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; Rückeshäuser 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 Università 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.

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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; Rückeshäuser 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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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 Rückeshäuser (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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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; Rückeshäuser 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 (Rückeshäuser 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; Rückeshäuser 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 en- hance auditors’ understanding of clients’ businesses as the engagement between auditors and clients is no longer limited to the end-of-financial-year reporting period (ACCA 2017). However, a comprehensive continuous audit is unlikely to be achieved unless companies de- cide to record all transactions on the blockchain. With only particular transactions being encoded, the promises of continuous auditing can only partially be delivered (O’Leary 2018). BT does not only allow for the timely examination of transactions but also for automation of transaction recording and verification. In this regard, reference has been made to smart contracts that enable efficient control of transaction and recording processes (Dai and Vasarhelyi 2017; Kozlowski 2018; Rozario and Vasarhelyi 2018).

Smart contracts

An implicit process in accounting and auditing is the in- volvement of the human element in all steps. However, the necessity for the human function may change with blockchain development. BT can carry not only transac- tional data in real time but can also carry a programmed version of human action. These take the form of so- called smart contracts, which encode relevant terms into a blockchain and execute automatically when predefined conditions are met (Coyne and McMickle 2017; Ølnes et al. 2017; KPMG 2018a; Rozario and Vasarhelyi 2018). Smart contracts digitally facilitate, verify, control and enforce transactions. Smart contracts are executed by a computer network that uses consensus protocols to agree upon the sequence of actions specified in a contract (CPA Canada 2016; Peters and Panayi 2016; Hileman and Rauchs 2017; Deloitte 2018).

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Before the emergence of BT, the execution of smart contracts was impossible due to business parties main- taining separate databases. With a shared database run- ning a blockchain protocol, smart contracts auto-execute with reduced risk of error or manipulation and no need for a third-party intermediate (Dai and Vasarhelyi 2017; Yermack 2017; Rozario and Vasarhelyi 2018). Smart con- tracts basically extend blockchains’ utility from simple record-keeping of transaction entries to automatically implementing terms of multiparty agreements (CPA Canada 2016; Deloitte 2018). For accountants and au- ditors, smart contracts are said to play a significant role as they allow for the autonomous recording of trans- actions in compliance with agreed terms (ACCA 2017; CPA and AICPA 2017; Dai and Vasarhelyi 2017; ICAEW 2017; Yermack 2017; Kozlowski 2018; O’Leary 2018). If rules such as record sales after shipment of goods are pro- grammed into smart contracts, the system automatically reviews and verifies the shipment date before recording sales onto the blockchain (Dai and Vasarhelyi 2017).

Rozario and Vasarhelyi (2018) propose that external auditors make use of smart contracts (see also Rozario and Thomas 2017). According to the authors, smart contracts can facilitate the execution of audit processes by automating the transaction reconciliation procedure while providing more transparency to stakeholders through close to real-time audit reporting. The auto- mated reconciliation of transactions does not only save time but also substantially reduces the risk of human error (Kokina et al. 2017; Rozario and Vasarhelyi 2018). However, in this regard it must be noted that it is unlikely that every transaction will be audited by BT smart contract procedures and undergo automated data reconciliation. Complex accounting entries such as the valuation of fair value or accounting measurements such as impairment testing require human expertise and judgement by accountants and auditors. Hence, Rozario and Vasarhelyi (2018) suggest a holistic audit model con- sisting of a hybrid of blockchain smart audit procedures and audit procedures performed outside the blockchain.

Artificial intelligence (AI) technologies may extend the potential of smart contract applications to the as- sessment and recording of the physical conditions of goods. In combination with AI, smart contracts could detect and measure damage on inventory and other as- sets and potentially automate the accounting measure- ment of those assets. For instance, when shipped goods are equipped with special sensors or chips, those sensors or chips could self-report inventory damage and signal to smart contracts to immediately adjust the correspond- ing accounting measurements (Dai and Vasarhelyi 2017; Kozlowski 2018).

Kozlowski (2018) recommends embedding account- ing standards into the blockchain infrastructure by encoding them into smart contracts. As part of the continuous audit, auditors could then monitor whether

transactions are compliant with those accounting rules and highlight cases of mismatch. Smart contracts can revoke transactions if the system detects that rules and standards encoded into the contract are disobeyed (CPA Canada 2016; Deloitte 2016a). Besides the automation of recording transactions, smart contracts may offer a predicting function, for instance by encoding default or credit rating prediction models (Dai and Vasarhelyi 2017). Those models would be able to monitor debtors’ default risk based on the evaluation of their financial status and purchase behaviour, and adjust bad debt estimations accordingly, when necessary.

Accountants’ and auditors’ roles

From the analysis of academic studies, professional reports and websites we found that the argument of auditors becoming obsolete as a consequence of the blockchain development receives strong support and enjoys increasing popularity. A substantial body of academic works predicts several negative effects on the accounting and auditing profession and considers the disruption of the entire industry as possible (Peters and Panayi 2016; O’Leary 2017; Yermack 2017; Casey and Vigna 2018a). More precisely, claims have been made that the accounting and auditing profession is at risk due to the automation of reconciliation and that those who keep the accounting books as well as those who audit them will lose their jobs (Casey and Vigna 2018a).

Auditors enhance trust and confidence in the infor- mation of the companies they audit and thereby sup- port the functioning of global capital markets. The ar- gument that auditors become obsolete as they can be replaced by blockchains is based on the assumption that transactions themselves can be trusted. The trust that a blockchain-based accounting system may provide is solely that the transaction has occurred. As outlined ear- lier, blockchains do not provide a guarantee for transac- tions taking place in the real world. Even if they are recorded onto blockchains, transactions may still be fraudulent, illegal or unauthorised. As underlined by CPA and AICPA (2017), transactions might be executed between related parties, linked to a side agreement or incorrectly classified. Hence, given the need for audi- tors to detect and investigate transaction errors or fraud, the argument of auditors becoming obsolescent is not evident.

In addition, BT cannot replace the extensive account- ing knowledge required to determine whether ledger en- tries have been made correctly (Coyne and McMickle 2017). For example, BT is not capable of preventing asset misappropriation, erroneous measurement or esti- mation of valid transactions (EY 2016; ACCA 2017; CPA and AICPA 2017; ICAEW 2017). As a result, both schol- ars (e.g., Coyne and McMickle 2017; Dai and Vasarhelyi

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

2017; Kokina et al. 2017; Kozlowski 2018; Rozario and Vasarhelyi 2018) and professional accounting bodies and Big 4 audit firms (e.g., EY 2016; ACCA 2017; CA ANZ 2017; CPA and AICPA 2017; KPMG 2018b) agree that accountants and auditors will not become redundant.

Moreover, it is unlikely that companies will store all their transactions on blockchains. Recent studies have shown that organisations currently employing BT record only certain transactions (related to accounts receivable and accounts payable accounts) on blockchains. As those organisations will continue to make use of internal Enterprise Resource Planning (ERP) systems (CPA Canada 2016; Dai and Vasarhelyi 2017; Ortmann 2018), they will still be dependent on internal and external auditors to verify their accounts. Although accountants and auditors are not going to become redundant, their roles are likely to change due to the shift in the recording and reconciliation of transactions from a manual to a progressively automated procedure. Thus, BT is likely to foster the reengineering of accountants’ and auditors’ roles. A new generation of accountants and auditors – equipped with skills to operate in the new blockchain ecosystem – may be required to respond to the change of the current accounting and auditing paradigm (ACCA 2017; CPA and AICPA 2017; KPMG 2018b).

Concluding Remarks

The current blockchain hype sets researchers and practi- tioners in motion to critically examine the core features of BT and its impacts on accounting and auditing practices. This study is a timely investigation that reveals the main accounting and auditing areas on which BT is expected to impact. We provide an initial but structured overview of the academic and professional literature that has considered the interactions between BT and the accounting and auditing profession.

Summary of findings

The analysis of the literature, reports and websites has revealed four main themes debated by scholars and professionals: (1) governance, transparency and trust, (2) continuous audits, (3) smart contracts and (4) accoun- tants’ and auditors’ roles in the emerging blockchain ecosystem. For each theme, we discussed the main con- tents and elaborated on BT’s potential benefits and draw- backs. One of the greatest advantages of BT emphasised by accounting and auditing academics and practitioners is that the technology increases the efficiency of record- ing, reconciling and auditing of accounting data. At the same time, BT allows accountants and auditors to save costs and time executing these tasks and reduces the risk of human error. However, in contrast to such benefits, scholars and professionals have also identified potential

limitations. For instance, while BT is a promising tech- nology for increasing trust between transacting parties, its ability to detect fraudulent transactions is limited. Some argue that unless companies record all transactions on blockchains, the technology will only provide limited benefits. Overall, we have found that the perspectives of researchers and practitioners appear to be diverse and neither group seems to be explicitly favourable or unfavourable towards blockchain development.

Implications for accountants and auditors

The accounting profession has come a long way from single-entry bookkeeping to the present-day develop- ment of BT, which is said to disrupt the accounting and auditing industry. Despite several concerns and predic- tions about how new technologies will marginally affect or eliminate accountants and auditors, historically these professions have always remained consistent. Given that BT has gained momentum only recently and still lags be- hind with regards to practical adoption, the blockchain development in an accounting and auditing context must be viewed critically. It is not feasible at this stage to fully project the impacts BT may have on accounting and auditing. Nevertheless, based on the debate in the aca- demic literature and professional reports and websites, this study has identified implications for practitioners in the accounting and audit industry.

As accountants and auditors are facing business clients currently adopting BT, they are called upon to under- stand blockchain-based accounting and auditing ap- plications. Hence, while BT is becoming more widely adopted across industries, accountants and auditors must broaden their skill set and knowledge in order to be able to anticipate and meet the demands of their clients. This study of current research on BT in the account- ing and auditing field has highlighted several possible impacts on the profession with reference to continuous audits and the application of smart contracts.

For instance, continuous audits enabled by BT may imply a reduction of labour-intensive and time- consuming audit activities such as manual data extrac- tion and audit preparation tasks. This is expected to allow accountants and auditors to focus on more valu- able activities, such as strategy advice, in-depth analyses and data mining. Accounting and auditing practitioners may expand their services exploiting the BT revolution, by advising companies on their adoption of BT, as well as supporting its implementation.

Furthermore, accountants and auditors could play a pivotal role in the generation, execution and control of smart contracts. As trusted professionals, accountants and auditors have the extensive accounting and auditing expertise necessary to monitor and control how smart contracts and encoded accounting standards and other

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

regulations are being executed. However, in order to be able to perform this task, accountants and auditors will need to acquire technical understanding of, for instance, blockchain-based smart contract solutions and associ- ated technologies such as AI.

Finally, being the experts in record keeping, standard setting and the application of complex business rules, accountants and auditors may gain a relevant role in the regulation and implementation of BT globally. On the one hand, they may offer advisory services to their clients for blockchain-based solutions; on the other hand, they may provide their expertise to authorities and regulators willing to institutionalise BT.

This study has elucidated some potential implications of BT for the accounting and auditing practice. It has shown that traditional accounting and auditing services will remain important in the future, though the spec- trum of tasks that accountants and auditors are required to fulfil will change, as will the skills they need to develop. It is unclear precisely how the future of BT in accounting and auditing will evolve. As BT leverages new opportu- nities as well as challenges for accountants and auditors, there is a need for the profession to understand the im- plications of BT and to stay abreast of developments in this new blockchain ecosystem. More research is needed to identify the effects of BT on accounting and auditing practice and to reveal the perceptions of and responses to this innovation among accountants and auditors.

Suggestions for future research avenues

From the preceding analysis it is evident that academics’ and professionals’ knowledge of the technological as- pects of BT and engagement in its technological ad- vancement is fairly limited. However, if accountants and auditors want to be on top of the blockchain develop- ment, such limitations need to be overcome in a timely manner. Collaborations with scholars and professionals from IT disciplines may support a better understanding of BT. The analysis of real-world cases of BT adoption may provide in-depth insights into blockchain’s useful- ness for and impacts on the accounting and auditing profession. Similarly, studies investigating the percep- tions and experiences of auditors and accountants may reveal the actions – if any – undertaken in the industry to face the BT revolution.

In more detail, from our literature review we identi- fied five areas related to identified key themes on which future research should focus, in order to shed more light on the applications and implications of BT. First, future studies should address the issue of BT and information accessibility. Concerns about which shareholder or stake- holder has access to what kinds of information need to be considered in the context of the particular blockchain architecture. More precisely, researchers should provide

answers to the question of whether private or public blockchains or hybrids are best suited for accounting and auditing purposes. The following research questions may help to address such matters.

� Who should be participating in the network? � Who decides what information each participant can

access? � What kind of accounting information should be

recorded on blockchains? � Which information should be kept private and which

should be made publicly available?

A second area of future research may focus on the practical applicability of smart contracts in the blockchain ecosystem. Providing answers to the follow- ing questions is of particular significance for standard setters and regulators who are likely to regulate and monitor smart contract applications, and for auditors who rely on accounting standards and other frameworks when conducting audits:

� What kind of information (rules, regulations, ac- counting standards) can be encoded into smart con- tracts?

� How will the use of smart contracts influence the audit process?

� To what extent may smart contracts make the audit process more efficient?

With regards to the latter, scholars should measure the amount of time and labour that could be saved through the use of smart contracts. A third area of future research may involve continuous audits, by addressing research questions such as:

� How will continuous audits be conducted? � Can continuous audits reach their full potential if only

selected transactions are recorded on blockchains? � How are auditors going to address the issue of ‘big

data’ generated through continuous audits?

Regarding the latter research question, it needs to be emphasised that continuous audits are likely to generate increasing amounts of accounting data with which com- puters and auditors will be required to deal. A fourth path of future research may explore the level of technological understanding and skill sets needed by accountants and auditors to provide accounting and auditing services to clients using BT. This may include an extensive analysis of how BT alters the nature of auditors’ and accoun- tants’ tasks. Hence, researchers should address research questions such as:

� What knowledge do accountants and auditors need to acquire to be able to provide blockchain-based services?

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

� How are accountants and auditors preparing for the blockchain advancement?

� How do accountants and auditors perceive the blockchain development?

� What tasks will auditors and accountants have to per- form in the future and which tasks may disappear?

� How will accountants and auditors work alongside BT in the future?

A fifth area of potential research may involve the anal- ysis of the governance and accountability of blockchain networks. While BT is supposed to increase trust and transparency, it is yet to be discussed who is to be held to account when unforeseen difficulties such as fraudu- lent transactions occur. To shed light on this matter, the following research questions need to be addressed:

� How are blockchain networks governed? � What role do accountants and auditors play in the

governance of BT networks? � Are traditional governance and accountability con-

cepts applicable to BT?

These five areas of potential future research may exploit different methodological approaches, both quantitative and qualitative. On the one hand, large- scale survey questionnaires may allow for large samples of observations to assess the diffusion stage of BT within the accounting and auditing industry. In this regard, survey questionnaires allow for the measurement of existing levels of BT knowledge and awareness among accountants and auditors. On the other hand, qualitative single or multiple case studies of BT applications may provide in-depth insights into the impacts of BT and detailed implications of how the accounting and audit- ing industry is adapting to the blockchain ecosystem. Moreover, interviews with accountants and auditors may be conducted to provide first-hand information from early adopters, potential adopters and those who may reject the technology.

This study has shed light on BT’s potential for prac- titioners and academics in the accounting and auditing field. At the professional level, BT is challenging the tra- ditional approach to accounting and auditing; hence new skills and expertise need to be developed by professionals if they want to face this challenge. At the academic level, the potential changes introduced by BT call for more re- search that will help understand this new technology and support the profession and the regulators dealing with BT. This study has analysed a small sample of publica- tions on BT in accounting and auditing but has revealed significant implications and issues of the development of blockchain for accountants and auditors. As a result, it calls for more research by suggesting relevant areas of future investigation on BT in accounting and auditing. The suggested areas of future research are not exhaustive

but are a start to a much needed research stream that can explore a fast-paced technological innovation with the potential to revolutionise the accounting and auditing profession.

Notes

1 Scholars and practitioners apply the terms ‘blockchain’ and ‘dis- tributed ledger technology’ synonymously.

2 Triple-entry bookkeeping was indicated as a solution to the limits of double-entry bookkeeping (Ijiri 1986) because a third entry by a neutral intermediary was required to authorise and assure for the two entries made by the two transacting parties. The third entry is supposed to be an independent verification to reduce room for fraudulent behaviour and enhance trust in the system.

3 Global accounting and fraud scandals (e.g., Enron and World- Com) have demonstrated that double-entry bookkeeping is not free from flaws. Bankers, traders, brokers and other financial in- termediaries have acquired a role as gatekeepers of the financial system (Casey and Vigna 2018b). Those parties do not always have a legitimate interest in recording transactions accurately. Therefore, double-entry bookkeeping is said to have only limited ability to provide comprehensive assurance for the correctness of companies’ financial statements (Dai and Vasarhelyi 2017).

4 This period was chosen to grant the collection of most recent publications from the year of the first output on BT (Nakamoto 2008).

5 The selection of Big 4 audit firms is underlined by the evident adoption of BT by those firms and the seriousness with which they approach the innovation. PwC, for instance, recruited 15 technology specialists in 2016 to set up a global technology team. In 2014, Deloitte launched Rubix, a blockchain that supports advisory services and builds distributed applications for clients across sectors. EY established its Ops Chain in 2017, which con- sists of a set of applications that facilitate the commercial use of BT. KPMG in strategic partnership with Microsoft launched their joint blockchain nodes in 2017 (NASDAQ 2017). The sam- ple that constitutes the group of leaders was selected based on the media attention to their published reports, the number of times their reports were cited in scholarly works and their interest in BT demonstrated on their websites.

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