Accounting and Auditing at the Time of Blockchain Technology: A Research Agenda

250 words Synopsis
Accounting and Auditing at the Time of Blockchain Technology: A Research Agenda

Jana Schmitz , RMIT University, Melbourne

Giulia Leoni?, RMIT University, Melbourne

Blockchain is a distributed ledger technology expected to have significant impacts on the accounting and auditing profession. This study, applicable and timely for both accounting and auditing scholars and practitioners, explores blockchain technology and its main implications for the accounting and auditing profession. The research question addressed in this study is: What are the major themes emerging from academic research and professional reports and websites debating blockchain technology in the accounting and auditing context? A literature review of academic literature and professional reports and websites is performed to identify a taxonomy of emerging themes. The study finds that the most discussed themes in scholarly works and professional sources are governance, transparency and trust issues in the blockchain ecosystem, blockchain- enabled continuous audits, smart contract applications and the paradigmatic shift in accountants’ and auditors’ roles. Based on these four themes, practical implications for accountants and auditors on how to approach the blockchain development are provided. Moreover, this study offers suggestions for future research on accounting and auditing in the blockchain era.

B lockchain technology (BT) – also known as distributed ledger technology (DLT) – is a system in which transaction records stored in blocks are

maintained across several computers linked to a peer-to- peer network that uses algorithms to verify transactions (Coyne and McMickle 2017; Dai and Vasarhelyi 2017; Kokina et al. 2017).1 BT is the technology behind the cryptocurrency Bitcoin and has been referred to as one of the most fundamental disruptive innovations and impactful technologies developed in recent years (Swan 2015; Peters and Panayi 2016; Tapscott and Tapscott 2016; Tan and Low 2017). More precisely, BT has been forecasted to be a game-changer in various industries, with the potential to transform contemporary business models and the structure of markets (Deloitte 2016a; Casey and Vigna 2018a). While BT has already begun to demonstrate its disruptive influence on different industries such as financial services, agriculture, trade, healthcare, transportation as well as government (Ølnes et al. 2017; Tan and Low 2017; Yermack 2017), it is also expected to strongly impact on the accounting and auditing profession in the future (Coyne and McMickle 2017; CPA and AICPA 2017; Dai and Vasarhelyi 2017; Kokina et al. 2017; Ru?ckesha?user 2017; Yermack 2017). Dai and Vasarhelyi (2017: 5–6) argue that ‘[b]lockchain’s functions of protecting data integrity, instant sharing of necessary information, as well as programmable and automatic controls of processes, could facilitate the development of a new accounting ecosystem’.

Furthermore, recent reports by the Big 4 audit firms suggest that accountants and auditors, regulators and

standard setters will be significantly affected by BT (Deloitte 2016a; KPMG 2016a; PwC 2016, 2017a; EY 2017), especially with regards to record-keeping processes, including the way transactions are initiated, processed, recorded, reconciled, audited and reported (Fuller 2016; ACCA 2017; CPA and AICPA 2017; Coyne and McMickle 2017).

BT is not considered a passing trend, but a paradig- matic change in the recording and management of transactions (Carlin 2017; CPA and AICPA 2017; Dai and Vasarhelyi 2017). Like every innovation, BT can be interpreted both as an opportunity and a threat. On the one hand, some authors claim that BT has the potential to make accounting information more trustworthy and timelier by providing a better alternative to current accounting and auditing systems (e.g., Coyne and McMickle 2017; Kokina et al. 2017). On the other hand, given its potential to automate certain accounting and auditing processes, BT is also feared as a threat to the status quo of the profession of accountants and auditors, their practices and traditions (Tapscott and Tapscott 2016; Casey and Vigna 2018a).

?Currently at Universita? degli Studi di Genova. [Correction added on 25 April 2019, after first online publication: current institution of author Giulia Leoni has been added.]

Correspondence: Jana Schmitz, RMIT University, 124 La Trobe Street, Melbourne VIC 3000, Australia. email: jana.schmitz@rmit. edu.au Accepted for publication 23 February 2019.

Australian Accounting Review No. 89 Vol. 29 Issue 2 2019 doi: 10.1111/auar.12286 331

https://orcid.org/0000-0003-4293-4920
Accounting and Auditing at the Time of Blockchain Technology J. Schmitz & G. Leoni

Accounting academia is only now beginning to ad- dress this issue as only a few scholars have entered the academic domain of BT (e.g., Fanning and Centers 2016; Ram et al. 2016; Dai and Vasarhelyi 2017; Kokina et al. 2017; O’Leary 2017; Ru?ckesha?user 2017; Tan and Low 2017; Yermack 2017; Chedrawi and Howayeck 2018; Kozlowski 2018). Thus, the opportunities and challenges of BT for the accounting and auditing profession are still under-investigated and empirical evidence is yet to be provided (Carlin 2017; Dai and Vasarhelyi 2017).

This study aims to explore BT and its main impli- cations for accountants and auditors by systematising academic studies and professional reports and websites that explore BT in the accounting and auditing field. By reviewing and analysing the most recent academic literature and professional sources, the study provides an overview of emerging themes relevant for future re- search and practice. By doing so, this study makes three major contributions. First, it is one of the very first stud- ies to provide a systematisation of BT research in the accounting and auditing context to offer an overview of this innovation to practitioners and academics, as well as to policymakers and regulators. Second, it provides an overview of how accounting and audit practices may change and be impacted by BT. This overview supports both current and future accountants and auditors in how to approach the fast-moving blockchain advancement. Third, by synthesising existing academic literature and professional reports and websites, this study also pro- vides a roadmap containing suggestions for potential research questions and future research avenues.

The study commences as follows: the next section pro- vides insights into the features of BT and outlines what the technology means for accounting and auditing. Fol- lowing the elaboration on BT, the employed research methodology is presented. Thereafter, the results emerg- ing from the review of academic and professional sources are presented. This section includes the identification and examination of the four major themes. The conclud- ing section provides a summary of findings, implications for practitioners and avenues for future research.

Blockchain Technology: What It Is and What It Means for Accounting and Auditing

BT has been described as an internet-based peer-to-peer network technology that uses cryptography. Peer-to peer networks use a distributed application architecture that allocates and shares tasks among peers participating in the network. This network structure presupposes that all participants engage in tasks and decision making. More- over, all network participants maintain an identical copy of the ledger in which information is recorded. Those ledgers contain all transactions made since the creation

of the ledger (CPA and AICPA 2017). Ledgers can be non- distributed or distributed. In a non-distributed ledger, every record is saved in a single location (e.g., a single computer) and can be modified by users by accessing, amending and overwriting the original file. As opposed to non-distributed ledgers, in a distributed ledger net- work like blockchain, every record is saved in multiple locations across the network. Therefore, no user in the network can unilaterally modify the record as it is stored in multiple copies on multiple independent computers within a decentralised network (Tan and Low 2017; O’Leary 2018). This creates distributed control within the network, as no single peer (individual, group or institution) controls the ledger.

BT provides a technological replacement of the trusted party needed to verify transactions by offering a triple-entry ledger system that provides authentication transparency (Dai and Vasarhelyi 2017; Yermack 2017; O’Leary 2018).2 However, BT does not simply add a third ledger to the traditional double-entry bookkeeping approach but adds a shared ledger. Instead of keeping separate transaction records (double-entry bookkeep- ing), the blockchain ledger records accounting entries for both transacting parties. This creates an interlocking system of enduring accounting records (O’Leary 2018), where trust moves from an external authority to all participants in the blockchain network (ICAEW 2017; Tan and Low 2017). Because all network participants have access to the same set of shared ledger records at any time, any single change of the ledger (i.e., transferring as- sets to another participant in the network) is made visible to everyone on the network (ACCA 2017). Changes can only be made if the rules dictated by the consensus proto- col are followed. The consensus protocol takes the form of mathematical algorithms and needs approval from network participants to effectively action the change. Without the consensus, the network automatically rejects the ledger entry (Coyne and McMickle 2017; Dai and Vasarhelyi 2017; Kozlowski 2018). Different consen- sus protocols exist that must be distinguished between: public and permissionless blockchains that are publicly accessible and private and permissioned blockchains that only grant access to selected individuals or groups (Yermack 2017). Public, permissionless blockchains are visible and accessible to everyone who wishes to view them. On the contrary, private, permissioned blockchains are similar to traditional transaction ledgers, where only authorised users with granted permission can view the contents (Coyne and McMickle 2017; Yermack 2017). To this type of blockchain external audi- tors have to be granted access to conduct audits (O’Leary 2017).

Given its distributed nature and its consensus mecha- nism, BT provides a novel solution to control the ledger of recorded transactions. Every new record is added to existing blocks to form a chain that is cryptographically

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J. Schmitz & G. Leoni Accounting and Auditing at the Time of Blockchain Technology

linked. Because of this chain-shaped link, any attempt to make changes to previous transactions would require the reprocessing of all subsequent blocks on the chain at a rate faster than that at which new blocks are added. As this is technically impossible, BT is immutable and considered as fraud unattainable (Coyne and McMickle 2017; Dai and Vasarhelyi 2017; O’Leary 2017; Yermack 2017). As a result, BT is said to overcome the limits of double-entry bookkeeping such as the need for external assurance on companies’ financial statements and the potential for fraud.3

Research Methodology

Since BT only recently emerged as a new area of research, scholars have based their studies predominantly on pro- fessional literature, online sources and reports published by early adopters of the technology. Hitherto, the number of academic publications from different research fields is limited and a comprehensive review of BT literature on accounting and auditing topics has not yet been con- ducted. Nevertheless, with the growing scholarly interest in BT and its potential economic and societal impacts, an increasing number of publications in the accounting and auditing field recently started to emerge, advancing scientific rigour.

This growing number of academic publications ad- dressing BT in the accounting and auditing domain of- fers an opportunity to explore and discuss the results from these academic as well as professional literatures, to provide implications for accounting and auditing prac- titioners and to suggest avenues for future research. To determine the main issues, themes and topics relating to BT debated in the academic and professional litera- tures, in this study a systematic review of professional re- ports, websites and academic publications in accounting and auditing was performed. The investigation entailed two different phases, presented below. First, a search and review of academic studies, professional reports and websites addressing BT in the accounting and auditing context was performed, followed by a thematic analysis to identify the main themes emerging from the existing research, reports and websites.

Review of academic literature and professional sources

In this study, we focus on this emerging academic liter- ature as well as professional publications and websites addressing BT in the accounting and auditing industry. At the first stage of this study’s investigation we per- formed a systematic review of academic publications to collect academic studies on BT in the accounting and au- diting field. The period under study ranges from 2008– 2018.4 We sourced relevant publications by launching a

Table 1 Initial Google Scholar search results

Key search term combinations Number of hits

‘blockchain’ and ‘accounting’ 68 ‘blockchain’ and ‘auditing’ 15 ‘distributed ledger technology’ and ‘accounting’ 189 ‘distributed ledger technology’ and ‘auditing’ 25 Total 297

keyword search on Google Scholar. Given that the terms blockchain and distributed ledger technology are used syn- onymously, both terminologies were applied in this lit- erature search. The employed keyword combinations are listed in Table 1. This search provided an initial pool of 297 academic sources.

From this initial pool, only peer-reviewed academic journal articles or book chapters written in English were considered. After eliminating conference papers, book reviews and newspaper articles, we obtained a total of 79 publications. In order to ensure selecting only those sources addressing the relevant research domain, Cockcroft and Russell (2018) recommend conducting a comprehensive screen of search results, through which sources covering unrelated topics are filtered out. Adopting the authors’ approach, we reviewed journal article abstracts and introductory sections of book chapters in all 79 publications to exclude those publications whose content was not related to BT in the accounting and auditing domain. Following this pro- cess, we excluded book chapters and journal articles that mention BT in the context of research fields irrelevant to this study, such as the health sector, capital markets, agriculture and supply-chain management. Moreover, we excluded those sources that only mention BT and/or DLT and accounting and/or auditing without engaging in the accounting and/or auditing context. This resulted in a total of 16 academic publications that explicitly address BT in the accounting and auditing space. The list of selected academic sources is presented in Table 2.

Owing to the limited amount of scholarly work on BT in the accounting and auditing domain, we further searched for professional reports and websites of the major professional accounting and audit firms and associations worldwide. This step was undertaken to provide a more comprehensive picture of the current development of practical applications of BT in the ac- counting and auditing industry. Exploring practitioners’ views and perceptions of BT helped us to understand the potential BT holds for accountants and auditors and how the technology may affect the profession. Indeed, we argue that the debate of industry leaders and early adopters provides valuable insights into the future of the BT innovation (Bjørnenak 1997; Malmi 1999). We defined the main professional accounting bodies

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Table 2 Themes emerging from blockchain studies in the accounting and auditing field

No. Author(s) and year Governance, transparency and trust Continuous audit Smart contracts Roles of auditors

1 Atzori (2017) ?

2 Coyne and McMickle (2017) ? ? ?

3 Dai and Vasarhelyi (2017) ? ? ? ?

4 di Fiammetta (2017) ?

5 Fanning and Centers (2016) ?

6 Kokina et al. (2017) ? ? ?

7 Kozlowski (2018) ? ? ?

8 O’Leary (2017) ? ?

9 O’Leary (2018) ? ?

10 Ølnes et al. (2017) ?

11 Peters and Panayi (2016) ? ?

12 Rooney et al. (2017) ? ?

13 Rozario and Vasarhelyi (2018) ? ? ?

14 Ru?ckesha?user (2017) ? ?

15 Wang and Kogan (2018) ? ?

16 Yermack (2017) ? ? ?

recognised at international level, that is, Chartered Pro- fessional Accountants Canada (CPA Canada), American Institute of Certified Public Accountants (AICPA), Chartered Accountants Australia and New Zealand (CA ANZ), Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants in England and Wales (ICAEW) as leaders, and the Big 4 audit firms, PwC, Deloitte, KPMG and EY, as early adopters.5

To identify professional sources most pertinent to addressing the study’s objective, we employed purposive sampling of global accounting bodies’ and Big 4 audit firms’ reports and websites (Kim and Kuljis 2010). All relevant online sources were retrieved from the websites of CPA Canada, AICPA, CA ANZ, ACCA, ICAEW, PwC, Deloitte, EY and KPMG. We obtained an initial web-based search result of 98 online sources consisting of reports and websites. Similar to the aca- demic literature search, the selection of online sources considered as relevant for this study was conditioned by their coverage of BT-related issues in the field of accounting and auditing. Therefore, online sources that mentioned blockchain and/or distributed ledger technol- ogy in the context of topic areas other than accounting and auditing, such as, for instance, identification, land registry, insurance, legal matters or supply-chain management, were eliminated from the initial search result of 98 online sources. This web-based analysis resulted in a purposively selected sample of a total of 20 publicly available sources in website and report format (see Table 3).

The selection of a relatively small sample is aligned with approaches adopted by Unerman (2000) and Kim and Kuljis (2010), who claim that rather than superfi- cially examining a large-scale sample of multiple web- based sources, a focused sample smaller in size allows for greater insights into key themes and the underlying strategic agendas of professionals.

Thematic analysis of academic literature and professional reports and websites

Our analysis entailed the coding of the 16 academic publications and 20 professional reports and websites. Coding and related thematic analysis helped us to understand the focal issues emerging from the data and to discover themes pertinent to the phenomenon under study (Boyatzis 1998; Fereday and Muir-Cochrane 2006; Bowen 2009). Codes emerging from the review of academic literature were iteratively compared with codes identified through the analysis of professional reports and websites (Bowen 2008). The constant comparison of purposively sampled sources allowed us to test identified codes with a view to developing themes. Whenever new codes suggested new themes during the analytical process, previously scrutinised sources were re-assessed (Bowen 2008). The two authors performed the coding process separately and subsequently compared their theme lists to identify common themes, discuss differ- ences and reach consensus on the main themes (Parker and Roffey 1997). The discussion and comparison of themes has demonstrated that the coding process culminated in a saturation point, where more and new data did not provide new information but ensured repli- cation of identified themes (Bowen 2008). This iterative analytical process resulted in the creation of a list of four key themes revolving around BT’s effects on the account- ing and auditing profession. The key themes are (1) governance, transparency and trust, (2) continuous audit, (3) smart contracts and (4) accountants’ and auditors’ roles, which are discussed in the following section.

Results from the Thematic Analysis

The forthcoming sub-sections are structured around the four key themes that emerged from the thematic

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J. Schmitz & G. Leoni Accounting and Auditing at the Time of Blockchain Technology

Table 3 Themes emerging from purposively selected professional reports and websites

No. Author(s) and year Governance, transparency and trust Continuous audit Smart contracts Roles of auditors

1 ACCA (2017) ? ? ?

2 CA ANZ (2017) ? ? ?

3 CPA Canada (2016) ? ? ?

4 CPA and AICPA (2017) ? ? ? ?

5 Deloitte (2015) ?

6 Deloitte (2016a) ? ? ?

7 Deloitte (2016b) ? ?

8 Deloitte (2018) ?

9 EY (2016) ? ?

10 EY (2017) ?

11 Hileman and Rauchs (2017) ? ?

12 ICAEW (2017) ? ?

13 KPMG (2016a) ?

14 KPMG (2016b) ?

15 KPMG (2018a) ?

16 KPMG (2018b) ?

17 PwC (2017a) ?

18 PwC (2017b) ? ?

19 PwC (2018a) ?

20 PwC (2018b) ?

analysis. Each sub-section presents the main contents of analysed academic publications and professional reports and websites and elaborates on key issues.

Governance, transparency and trust

Casey and Vigna (2018a) refer to blockchain as a ‘truth machine’ that contains all the necessary tools to establish unprecedented levels of trust and transparency. Owing to its distributed and decentralised nature, BT takes accounting and auditing into a peer-to-peer domain with no institutional intermediation (Atzori 2017). BT provides distributed data security, transparency and immutability (di Fiammetta 2017). According to several scholars, the above features could greatly improve accounting and auditing practice and could force auditors and accountants to make a considerable shift towards more transparent behaviour (Rooney et al. 2017; Yermack 2017).

BT allows companies to write transactions into the blockchain, whereby immutable accounting records are created. Manipulating or destroying those transaction entries in an attempt to falsify or eliminate them is prac- tically impossible because they are cryptographically sealed and distributed (Deloitte 2015, 2016a; KPMG 2016a; Hileman and Rauchs 2017). Several publications, reports and websites emphasise how immutability becomes the key to accountability as blockchains allow participants to view encrypted transactions and ensure that they are kept updated and synchronised (Deloitte 2016b; KPMG 2016b; CPA and AICPA 2017; Atzori 2017; di Fiammetta 2017; Yermack 2017; PwC 2017b). As a result, BT is deemed to significantly improve gover- nance and transparency by providing shareholders and

stakeholders with immediate access to accounting data, thereby providing them with a true and fair view of data that are inherently trustworthy (Atzori 2017; Yermack 2017). Given its scalable and modular structure, BT – particularly private, permissioned blockchains – offers the possibility to create differentiated access to informa- tion for stakeholders and shareholders, who usually have different needs for accounting information (Yermack 2017). For instance, CFOs and auditors require access to the full range of accounting data while accounts payable clerks only need accounting information related to accounts payable transactions, and investors may only make use of aggregated accounting information.

The enhanced level of transparency in combination with the verifiable nature of BT are likely to increase shareholders’ and stakeholders’ trust (Deloitte 2015; CA ANZ 2017; Hileman and Rauchs 2017). BT may also provide the opportunity to disclose off-book transac- tions and hidden accounts, which has profound im- plications for accountability and transparency as well as for companies’ competitive stance and compliance to rules (Tapscott and Tapscott 2017). Attention must be paid to the issue of transaction verification (Coyne and McMickle 2017; Dai and Vasarhelyi 2017), because the simple recording of data on the blockchain does not imply that the transaction has happened in the real world: ‘Just because a transacted record is com- puterized and “blockchained” does not necessarily im- ply that its physical world counterpart material of com- merce has not been tampered with’ (Apte and Petrovsky 2016: 77).

In other words, only because an asset transfer has been recorded on a blockchain does not guarantee that the asset has been transferred or exchanged, payments have been made and transactions have been recorded in

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the real world. Hence, some accounting scholars have criticised blockchain verification methods for not be- ing able to sufficiently validate transactions (Coyne and McMickle 2017). Therefore, companies using BT in con- junction with offline payments have no guarantee that the transaction occurred in the real world. However, for the accounting experts, this is an important aspect they can contribute to by researching mechanisms to reconcile blockchain-recorded transactions and actual payments (CA ANZ 2017; CPA and AICPA 2017).

Finally, researchers raise concerns about blockchains being ‘fraud free’ (Coyne and McMickle 2017; Ru?ckesha?user 2017; Wang and Kogan 2018). Indeed, committing fraud is still possible on blockchains, as ‘lies encoded on the blockchains are still lies. They’re just im- mutable lies’ (Bradbury 2015). Arguing that BT is unable to detect fraudulent transactions if those transactions were fraudulent from the beginning, researchers alert practitioners that the capability of BT to prevent fraud may be overestimated and overhyped (Ru?ckesha?user 2017). However, although BT cannot eliminate fraud completely, it may help identify fraud in real time (Wang and Kogan 2018).

Continuous audit

Contemporary audit practice is labour intensive. At the beginning of each audit auditors receive journal entries, spreadsheet files and other documents both in electronic and manual formats. Before the actual audit process begins auditors are required to invest significant time into the preparation of data and planning of the audit. This lengthy process comes at the sacrifice of efficiency and cost-effectiveness (Deloitte 2016a; CPA and AICPA 2017; CA ANZ 2017; Ru?ckesha?user 2017; Kozlowski 2018). Whereas contemporary audits require the approval of transactions and balances at the end of reporting periods, blockchains provide validated trans- action records almost immediately (CPA Canada 2016; Rooney et al. 2017; Wang and Kogan 2018). Through the instantaneous confirmation of transactions, BT enables continuous auditing, also termed ‘real-time auditing’. EY (2017) describes auditing in the blockchain era as plug-in, always-on audit, emphasising that external auditing transitions from a periodical or annual exercise to a continuous matter. Monitoring what happens in real time is a substantial departure from contemporary audit practice, which is focused on investigating what hap- pened in retrospect. Continuous auditing eliminates the traditional audit concept of sampling as BT offers an up- to-date, immutable historical record of all transactions (CPA Canada 2016; CA ANZ 2017; PwC 2017a, 2018a; Rooney et al. 2017). By combining the processing of transactions with the recording and reconciling of those transactions, BT introduces substantial efficiencies (EY

2016; ACCA 2017; CPA and AICPA 2017; Kokina et al. 2017; PwC 2018a, 2018b). Precisely, the need for entering and reconciling accounting data in multiple databases is eliminated, whereby time is saved and the risk of human error is substantially reduced (Kokina et al. 2017).

Several analysed reports indicate that the increased au- ditability of accounting information is one of the major benefits of BT (Fanning and Centers 2016; ACCA 2017; CPA and AICPA 2017; O’Leary 2017). As BT provides a real-time audit trail, auditing is not only made signif- icantly simpler but also considerably cheaper (Fanning and Centers 2016; Deloitte 2016b; CPA and AICPA 2017; EY 2017; PwC 2017b). Auditors can operate more effi- ciently and effectively due to the reduced time spent on reconciling and disputing records with clients (Rozario and Vasarhelyi 2018). Beyond that, it is assumed that continuous auditing makes it simpler for auditors to investigate fraud since the real-time systems highlight anomalies at the time of occurrence allowing for timely investigations (Deloitte 2016a; EY 2017).

Further, BT-enabled continuous auditing could …

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