BLOCKCHAIN TECHNOLOGY AND ITS POTENTIAL IMPACT ON THE AUDIT
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Introduction
Background
Blockchain technologies offer enhanced benefits of real-time information access and flow through the digitisation of information through the analytical machine-learning capabilities (Bible et al., 2017). The provision of real-time information provides a means of initiating stakeholder confidence with the hosting of smart contracts which enhance the pursuant of effective financial transactional practices. However, Ovenden (2017) notes a potential implication on reducing the role of CPA auditors across financial institutions. A smart contract is viewed as a computer protocol that digitally facilitates, verifies and enforces performance or negotiation of a contract and also allows performance of a credible transaction without third parties. Smart contracts focus on providing superior security and also lead to reduction in other transactions related to contracting (Dai and Vasarhelyi, 2017). Effective implementation of smart contract is useful for auditing world and different cryptocurrencies have embedded them in the efforts towards automating business processes. According to Rozario and Vasarhelyi (2018), external auditors are expected to take into consideration the impacts of sophisticated audit analytics together with smart contract as an emerging technology. Therefore, they can maintain their relevance and crate value to the public through delivery of audits that are of high quality in the complex ecosystem which is also large.
Problem Statement
Despite the various studies which have focused on the benefits of block technologies, the infancy in the adoption of blockchain technologies still makes it challenging to provide a complete assessment of their role in the audit process. In this study, the focus will be given to smart contracts that are believed to be transforming accounting and auditing practices. According to Geer (2018), blockchain technology through smart contracts automatically performs actions including sharing and verifying of the information. Integrating blockchain technology and smart contracts could potentially ensure the outcomes are executed accurately hence eliminating possibilities of fraud and human error. Smart contracts can benefit businesses especially the finance department in executing high volume transactions. Geer (2018) stated that smart contacts can benefit an organisation by shrinking the costs due to timely processing of transactions. Importantly, this study focuses on smart contracts blockchain technology and its potential effects on auditing practices and profession. High, Kloch and Uhryniak (2019) defined smart contracts as the technology which automatically process transactions. Smart contract blockchain technology can be used in different sectors including banking, medical and healthcare industry, real estate markets, energy industry, gaming, and insurance.
Aims and Objectives of the Study
The primary aim of the study is to investigate the potential impacts of the smart contract on the accounting and audit practices.
Objectives
• To explore the application of smart contract in the sector of finance.
• To determine the impact of smart contracts on the audit profession.
• To examine the changes that smart contract has brought to auditing practices.
• To evaluate the changing role of the auditors while pursuing the auditing practices.
• To investigate the new skill set for the auditors.
Research Questions
i. What is the potential effect of smart contract on audit practices in the finance sector?
ii. How will smart contract impact audit profession?
iii. What skills are required for auditors to effectively execute their roles using smart contract blackchain technology?
iv. What measures should companies embrace to enhance effective integration of smart contract blockchain technology in the accounting practices?
Literature Review
Smart Contracts
Dai and Vasarhelyi (2017) established that smart contracts are algorithmic account holders on blockchain that enables individuals to access history of transactions. These technologies enable accountants to effectively and accurately distribute revenues among the account holders. According to Macrinici, Cartofeanu and Gao (2018), smart contracts are part of the blockchain technology use by organisations due to high customability they add to transactions. Smart contract enable businesses to automate the process of contracting, monitoring, and enforcement with minimal intervention of people. Additionally, Zou et al. (2019) argued that smart contracts involves the automation of legal contracts in general deployed in a distributed network that can acquire outside information and update internal transactions automatically. Smart contracts are increasingly adopted because of the high level of effectiveness. In light of this, Dai and Vasarhelyi (2017) proposed that smart contracts are currently used in blockchain technology because of their intelligence, credibility of transactions, efficiency and automation. Smart contracts automatically execute functions for real-world scenario’s based on individuals needs. For instance, when all the conditions are reached, this technology executes transactions automatically depending on the present rules without external intervention. Therefore, Miller and Bentov (2016) claimed that deployment of smart contract in particular transactions can help an organisation to save time and cost. Yu, Hui and Miklos (2018) state that the multitude features continue to attract the interest of different organisations including auditors who need to understand the manual and automatic tests. The aspect of efficiency enable smart contract to execute transactions at a sufficient speed as well as solve potential problems associated with a transaction in a more efficient manner.
Liu et al. (2018) argued that smart contracts are powerful applications with the capability to predict potential vulnerabilities in the auditing practices. Although Liu et al. (2018) identifies multiple benefits associated with the application of smart contracts on auditing practices, the study was shallow on the implementation strategies and potential challenges. In the current business ecosystems, auditors are professionals trusted to attest existence of transactions, completeness, accuracy, and evidence. To effectively fulfill these, auditors require a deeper understanding of information technology systems and infrastructure relevant to financial controls and reporting. The challenges are broadly classified into governance, operational risks, technical risks, cyberrisks, and compliance. Despite identifying these challenges, there is limited information on how auditors can address the challenges to achieve efficiency in the auditing practices. Integrating smart contract blockchain technology will improve auditing practices through reducing operational error and improving cost efficiency because of automation.
Blockchain Technology
According to Bodo, Gervais and Quintas (2018), blockchain is the latest digital technologies that are expected to cause large scale and fundamental change in the political, social, and economic relations and organisations of organisations. Blockchain technology is an append on database that allow people to access to a wide range of transactions history as well as verify the validity of the records. In light of this, Mohanta, Panda and Jena (2018) revealed that blockchain technology leverage on distributed ledgers to ensure transactions are consistent over time. In this case, distributed ledgers are freely configurable to every application which enables it to correspond to the building blocks of the blockchain technology. Nugent, Upton and Cimpoesu (2016) argued that blockchain technology promotes execution of transactions in an organisation. In this case, the focus will be given to Ethereum blockchain technology, the second largest after Bitcoin. Ethereum ablockchain allows organisations to view terms of the contract which eventually creates inherent risks related to confidentiality.
Although most studies such as Nugent, Upton and Cimpoesu (2016); Bodo, Gervais and Quintas (2018); and Miller and Bentov (2016) advocates the use of smart contract blockchain technology in the auditing practices; there is a gap in knowledge on how the technology will address various issues including cybersecurity, commoditization of core services, and fraud. The current auditing practices take relatively long time, which is costly to most organizations. Therefore, the study indents to investigate if the issue of cost and time will be efficiently solved by smart contract blockchain technology. Giancaspro (2017) acknowledges that block-chain based smart contracts have a broad range of applications and can offer huge benefits such as new business or operational models, lower costs of operation, fewer intermediaries, lower execution risks, enhanced accuracy, increased speed and real-time. The findings of Norta (2016) indicated that integrating smart contract with block chain technology can offer greater degree of scrutiny accompanied by enhanced capabilities to perform tasks in real time with reduced costs.
Research Gap
Despite the rapid growth and development in blockchain technology, there is still a gap in knowledge concerning the potential impacts of smart contracts on auditing practices. Research reveals that that the smart contracts will improve efficiency of business processes and have different use cases in financial system, healthcare, supply chain, internet of things, insurance and digital right management (Yu, Hui and Miklos, 2018). As a consequence, there is insufficient information concerning implementation and use of smart contracts blockchain technology in auditing practices. Auditors are expected to gain deeper insights regarding challenges and opportunities associated with this technology. Since smart contract is still in the infancy stages, more research is needed regarding the technology and it will benefit the auditing processes.
Research Methodology
Research Method
In this study, a mixed-method approach will be used whereby both quantitative and qualitative techniques will be employed. The quantitative method emphasises on objective measurements whereby data is statistically, numerically or mathematically collected through surveys, questionnaires and polls (Saunders and Bezzina, 2015). The quantitative method will be used because it allows examination of the relationship between variables. A qualitative method, on the other hand, involves a scientific approach used to obtain data through conversational and open-ended communication (Savin-Baden and Major, 2013). The qualitative method will be used to gather in-depth data from individual’s perceptions and experiences regarding the research phenomenon. Therefore, a mixed method was adopted to enhance the depth and breadth of the data. Moreover, a mixed approach gives a better understanding of the research phenomenon at a broader perspective since the weaknesses associated with the qualitative method will be addressed by the strength of the quantitative technique.
Data Collection Methods
The study will use primary data collected through questionnaires and interviews for quantitative and qualitative approaches respectively. The closed-ended questionnaire will include questions on the role of auditors, required set of skills by auditors, and the challenging role of the auditors while using smart contracts in executing their roles. The quantitative data collected from questionnaires will be analysed through the Statistical Package for the Social Sciences (SPSS) software which is which analyses data and conducts statistical tests. The SPSS software was used since it offers complete reporting and presentation of the results as well as provides in-depth statistical capabilities.
The qualitative data will be collected using semi-structured interviews. The interviews were used because they provide flexibility to interviewers and to gain better response from the respondents. Individuals will be required to provide their opinion, experience, and knowledge on the application of smart contract in the sector of finance, impacts of smart contracts on the audit profession, and the changes that smart-contract has brought to auditing practices. The target population includes accountants, auditors, and information technology experts who have a profound understanding about smart contracts and blockchain technology. Face to face or phone interviews will be conducted depending on availability of individuals. The qualitative data will be analysed using a thematic method, which involves identification of themes and patterns from the collected data.
Sampling Technique
The participants will be selected based on purposeful and simple random sampling techniques. In the qualitative research, a purposive non-probability sample consisting of 15 employees from companies that have implemented blockchain technology in their audit practices will be used. On the other hand, in the quantitative data collection, simple random sampling will be used and will consist of 100 employees who will fill the questionnaires administered to them. Sample recruitment venue will include emails and letters that will be sent to the participants to obtain informed consent and willingness to participate in the research.
Maintaining Data
The data collected in this study will be kept safe and secure by restricting access to data using a system of passwords, running anti-virus software to protect the information against viruses and making regular back-up of files. The research data will be stored in the office of the faculty and both paper and electronic forms will be used in long-term retention.
Ethical Considerations
A written, signed and dated informed consent form will be provided whereby the subject will be provided detailed information regarding the study and its objectives. A voluntary agreement from the subject will be obtained and ensure everyone comprehends the information provided. The collected data will not be shared or accessed by third parties to enhance confidentiality of the data.
Significance of the Research
The findings that will be obtained from the study on the impact of smart contract on the audit practices will benefit different fields including auditing, education and finance. Financial auditors can use the recommendations to understand how their role is changing in auditing practices. Managers of different organisations can gain deeper insights on the efficiency of the smart contracts in the finance field and determine whether smart contracts blockchain technology is worth to be deployed in the companies’ systems. Scholars and academicians interested in blockchain technology research will also benefit from the study because it will offer background information that will form the basis to conduct future research along with the literature gaps that will be identified. Educational or learning institutions will also use the results to make significant changes in the curriculum to ensure that the education offered is oriented towards the changing profile of auditors in financial reporting.
Limitations of the Research
There is an impossibility to analyze the severity of the impact of block-chain technology in disrupting auditing profession. A more systematic strategy is needed to analyse the impact of smart contracts on the auditing profession and financial reporting. The findings will be based on the information from the respondents; and this might affect the credibility of the study.
Proposed Time Schedule
Timeline
Date 5 March -30 March 2020 5th April -25May 2020 28th May –15thJuly 2020. 17thJuly -29th Oct 2020 1 November-30 December 2020
To write the introduction chapter, send to the professor for review and address feedback.
To write the literature review chapter, send to the supervisor, and address the feedback
To collect the data, write the methodology chapter, analyse data, send for review, and address the comments
Write the remaining chapters and send to the supervisor for review and address the feedback
Review the dissertation and submit
References
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Bodo, B., Gervais, D. and Quintais, P.J., 2018. Blockchain and smart contracts: the missing link in copyright licensing? International Journal of Law and Information Technology, 26(4), p. 311-336.
Dai, J. and Vasarhelyi, M.A., 2017. Toward blockchain-based accounting and assurance. Journal of Information Systems, 31(3), pp.5-21.
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Geer, D., 2018. How Smart Contracts Can Create a Competitive Edge.
Giancaspro, M., 2017. Is a ‘smart contract’really a smart idea? Insights from a legal perspective. Computer law & security review, 33(6), pp.825-835.
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Saunders, M.N. and Bezzina, F., 2015. Reflections on conceptions of research methodology among management academics. European management journal, 33(5), pp.297-304.
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