Audit with Blockchain: challenges and opportunities

17 April 2020

Audits can be of any kind, from financial to security, and all of them involve digital data storage and query. They usually take a long time and they are fundamental to any subsequent activity, so there is no room for mistakes. An audit with Blockchain does not have such problems, but it is not free from challenges.

According to your situation, there could be more benefits than hindrances or vice versa. What we are doing in this post, is taking into account all the pros and cons of carrying out an audit with Blockchain.

Briefly: how Blockchain works

Imagine yourself doing domestic accounting. You want to keep track of everything, but you also want to be transparent about your finances with your partner and your kids. In order to achieve total control and transparency, you write every income and expenditure on a ledger, specifying the amount, the source, the date and time, and the author of the transaction. In this situation, you are the authority in control of the ledger, so every time a member of your family spends some money, they first have to check with you if there is enough of it, and they have to report every single penny spent. Furthermore, your family trusts you, but they really have no guarantee that you are not manipulating the ledger and spend (or allow someone to) more than you could.

Now, imagine everybody in the family has a copy of the ledger and transactions can be managed automatically: if you want to make an expense, everybody can verify you have enough funds and permit the transaction. If someone in the family tries to delete a record, you will all know, because they can only manipulate their copy, not yours.

Extend this to the whole world, extend this to any kind of digital data, not just money, and you are talking about Blockchain.

Obviously, there is more than that, but we just wanted to explain the basics with a practical example, but we could have mentioned that because the ledger is public, it must be encrypted.

Identities are verified with two cryptography keys: one public and one private.

Of course, the public key can be shared with others, while the private key must be kept for yourself only.

Audit with Blockchain: opportunities

If the example above worked, you know that Blockchain does not allow anyone to modify in any way stored data: anything that goes on the blockchain, stays on the blockchain. Records are permanent, and they could be used to verify certain transactions during an audit process.

Such verification would normally involve the client, as they would have to give their bank statements, and also third parties, who would have to confirm the transactions. This could take up to a few days, or even a month, because some transactions take up to 30 days to appear on the statement.

If the auditor had access to the public blockchain, the process would have taken minutes.

Transactions themselves require very little time to be completed and recorded, with the average transaction validated in about 10 minutes: almost real-time.

How can auditors make use of this quick process?

Well, they no longer need to run after deadlines: a classic audit must be performed at the end of a given period (usually a year), an audit with Blockchain can be performed any time.

Moreover, with transactions automatically recorded, there will be no chance for errors like missing transactions, duplicated ones, incorrect information about senders and receivers, and so on.

Not only the company under audit will be more transparent and trustworthy, but the auditor will be, too.

Audit with Blockchain: challenges

Although Blockchain is transparent, immutable, and secure, there are still some negative factors to weigh on the scale.

One of them is a direct consequence of Blockchain’s immutability: there is no way to reverse a transaction!

If someone transfers funds to the wrong account, there is no chance to fix it. The auditor must keep an eye on every movement, and it is not always easy.

In case something like that happens, there is no central authority to whom you can report it, and you will have to sort things out on your own.

A point of no return could be the loss of your private key: if it happens, there will be no way to access your account, and recovery procedures may not be so easy. Not to mention if it is stolen: your records might be compromised and the audit turns into a disaster.

Is a new audit process possible?

There are still some unanswered questions, but the ground is good. It might take some time for Blockchain to fully replace traditional audit processes, but the change will be radical.

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