As a technology, blockchain comes with a few well-known qualities—tools based on the technology are impossible to breach, they store transactions and other records in real-time, the data stored in blockchains cannot be manipulated without authorization and many others. The common thread running through such characteristics is trust. Blockchain is, without a doubt, reliable for usage in several business areas. And that is why the technology, also known as a distributed ledger, has so many applications in fields as diverse as public welfare, supply chain-related functions and, of course, NFT transactions. Besides these, there are several uses of blockchain in financial services too. One of the prominent ones among them is financial auditing. Generally, major businesses may face difficulties in verifying the integrity of transactions, including all transactions of mega-corporations in audit tests and similar others. Using blockchain in financial services and functions such as auditing sorts out such problems for auditors and businesses everywhere.
Bringing in Real-Time Auditing and Automated Financial Operations
Traditionally, audits are supposed to be conducted at the end of a financial year. During that phase, trained auditors and chartered accountants run through, either partially or completely, thousands and thousands of transactions recorded throughout the year on balance sheets, cash flow statements and other financial documents to verify each entry for authenticity, understand the financial areas that are problematic within the organization and need correction and find instances of error and fraud, amongst other details.
With the increasing use of blockchain in financial services such as auditing, organizations could have their transactions verified and greenlit in real-time. This automation of auditing involves financial transactions going through audit scans as they take place. If an instance of fraud or error occurs, the financial directors and technical operators will get a notification about it. Then, such parties can conduct thorough financial investigations to get to the root of problematic situations. In such cases, computerized programs could settle blockchain-driven smart contracts on behalf of the concerned board of directors autonomously. Furthermore, blockchain could also enable automated payment processing to stakeholders, digital signing of documents and contracts, creating valid audit trails for transaction verification as well as registering digitized assets, which include stocks, NFTs, bonds, land titles.
Blockchain can be used to fuel the rise of “virtual organizations.” Such Decentralized Autonomous Organizations (DAOs) can be entirely operated with the help of digitized smart contracts. Smart contracts are blockchain applications that are completed only when specific conditions mentioned in them are fulfilled. For example, if a smart contract for an export has the condition that a specific amount of money wouldn’t be unlocked for the seller of the goods in question unless the buyer receives their package within the agreed ETA, then they wouldn’t get paid if the delivery is made later than the agreed time. Smart contracts can be used to regulate other contractual situations too, when the transfer of money or assets is involved.
Combining blockchain in financial services with machine learning is particularly useful for automating finance-related operations and monitoring. Machine learning and blockchain can work in combination to assist auditors with financial monitoring in real-time. AI and machine learning have several financial applications of their own, and using them to carry out micro-level financial monitoring allows auditors to not miss any anomalies in vast swathes of financial data. Speaking of using machine learning and blockchain for automating finance-related operations, particularly for DAOs, such systems can come in handy for making trade-related payments and filing tax returns for businesses.
One thing is certain, the presence of blockchain in the process improves the integrity of the data stored and transferred through different channels within the organization.
Organizations can use blockchain as a digital crutch for accounting as the technology shows subtle and uncanny similarities to the actual principles of accounting. So, in many quarters, businesses may refer to the technology as a “digitized double-entry accounting tool.” Due to the incredibly dynamic nature of how blockchain enables auditing to be done, many people refer to it as a “plug-in auditor,” drawing parallels between the technology and other plug-in applications that run continuously after they’ve been linked with a web browser or another host application.
There are many benefits of transactions being audited in real-time. Firstly, it makes dealing with instances of fraud much quicker and accurate. If fraud is detected and investigated as soon as it is found, businesses can avoid, or at the very least, mitigate their consequences and, therefore, keep business losses at a minimal at all times. The automation of financial business processes comes with its own set of benefits too—such as payments being made and contracts being set up and honored on time.
As you can see, the involvement of blockchain in financial services reduces human error from the process and makes it thoroughly streamlined. It is fair to say that the technology befits large organizations with several thousand transactions over the period of a financial year.
Ensuring Audit Testing for All Transactions
One of the common, and often overlooked, issues with standard auditing today is that auditors do not cover all the transactions for audit testing. Typically, auditors use a sample of data in financial documents within the audit period for the purpose of testing. This is known as the sample selection methodology. The auditors then make assumptions regarding the sample, such as studying it and assuming that any financial issues within the financial operations of an organization will reflect in the sample. Due to this reason, standard auditing is considered to be a “less than 100%” assurance activity.
On the other hand, blockchain can enable auditors to cover all transactions for audit tests. As stated earlier, blockchain enables real-time transactional monitoring, so transactions will be tagged in real-time as they take place. For example, if the accounting department of an organization clears a check for paying certain suppliers or transporters, such a transaction is marked and tagged. As you may know, blockchain tools use code signatures to distinguish different blocks containing data. Similarly, the transactions made by an organization will be recorded in the ledger of the payer and the receiver as well as audit tested at the same time. This brings higher levels of accuracy in testing and lets auditors conduct audit tests more comprehensively and without an element of luck involved.
Evolving the Role of the Auditor
The continued growth of blockchain in financial services is expected to transform the role of auditors in organizations too. Once the process of auditing is automated, auditors will not be expected to perform standard tasks such as validating transactions at the end of the year or checking for inaccuracies, errors and fraud. In that case, the auditor will take on a role requiring greater oversight, data fluency and judgment.
In other words, the auditor will go from someone who traces records and financial transactions to an official who will carry out more complex tasks requiring human traits of logical reasoning and critical evaluation—such as long-term risk assessment related to specific financial decisions taken by the organization, predictive audits for the future, as well as loopholes in the operational and financial frameworks that could leave an organization vulnerable to fraud in the next few years.
Moreover, human auditors will play a greater role in financial strategic planning and long-term expenditure planning to proactively manage the financial health of the company for the foreseeable future. Auditors’ immense experience in the field of finance will allow them to predict “black swan events” such as pandemics and recessions and allow organizations to be financially and operationally prepared when they face such situations.
Blockchain promises to be a truly disruptive, transformative presence in modern auditing when it will be adopted universally by organizations in all sectors in the future. The traditional qualities of blockchain—decentralized, secure, transparent, non-manipulatable, quality in data provenance enhance the process of carefully scanning business transactions dynamically. Additionally, using blockchain in financial services and other technologies, such as machine learning and computer vision, adds several new dimensions to the financial management of all kinds of organizations.