Chain Bazaar Make it easier for the blockchain to land

Author丨Najoua Elommal,Riadh Manita

Picture丨From the Internet

Picture丨From the Internet

Editor's Note: The original report comes from Najoua Elommal, Riadh Manita, "Journal of Innovation Economy and Management". Due to the length of this article, we will divide it into three parts: upper, middle and lower. This article is the first part. It mainly introduces what the blockchain is, and what kind of changes the blockchain technology has brought to the auditing industry, and what views the previous researchers hold. Please contact the editor for Chinese reprint.

Summary

Summary

Blockchain technology is changing not only the way financial transactions and information are recorded, processed and stored, but also the way audit firms work. This article aims to explore how blockchain technology affects the auditing industry. This study conducted a qualitative study with a sample of 17 accountants. The results show that this technology can affect accounting firms on six key levels. Blockchain technology will give audit The teacher brings the following convenience:

(1) Save time and improve audit efficiency

(2) Support audits covering the entire sample instead of audits based on sampling techniques

(3) Focus the audit on internal control testing rather than transaction substantive testing

(4) Establish a continuous audit process

(5) Play a more strategic audit role

(6) Develop new consulting services

The reference to blockchain technology emphasizes the need for audit work to establish a clear and coherent system and new audit standards, enabling auditors to flexibly use this technology and strengthen audit work.

JEL code: M42

background

background

Blockchain technology, like other new digital technologies (robotics, big data, analytics, artificial intelligence, etc.), is changing not only the way companies do business, but also the way information is processed and communicated between different stakeholders . This technology originated from Crypto (mainly Bitcoin), and today is considered one of the most powerful new technologies after Internet technology.

Clearly, the audit industry would be transformed by such changes, and indeed, blockchain technology could fundamentally change the way audit firms work and the way they design and grow their businesses.

Blockchain technology can create potential opportunities for the audit industry to develop new services, as well as bring changes to existing services, which may be replaced in whole or in part by technical systems (Appelbaum et al., 2017).

Realizing the huge development potential of blockchain technology, audit firms invest more than $3 billion in this technology every year (Smith, 2018). For example, in 2017, Ernst & Young (EY) began to accept Bitcoin consulting services. As the first company to accept Bitcoin consulting services, it invested in the development of applications and services to promote blockchain technology in its application in business.

KPMG, in cooperation with its partner Microsoft, launched a new service based on blockchain technology to help companies implement business process optimization (KPMG, 2017). Deloitte created the first blockchain technology lab in 2016. PwC launched a digital asset service using blockchain technology in 2016.

As with any new technology, there are some challenges and opportunities presented by blockchain technology that auditors need to be aware of. Their expertise may be replaced by other companies working on new technologies. In fact, enterprises must enhance their flexibility and ability to integrate innovation in an uncertain environment, which will be the only way to remain competitive and meet future challenges. (Ayerbe et al., 2020; Dupont, 2019).

At the same time, blockchain technology involves IT risks, namely unauthorized access and threats to identity, which may also have an impact on traditional audit processes and business development. According to Alles (2015), the acceptance of advanced technologies and blockchain by audit clients will act as a catalyst for auditors to adopt these technologies.

Blockchain technology, combined with other digital technologies, can transform the audit process by modifying the way auditors access data, collect evidence, and analyze data (Rozario, Thomas, 2019). Auditors have no choice but to integrate these technologies, change their organization and processes, and risk losing their legitimacy in the audit market.

Aware of these risks, the Big Four accounting firms (Deloitte, Ernst & Young, KPMG, and PwC) are working with 20 Taiwanese banks on a joint pilot project aimed at offering new accounting services. The purpose of this collaboration is to test a new blockchain platform that allows auditors to directly verify and confirm transaction evidence and facilitate the examination of external receivables, which is a burdensome audit task (Zhou, 2018).

More specifically, audit firms no longer manually evaluate audit evidence, because transaction information is easily accessible through blockchain technology tracking and verification, thus saving audit firms a lot of time.

In this context, few studies have attempted to understand the impact of blockchain technology on the auditing industry (Smith, 2018; Liu et al., 2019). Most studies focus on other digital technologies such as big data, analytics, and artificial intelligence, while ignoring the impact of blockchain technology on the audit industry (Manita et al., 2020).

Blockchain technology presents some of its own characteristics that distinguish it from other technologies. The blockchain contains information, which is protected by encryption, verified and authenticated by all users. Therefore, it should have a different impact on careers.

Smith (2018) reviews existing research on blockchain technology in the field of accounting and discusses the benefits and challenges this technology may bring to the accounting profession. He points to a range of potential impacts of the technology on the accounting profession. In particular, he concludes that blockchain will allow auditors to save time on repetitive tasks, such as confirmation and verification of amounts, and focus on higher-level tasks, such as the design of preventive tests and intelligent analysis of data .

Liu et al. (2019) attempt to discuss the possible opportunities and challenges that two types of blockchains (public and consortium) may bring to internal and external actors. Their research concludes with a series of recommendations for professionals to adapt to the technology and grow their businesses.

Desplebin et al. (2018) take a forward-looking approach to the potential transformation of this technology for the accounting and auditing profession. Their research summarizes a range of possible scenarios that reflect the accounting profession's evolution in terms of data security, dematerialized transactions, reconciliation, and a fair image of accounting information.

This research is still theoretical rather than based on empirical research, some studies try to explain the technology (Carlozo, 2017). Other studies have either synthesized articles on this topic or considered forward thinking about the possible impact of this technology on the accounting profession (Liu et al., 2019; Smith, 2018). The reason for this choice may be the difficulty of obtaining information and the fact that most companies do not use this technology.

Audit firms (especially the Big Four) are investing heavily in developing this technology and acquiring new tools and controls developed to its advantage. Therefore, it is necessary to conduct on-the-spot investigations to deeply study the impact of this technology on auditing activities. Against this background, this study aims to examine the possible impact of blockchain technology on the profession, the auditing process, and the business development process.

This research is beneficial for both auditors and blockchain technology. On a theoretical level, the literature on the impact of blockchain technology in the field of auditing can be enriched by explaining how blockchain technology will change the profession of auditors and the new challenges it faces. On a management level, this research can enlighten professional auditors not only about the possible evolution paths of their audit processes, services and development of new business opportunities, but also about the technical and organizational challenges they will face.

This research can inspire audit regulators to revise audit standards according to technological developments. Finally, it can also guide universities and colleges responsible for training auditors in the technical, critical thinking and data analysis skills that auditors must acquire or develop in order to adapt to new market demands and face new challenges. future challenges.

This paper mainly elaborates the impact of blockchain technology on the auditing industry from the following aspects. First, we define the blockchain technology, introduce the research status at home and abroad and the research method of this paper. Afterwards, we present and discuss the main research findings, emphasizing the main contributions and limitations of blockchain technology.

First, we will introduce what blockchain technology is, what are its characteristics, and how it works, while we will focus on the application of this concept in the field of auditing.

secondary title

Blockchain: Evolution, Benefits and Types

1. What is blockchain?

In 2008, Satoshi Nakamoto invented Bitcoin, bringing blockchain technology into the public eye. Crypto is a specific way of using blockchain technology, making point-to-point transactions possible without the existence of third-party institutions.

Some researchers define a blockchain as “a network of peer-to-peer nodes (i.e., users’ computers) whose transaction data is immutable and publicly traceable” (Swan, 2015; Tapscott and Tapscott, 2016; Drescher, 2017; Sheldon, 2018). Based on this, simply put, blockchain technology is a technology for storing and transmitting data. Thanks to this technology, it is possible to know the origin of data in circulation, and every change of data is recorded by blocks.

New data is automatically stored in a block, which is connected to the block that recorded the previous data, forming a blockchain. Blockchain allows direct transactions between users without the need for a trusted third party (Gruber, 2013; Singh, 2015). According to Delahaye (2014), this technology can be likened to a large notebook or an open book, which everyone can consult for free, but no information can be deleted or destroyed.

2. Features and advantages of blockchain technology

An analysis of the definition of blockchain reveals three main characteristics of the technology:

Transparency and Traceability: Blockchain contains information that cannot be modified or deleted and is shared by users. In addition, every operation performed is explicitly recorded in the blockchain, so every path of stored information can be traced. In fact, the longevity and consistency of the system is guaranteed by replicating the records it creates in the memory of other computers (network nodes). Transparency and traceability will increase confidence in user adoption.

Data Security Protection: Data recorded in the blockchain is protected through encryption, authentication, verification and immutability, as blocks eliminate frictional errors and reduce risk. In fact, the standard that needs to be verified by a set of nodes greatly reduces the risk of malicious behavior, hijacking or hacking. Nodes control each other, which enables secure data protection without a central authority. Users can also be anonymized.

Decentralization: Blockchain technology makes transactions easy without the need for a central network, which provides control and governance of the system. In fact, the verification of data recorded on the blockchain is not performed by specific participants, but by the rules of the blockchain. If we combine this technology with smart contracts, it will be possible to exchange value between two parties without a middleman.

Therefore, eliminating middlemen will likely increase productivity and efficiency, and reduce transaction costs such as inspection and audit fees. These characteristics make blockchain technology a revolutionary technology that can lead companies to design new working methods and organizational forms, change their business model.

In this sense, Beck and Müller-Bloch (2017) argue that blockchain does not represent an incremental technology (including adding some functionality to existing technology), but a radical innovation because it establishes New standards of technology and practice (Utterback, Acee, 2005; Bates, 2011).

Blockchain technology allows transactions to be recorded as a single event, verified by the community. This process works very well for businesses as it eliminates the need for businesses to enter and store transactions in multiple databases, saving time and greatly reducing human error and fraud.

While this new technology can give companies a competitive advantage, it is not without risks, as it requires fundamental organizational change, providing new skills, tools and ways of working that can disrupt old practices (Dewar , Dutton, 1986; Adams et al., 2006). The invention of blockchain technology is often compared to the Internet because of its enormous potential to revolutionize multiple industries (Lepak et al., 2007; McLean, 2016).

Therefore, blockchain technology will challenge enterprises, guide them to strengthen innovation, and rethink their business models when their survival is impacted.

3. Blockchain type

There are two main types of blockchains mentioned in the literature, public blockchains and consortium blockchains, which are what we call permissioned blockchains and permissionless blockchains.

In the case of a public blockchain, the architecture is open, meaning anyone can access it and conduct transactions. In fact, according to O'Leary (2017), public chains allow network participants to contribute to the blockchain by accessing or sending transactions. For example, this type of blockchain is used in Bitcoin (O'Leary, 2017; Smith, 2020).

The alliance chain provides an architecture that can be registered and traded, but only provides access and usage rights to specific participants. Therefore, blockchains in this category impose restrictions on the network nodes allowed to verify transactions and the identities of transaction interests.

Burns (2019) pointed out that the volatility of the market capitalization in the field of encrypted assets in 2018 made people pay attention to the potential of blockchain technology, especially the practical application of this technology. According to Smith (2020), the role of consortium chains in terms of trade and adoption is more attractive for enterprises. However, this classification of consortium chains and public chains is simplified. In fact, there are multiple classifications depending on the criteria considered, such as different technologies, different ways of community governance, and so on.

secondary title

literature review

In recent years, blockchain has attracted more and more researchers' interest in different fields such as finance, marketing, supply chain, etc. However, as far as we know, few people have studied the application of blockchain in the auditing industry. Brender et al. (2019) point out that despite causing massive change in the blockchain finance space, the auditing and accounting industry has been neglected by academic research. There is not enough research in this area to cover the impact of blockchain technology on all audit professions.

Much of the current research focuses on the relevance of blockchain technology in the audit process and its ability to optimize existing audit procedures (Dai, Vasarhelyi, 2017; Smith, 2020; Yemak, 2017; Liu et al., 2019; Kokina et al., 2017). The research of Yermack (2017) proves that blockchain technology can guarantee the accuracy and reliability of transactions and realize real-time information disclosure. Kokina et al. (2017) provide an overview of the application of blockchain technology in a large audit firm and discuss its main opportunities and limitations.

Smith (2018) analyzed the possible impact of blockchain technology on the accounting industry. He also contrasts how the process will change as the technology becomes more ubiquitous. Accounting firms have invested heavily in blockchain technology from a financial, technical or human standpoint. However, blockchain implementation is still in its infancy. The automation of accounting and auditing tasks presents challenges and opportunities for accounting and auditing professionals, forcing them to evolve to keep up with this change. With this change, technology can replace some accounting or auditing tasks, and accounting and auditing professionals will play a more strategic role.

Dai et al. (2019) explore how the use of blockchain and smart contracts can restructure current audit procedures and facilitate the emergence of a new generation of audit, known as Audit 4.0. They propose a framework that summarizes areas where blockchain technology and smart contracts need to be applied to help implement Audit 4.0. They demonstrated that these techniques can address two key issues, namely data integrity and proper functioning of the smart audit module. They also demonstrate that these technologies can help establish a continuous and real-time audit process, which will facilitate the emergence of Audit 4.0.

Smith (2020) examines the interplay between smart contracts and blockchain technology-based applications by analyzing how they can change the audit process. To be effective and efficient, blockchain technology must be integrated with existing technology systems, he said. Smart contracts allow blockchain technology to be combined with other technologies and adjust the application of the blockchain platform from the enterprise level.

Desplebin et al. (2018) elaborated in a forward-looking manner the role of blockchain technology in terms of innovations that will impact the accounting and auditing professions. The author believes that blockchain technology will become the "core technology" of internal control, ensuring the certainty of information for stakeholders such as institutions, shareholders and customers. This technology will simplify verification errors and fraud and ensure the reliability of reports.

In a study focused on consortium chains, O'Leary (2017) investigated alternative configurations of different blockchain architectures that can be used to collect and process transactions in different fields, especially accounting, auditing, supply chain and other type of transaction information. He also suggested that blockchain technology could be used to process data derived from other technologies such as databases and data warehouses.

Liu et al. (2019) discuss the implications, opportunities, and challenges for operators of two types of blockchains, public and private. New auditing activities are emerging because of blockchain technology. Auditors can verify the existence of digital assets and prove the consistency between the physical world and the information on the blockchain. Additionally, there is no central authority in the blockchain, which makes it difficult for auditors to perform this task, leaving them to find new ways to verify assets.

As part of the audit of internal control of financial information, Sheldon (2019) discussed the impact of blockchain technology that auditors are more concerned about on ITGC (general information technology control), and the risks in the audit process that blockchain technology can eliminate. The authors emphasize the importance of blockchain user participation, including businesses, auditors, and regulators, among others.

The reliability of data produced by blockchain technology depends on the support and proper functioning of ITGC, as blockchain remains an integral part of IT infrastructure (AICPA and CPA Canada 2017). A good understanding of how this data is controlled, queried, and extracted is very important for users who make decisions based on this data, especially auditors who can use the blockchain.

Rozario and Thomas (2019) examine how blockchain and smart contracts affect the auditing paradigm of financial statements. The authors attempt to propose a conceptual framework for an externally audited blockchain, where a smart audit program (a type of smart contract) can autonomously execute audit procedures and disclose audit results to different participants in a near real-time manner. They show that an audit blockchain using financial and non-financial data has the potential to improve audit quality and reduce the expectation gap between auditors, financial users, and regulators.

Dai and Vasarhelyi (2017) attempt to discuss how the audit ecosystem is changing with blockchain technology towards more transparency, real-time and verification. They believe that with the development of blockchain technology, we tend to more accurate and efficient automatic insurance systems, thus changing the current auditing practices. Blockchain-related smart contracts can be used for secure storage of account data, instant sharing of relevant information with relevant parties, and improved verifiability of business data. A new system of accounting information can be generated and recorded on a secure blockchain.

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