BLOCKCHAIN AND THE FUTURE OF AUDIT PROFESSION

Ermira Mazziotta Muhlenberg College

ABSTRACT

Blockchain, originally used for Bitcoin trading, is one of the most important and innovative technologies developed in the recent years (Jun Dai, Miklos A. Vasarhelyi 2017). This technology is considered to be as important as internet and it could fundamentally change the nature of auditing by revolutionizing supply chains, payments and revenue streams through the way it documents and reconciles complex and disparate information from multiple sources. A blockchain is effectively a type of a decentralized database known as a distributed ledger. Unlike traditional databases, blockchains have no sole administrators. As each transaction is recorded it is time-stamped in real time onto the “blockâ€. Each block is linked to the previous block, and each user has a copy of that block in his or her own device. That process creates an audit trail (Hoelscher, Internal Auditor, February 2018). A technology that increases transparency, improves audit trail and gives real time access to transactions is good news for auditing profession. This paper will focus on both the benefits and the pitfalls related to the blockchain technology by reviewing recent research related to the blockchain. This paper will also address the impact that blockchain technology will have in the future of audit profession.

 

INTRODUCTION

Blockchain technology was introduced and initiated by mysterious group or person named only by the alias Satoshi Nakamoto (2008). He used a chain of blocks to create a decentralized, publicly available, and cryptographically secure digital currency system. The system, named Bitcoin, enables peer-to-peer digital currency trading. The Bitcoin blockchain can be viewed as a new type of accounting database that records the transactions of the digital currency into blocks. The blocks are arranged in linear chronological order and shared to a network (Fanning and Centers 2016; Peters and Panayi 2016; Swan 2015a; Yermack 2017). The main characteristics of blockchain are: (1) decentralization, (2) strong authentication, and (3) tamper-resistance. The operation and management of the Bitcoin system are designed to be decentralized. This means that all nodes in the system have access to the entire list of transactions. Such access allows nodes to both verify and publish new transaction records onto blocks, which are then periodically added to the end of the main blockchain with a time stamp (Nakamoto 2008). The system is also able to verify the identity of every payer and payee involved based on a public-key cryptography system (Diffie 1988). It also examines whether the payer possesses enough money for the transaction to occur. Moreover, the process of creating a block on the chain is designed to require costly computational resources. This is to ensure the integrity and irreversibility of published transactions, and makes it almost impossible for a single or a small group of malicious parties to tamper with any blockchain records (Jun Dai, Miklos A. Vasarhelyi 2017). According to (Kiviat 2015)  blockchain is a “trustless†technology. “Trustlessâ€Â  means –for the first time in history—exchanges for value over a computer network can be verified, monitored, and enforced without the presence of a trusted third party or central institution. Because the blockchain is an authentication and  verification technology, it can enable more efficient title transfers and ownership verification. Because it is programmable, it can enable conditional “smart†contracts. Simply, blockchain technology has broad implications for how we transact, and the potential for innovation is hard to overstate.

 

Ermira Mazziotta  is an Assistant  Professor of Accounting at Muhlenberg College.   Her research interests include accounting education, conversion to international accounting standards, auditing, fraud and internal controls.