Audit firms are an integral part of our worldwide economic system. They are to assure that the numbers firms produce and publish are correct and not subject to any kind of fraud.
Although I did never really like the accounting class at university I’m now working for one of the Big 4 audit companies – but in the advisory department, not in Audit. What I did realize in class was, what an incredibly important and at the same time simple system forms the basis of accounting – the principle of double entry bookkeeping.
Since 1494, thanks to Luca Pacioli, Europe knows the system of double entry bookkeeping. It means that each and every transaction is being recorded twice, on two different accounts – once as a debit and once as a credit. The purpose of that is to demonstrate corporate success in a twofold way:
- By comparing the equity of the current year with the one of the previous year in the respective balance sheet.
- By comparing the income and the expenses of the current year in the income statement
It’s easy to see, that this common and accepted way of bookkeeping is a backward contemplation. Transactions are not being recorded in real time but only period-specific over three, six, nine or twelve months.
OK, that is common and kind of “old” stuff. Now what does the blockchain has to do with audit and how should it possibly enable something like “future audit”? Why may there be a need for it?
The need for a reformation in audit arises from different aspects. Some would be:
- Human errors as reason for significant mistakes in accounting statements
- The current situation, that inspectors have to rely on the information given and produced by the firms that is subject to conflicts of interest
- Classic accounting practices may not be suitable for future business models like Microtransactions
A solution for those problems and at the same time a major enhancement for the traditional system of double entry bookkeeping could be: “triple entry bookkeeping“.
The idea is that a third recording of transactions is being created in a so called “World Wide Ledger”. This blockchain based ledger can be explained as a digital world wide open book, whose information can be accessed at anytime by anyone – including shareholders, auditors, supervisors etc.
The entries will be equipped with a time stamp that reflects the exact time of entry, which enables real time bookkeeping. As soon as the transaction is executed it immediately appears in the publicly accessible World Wide Ledger, not three, six or twelve months later. Since the blockchain protects and shows the entered data permanently and guarantees for its integrity, one can be sure to see true facts and figures there.
The upside of this development is obvious.
Investors can decide upon investing into a company based on real time data, cost saving potential in the financial departments arises, good governance gets even more important and so on.
But where’s an upside there’s a downside.
The first aspect here of course is the loss of earnings for audit firms in their core business. Furthermore there will be possibilities to still let assets and transactions disappear in offline structures. Another questions is, how immaterial assets should be recorded?
Will the consulting branches of big audit firms strengthen by this development? Will they be able to compensate the loss in audit business by blockchain implementation consulting and other related services?
Those will be some of the questions to be dealt with in the future while trying to move towards future audit.
Surely, this is still subject to the future and will not disrupt the industry tomorrow. But I think it is tremendously important to deal with possible game changers like the blockchain and evaluate the individual deployment potential right now in order not to miss the transformation when it comes – and it will come.