve as the basis for an increase in the auditability of information. Permissioned blockchains may have slightly different labels depending on which resource is consulted, but the greater transparency and levels of access that are enabled by a permissioned blockchain seem to represent an appropriate entry point for audit and attestation practitioners. There is no need for every auditor to become a coding or programming expert, but being able to understand the technology and its applications are sensible starting points.

There appear to be several definitive changes and shifts already developing in the accounting space. CPA practitioners, whether employed as auditors or not, need to be aware of how this technology will change the audit itself. Every CPA, including those employed in industry, interact and engage with the audit process, so all should be aware of how blockchain continues to develop and send ripples through the accounting sector.

Cybersecurity and technology translator – This might seem like an unusual place to start a conversation for auditors, but it makes more sense than initially apparent. Blockchain is redefining not only how data is stored, but also how that information is communicated back and forth between different technology platforms. Such a transition will impact the audit for sure, but it will also change how clients handle and transmit information internally and externally. Understanding these new interactions, and the role created for attestation professionals as a result, is an opportunity to both develop new skills and play a strategic role in explaining these changes to clients.

Smart contract arbiter – The idea of a smart contract (programmable and executable computer code embedded in the coding of a blockchain) has the potential to automate or at least streamline many responsibilities currently facilitated by human attorneys or other individuals. No contract – a traditional one or a smart one – is without problems, and these problems will invariably bubble up as business conditions change, organizations alter their structure and direction, and smart contracts become more mainstream. The automation of contractual activities will improve efficiency, but that does not mean the importance of internal controls will dissipate. To the contrary: with more automation comes the increased risk of errors and omissions occurring, and audit professionals are well positioned to both build appropriate controls and mediate disputes.

Consortium blockchain auditor – A consortium operating model will allow the network, permissions, and other operational considerations to be governed by committee. This differs from a permissionless blockchain, which has no barriers to entry or restrictions on who may join, and a permissioned blockchain, which may simply place too much control in the hands of a single entity. The consortium approach may represent an improvement over previous iterations, but it also raises the questions associated with shared governance. Simply put, getting a group to agree on things is exceedingly difficult in nature; and this is where auditors and attestation professionals can play an important role. Being mindful not to compromise independence, there is a growing need for controls and appropriate safeguards to develop and maintain said controls over the network and network members.

It is impossible to forecast how the greater integration of blockchain into the operations of certain organizations will play out, but there are some trends and topics coming to the surface. Audit and other attestation engagements will, and already are, changing in response to blockchain and cryptoassets; this is not a fad but rather a fundamental sea change in how attestation professionals interact with both colleagues and clients. Although the specific roles and tasks will change, the goal and purpose of attestation will not. Clients, internal or external in nature, are going to look for advice and guidance from audit and attestation professionals, and blockchain serves as a logical place from which a more strategic and proactive role can emerge. If 2019 was the year institutional adoption accelerated, 2020 is shaping up to be the year where audit and attestation engagements might start catching up.


Sean Stein Smith, CPA, DBA, is assistant professor in the department of business and economics at Lehman College, a senior college of the City University of New York in Bronx, N.Y. He can be reached at sean.steinsmith@lehman.cuny.edu.


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Disclaimer
Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.