Ask the expert: Technology

Blockchain goes beyond disruption

Q  What are the implications of blockchain on financial reporting and internal controls?

A  New technologies always disrupt financial reporting and internal control systems. But blockchain is different. It’s bigger. The transformation it sparks across many industries may have far-reaching implications. The resulting move toward digital assets and blockchain technology may affect everything from the products and services organizations provide and how they provide them to the way they manage internal recordkeeping systems and handle the processing and storing of transactions. Financial reporting risks presented by blockchain may go beyond those presented by other new technologies. Blockchain’s power comes from multiple parties — sometimes competitors — working together in a consortium to support and leverage a blockchain platform and share benefits. That shared benefit comes with shared risks. Each participant should consider participant responsibilities, operating and governance models, transaction rules, security protocols, incentives, penalties, and processes for joining and leaving the consortium. Internal controls serve to mitigate risks and provide assurances on the inputs, processing, and outputs of any system. Today’s controls are typically managed within an organization or by a service organization. Blockchain may fundamentally alter that, making internal controls management something that happens across organizations, with shared data and within shared systems of responsibility.

Q  Will blockchain replace financial statement auditors?

A  Blockchain is transformational in terms of recording value transfers and replacing antiquated and inefficient systems of multiple writers of the same data. But financial data goes beyond the ledger. Blockchain can’t make judgments. It’s not capable of deeper thought. It will not replace the need for auditors or reduce the important role auditors play in the capital markets. But it will certainly have impacts on the profession. Blockchain can increase the need to audit complex IT controls and include specialists in cryptography, analytics, and data science in the audit; present new forms of audit evidence; and drive improvements in audit tools, analytics, and automation.

Q  How can auditors prepare for blockchain’s disruption without specific auditing and accounting standards?

A  Auditors will need to understand blockchain and its major implications. Several professional bodies are focused on this topic. They’re exploring how to apply current principles-based standards in a new environment that features shared processing and completely new classes of assets. We all need to work together as a profession to think through the challenges and develop best practices and expertise for the capital markets of tomorrow.

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