The Impact of Blockchain in Account Audit and Tracking
Blockchain technology is fast becoming a game-changer in a considerable number of industries. In health care, it is improving access to and protecting electronic health records and ensuring easier retrievals, reduction of costs, increasing access to health care, and promoting a patient’s control over their data. In Supply chain management, it enables faster and cost-effective product deliveries and accurate product traceability.
In other words, the importance of blockchain technology transcends the creation and use of cryptocurrencies into more industrial applications. In fact, one industry mainly hanging precariously on the tiny thread of its past processes that’s about to be cut into pieces by the benefits of blockchain integration is the accounting industry, generally, and more specifically, audit and tracking departments.
Accounting Auditing and Tracking: What they are?
Before now, when one comes across the terms Accounting audit and tracking, what comes to mind is a bunch of paper documents with transaction records reconciled to identify the general performance of an organization’s books, among other specific uses. However, presently, account audit and tracking bring to mind the pictures of a bunch of computer files, records and documents scattered across single or multiple databases that connect some sort of chronological movement of how transactions or funds have travelled over time (their origins and destinations), the services for which they serve as payments and how they are stored or used.
This linear trail of transactions and funds as they are executed and moved from one place or organization to another creates what account auditors call the ‘Audit Trail’.
The audit trail, which is the chronological footprints left in the event of financial activities, is used to investigate how source documents are converted into account entries and included in the financial statements of organizations.
It is often used to track and eliminate discrepancies and track transactions through single or multiple accounting systems and discover anomalies. Auditors can often use the money trail in reverse to take entries in financial records and uncover the origin of such transactions.
How perfectly the blockchain’s nature fits the needs of account audit and tracking.
Generally, account audits and tracking deal with data and require accurate and comprehensive data to be carried out. These data might be standard or non-standard journal entries which might include but are not limited to sales data, purchases, cash receipts, bad debt expenses, payroll and depreciation expenses, periodic accounting and business combination or asset impairments. These different data are recorded in an organization’s general ledger, which is a combination of standard and non-standard journal entries. The general ledger provides the tool with which account auditors perform their forensic magic. It provides the comprehensive data that creates the audit trail and gives the holistic picture required for tracking and account audits.
In a statement by the US security and exchanges commission, out of 36 cases from 1987 to 1997, auditors failed to gather sufficient audit data to make for an objective investigation and ruling 80 per cent of the time, while 44 per cent of its cases had been severely affected by the faulty non-routine design of audit programs. These problems, among others, constitute some of the biggest challenges to professional account audit and tracking. Fortunately, the blockchain manages the problem of lack of data and would indeed promote the standardization of audit processes through blockchain-based applications and smart contracts.
The blockchain is similar to an organization’s ledger, only more sophisticated in functionalities and applications. The blockchain provides a distributed, publicly accessible and decentralized financial ledger for every transaction on its network.
It is Immutable, meaning that its content cannot be changed; it eliminates the need for the trust since all users of the blockchain network have access to its data and collectively validates its entries. The blockchain logs in the time of the transaction, the amount, the wallet addresses involved in the transactions, the origins and destinations, the fees paid, and more, making it the perfect ledger for gathering accurate, verifiable and trusted financial data.
Secondly, the blockchain is Decentralized, meaning that there is no centralized control of the data and services on the network. User ‘A’ has as much access as user ‘B’, and the information on the network is accessible to all users, making it a fragmented yet chronologically connected block of transaction data available to all and yet not controlled by any. This design provides the needed data integrity and trust required for account audit and tracking.
Besides the anonymity of the blockchain, doesn’t its immutability, decentralized nature, speed and accuracy, flexible accessibility and security make you feel like the technology was designed for accountants? At Bilic, we think the technology was modelled after the accountant’s ledger to provide a decentralized and trustless, constantly updated and immutable account book that documents all transactions on its network to move from the traditional centralized finance and control to a decentralized and fragmented design.
Impact of Blockchain Integration into Account Audit ad Tracking
While there is scarce data on blockchain use cases within the accounting audit and tracking sector, its use in the financial sector has grown in leaps and bounds. From its general use in finance, we can glean what the technology would do for account auditing and tracking.
With the blockchain, sensitive financial activities are protected from third parties. Its speed allows for fast international financial transactions, reducing intermediaries and making it very easy to construct clean and simplified audit trails.
In 2018 Santander One Pay FX was created using Ripple’s xCurrent. The creation enabled users to make international transactions that reflected almost immediately on the receiver’s end compared to the traditional designs for international money transfers that existed then. One of the novel features of One Pay FX was its elimination of intermediaries. This accounted for its lightning speed. Without intermediaries, the audit trail for transactions on the One Pay FX ledger would create some sort of closed-end to end movement without intermediate rerouting, which might create complex trails.
One of the most significant functions of the blockchain is smart contracts (a set of codes or instructions designed to automatically carry out a certain set of tasks that meet the conditions of the contract and agreements coded into it). These smart contracts leverage the speed and independence of the blockchain. In other words, they self-execute, requiring no intermediaries at lightning speed.
Presently, the cryptocurrency industry is hooked on lending and borrowing, staking and farming services of decentralized finance. DeFi uses smart contracts to automate these processes and almost completely eliminates errors.
Auditors can create smart contracts to automate certain processes which initially require manual human involvement. Hence, increasing the speed, accuracy and efficiency of the process. With this, auditing time and cost could be significantly reduced. More so, a large part of the process could be automated, especially where organizations have their blockchain and all required data are housed on it.
According to the McKinsey report, the blockchain technology has the capacity for immediate reconciliation and settlement of financial discrepancies, enhanced audit trail and generally improved operational effectiveness of financial markets.
Constructing an audit trail requires connecting the dots provided by available data. An audit trail might be challenging to create where data is unavailable completely. The blockchain eliminates the problem of the lack of transaction data. Each transaction on the blockchain is connected to the one before and the one after it to create an immutable chronological link of transactions in time.
In other words, the blockchain automatically creates a transaction audit trail as transactions are validated and added to the network, making the auditor’s work significantly easier. More so, blockchain integration is more than likely to increase account audit efficiency and improve the detection of fraud and its apprehension.
In addition, the blockchain integrates the anti-money laundering and Know Your Customer (KYC) designs which makes it possible to ensure compliance with stated policies, monitor suspicious transactions and track transactions from the origins to their cash out terminals.
Axoni, a US company created by Greg and Jeff Schvey in 2013, launched its distributed ledger for equity swap in 2020. This blockchain technology enables flexible integration of equity and much smoother transactions.
While existing transaction data are created by employees and verified by auditors, there is room for manipulation. On the other hand, the blockchain is an immutable ledger immune to alteration and manipulation. This means that when one’s records are entered on the blockchain, changing such records on one’s system would require the actor to do the same on all other thousands and millions of computer nodes connected to the network, making it impossible to alter data on the blockchain. The integrity of the blockchain is unblemished because its content can never be changed after they have been validated and included in the chain of transaction data on the network. Neither can data on the network be deleted. Therefore, the blockchain will provide a pool of verifiable and trusted data for smoother financial audits and tracking, just like Axoni.
The ability of the blockchain to keep track of data is priceless, so much that openIDL, built on the IBM blockchain network is automating insurance services on the IBM blockchain. With its technology, openIDL can regulate reporting and rearrangement of regulatory requirements.
Similar to what OpenIDL is doing in the insurance industry, the integration of blockchain to account auditing and tracking is bound to open up opportunities for the design of accounting audit technologies on the blockchain to fill in the existing gap. This would create a standardized audit process that would also increase the transparency and accountability of the process and deal with the challenges created by the non-routine design of traditional auditing processes.
One company already exploring this fertile and ready ground is Deloitte. The company recently launched COINIA, a blockchain compatible technology designed to assist in the efficient analysis of different digital assets, verification of asset ownership and retrieval of asset balances at specific block heights and dates. The tool is compatible with blockchain networks such as Bitcoin Cash, Ethereum and Ethereum Classic, Bitcoin, Litecoin, Ripple, and Dash.
In summary, the blockchain will continue to disrupt and transform processes within different industries because of its speed, accuracy, integrity and cost-effectiveness. Departments with ineffective, slow and complex designs like the accounting industry’s account audit and tracking department are more than likely to be transformed by the blockchain technology. However, while account audit and tracking are yet to experience unprecedented transformation through blockchain integration, the global financial system has been shaken by it. The effects of that shaking would trickle down to account audit and tracking without a shadow of a doubt.
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