Imagine for a moment that your contracts enforced their own clauses. If you think the question is hypothetical, it might be time to study up on blockchain.
In its simplest terms, blockchain enables two or more people, businesses or computers — which may or may not know each other — to exchange value in digital environments without an intermediary, such as a bank, intervening to validate and protect the transaction.
Blockchain solutions are only in their early stages, but their defining characteristics show clear promise for value generation. Imagine all the business deals your organization is unable to conduct today because you don’t know who is on the other end of the transaction and can’t be sure they own the assets they want to trade. Blockchains remove all that uncertainty. They authenticate users, validate transactions and record that information to a digital ledger in a way that can’t be corrupted or changed after the fact.
A blockchain ledger would provide an assurance baseline that eliminates the need for traditional auditing entirely
“A blockchain-based ledger lays out the entire history of related transactions, updated in real-time and visible to all parties involved — creating a clear, auditable record that is virtually impossible to falsify or destroy, promising to radically improve the fight against challenges like fraud and money laundering,” says Malcolm J. Murray, Fellow and VP, Gartner.
It’s not all upside
Standardization could also allow auditors to verify data behind financial statements automatically. This could significantly reduce the amount of time necessary to audit such statements, enabling auditors to spend more time on activities that add greater value to the organization. If blockchain was fully implemented, it would render traditional, point-in-time forensic retrospective analysis unnecessary.
But a blockchain-based world would also create new requirements for audit — and new risks. A blockchain ledger would provide an assurance baseline that eliminates the need for traditional auditing entirely as blockchains, by definition, create up-to-date immutable, historical records. But audit will need the skills and capabilities to review blockchains as they are created.
Risk will not be eliminated, just transposed. Audit leaders will need to understand the new risks involved in a blockchain-empowered organization, including regulatory, cyber and algorithmic risk.
The future of audit in a world of realized blockchains, though still a ways away, will focus more on the automation of controls and real-time auditing as opposed to reverse-looking audits.
Know the emerging use cases
Just because blockchain’s promise is unlikely to be fully realized in the short term doesn’t mean assurance leaders can take a wait-and-see approach.
Gartner expects to see fully realized blockchain-complete solutions starting around 2025, and by 2030, enhanced blockchain solutions will incorporate the Internet of Things (IoT) and artificial intelligence. Early use cases are already most advanced in payments, with the financial services industry leading the way — experimenting with methods to facilitate peer-to-pay payments and significantly cut down on transaction settlement time.
Make sure to differentiate real blockchain projects from general database improvements projects
Blockchain-based applications will eventually extend well beyond financial services. Some of the most notable pilots are taking place across the supply chain. Some suppliers, for instance, are combining blockchain technology with IoT sensors to trace food shipments, while blockchain-inspired solutions are streamlining trade finance documentation, “know your customer” accreditation and other costly, redundant and fraud-riddled trade processes. There are also myriad emerging use cases for governments, including blockchain’s potential to authenticate voters.
Read more:The Reality of Blockchain
The impact on a udit leaders
Audit leaders need to consider these emerging use cases within the context of their particular organization.
Start by asking yourself three basic questions when you come across a use case that could affect your organization:
- Does this directly challenge our business model or value chain?
- Does it present an opportunity for the organization to reduce risk?
- Are there new risks that will be associated with the adoption of this solution?
As you consider the impact, also make sure to differentiate real blockchain projects from general database improvements projects, which are often disguised as blockchain projects.
Blockchains won’t replace financial reporting and financial statement auditing overnight, but audit leaders do need to be familiar with the characteristics of blockchain and its underlying technologies. Leaders should also work with stakeholders across their organization to ascertain the risks associated with the expanding range of use cases, and be prepared to acquire the necessary competencies to support the organization’s adoption of, and participation in, blockchain solutions.