In the dynamic landscape of technology and business, auditors are faced with the challenge of adapting their methodologies to emerging innovations. One such innovation that has gained significant attention is blockchain technology. As auditors venture into auditing blockchain-based systems, they discover a host of advantages that set this technology apart from traditional systems. In this blog post, we delve into these advantages, shedding light on how blockchain’s unique attributes transform the audit landscape.
A Paradigm Shift: Key Differences between Traditional and Blockchain-Based Systems
Auditors who embark on auditing a blockchain-based system often find themselves comparing and contrasting the fundamental differences between traditional databases and blockchain-powered ones. Unlike conventional systems, blockchain-based systems store historical transactional data in blocks. This architecture not only ensures data integrity but also introduces a level of transparency that’s unparalleled. In the case of permissioned blockchains, such as the one under consideration by DBL (Decentralized Banking & Lending), access to blockchain data is strictly controlled, limiting it to authorized users and entities.
A remarkable departure from the norm is that blockchain systems are devoid of a central database controlled by a singular administrator. Instead, they thrive on decentralization, distributing control and power among network participants. An intriguing feature that auditors observe is the immutability of completed transactions within a blockchain. The cryptographic interlinking of blocks creates an unalterable record, mitigating data integrity risks that conventional systems often grapple with.
Advantages from an Internal Audit Perspective
John, an auditor delving into the potential of blockchain-based solutions, identifies several notable advantages from an internal audit perspective:
1. Robust Analytics
The structured and consistent storage of information across the permissioned blockchain facilitates robust analytics. This newfound ability enables auditors to conduct complex analyses with reliability, while dashboards can be updated frequently to reflect real-time data.
2. Real-time Auditing
Traditional auditing often relies on sampling, which can leave room for oversight. However, blockchain-based solutions enable auditors to conduct 100 percent population testing due to the comprehensive ledger of all transactions. Real-time auditing becomes a reality, with internal audit departments setting up read-only nodes on the blockchain. This allows them to monitor transactions as they occur, flagging any anomalies. The integration of analytics further empowers auditors to automate the auditing of routine transactions.
3. Shortened Audit Cycle
The traditional audit cycle often involves laborious data collection and organization. In a blockchain environment, the structured and readily accessible transaction data streamlines this process. This ease of access equips auditors with detailed, up-to-the-minute information that informs a more precise risk assessment. Consequently, audit planning time is reduced. Additionally, auditors can trace transactions independently throughout the blockchain, further expediting the audit cycle.
4. Automated Contractual Enforcement
Tracking adherence to contractual terms, a task that often demands substantial manual effort, undergoes transformation through blockchain’s smart contracts. These self-executing contracts, coded to trigger based on predetermined conditions, usher in a level of automation that drastically reduces the need for manual intervention. This shift empowers auditors to focus on higher-value activities, such as automated functionality testing, rather than being bogged down by sample-based Contract Risk Compliance (CRC) testing.
5. Trustworthy Reconciliations with Counterparties
Blockchain’s consistency and reliability across entities pave the way for reliable data reconciliations. With this inherent transparency, certain reconciliation controls may no longer require rigorous testing. Auditors can thus allocate their resources to other pertinent audit areas.
6. Rapid Data Recovery
In the event of disruptions, the redundancy of ledgers within the blockchain ecosystem ensures swift data recovery. Each participant in the blockchain network hosts a copy of the ledger, providing an extra layer of data security. This unique attribute bolsters data retention and retrieval controls, categorizing them as low-risk factors.
In conclusion, the journey into auditing blockchain-based systems opens up a realm of advantages that can reshape the auditing landscape. From real-time auditing and robust analytics to automated enforcement and rapid data recovery, auditors find themselves equipped with powerful tools that enhance efficiency, accuracy, and trust. As auditors continue to navigate this evolving terrain, embracing the benefits of blockchain technology can elevate their practices and drive transformative outcomes.
Auditing can be difficult with new and emerging technologies always competing for your attention and how you audit. Learn more about Internal Audit Management from Connected Risk and how it will help your organization stay nimble with your audits.