On June 27, Humanities and Social Sciences Communications, a part of the Nature portfolio, released a report on how blockchain technology is improving audit processes in China.
The report published under the title of “Informatization construction and audit quality” is using a quasi-experimental design, which is based on the growing adoption of China’s Blockchain Platform for Bank Confirmations.
Blockchain Platform for Bank Confirmations (BPBC) Improves Audit Quality: Report
The report clearly highlights improvements in audit quality after companies adopted the Blockchain Platform for Bank Confirmations (BPBC). The integration of blockchain technology has helped the banking sector to reduce the manipulation of operating cash flows within client firms. According to the report, there were major improvements in those companies, which were involved in major manipulation before the system was integrated.
The report mentioned the conclusion that “blockchain technology improves audit efficiency, resulting in shorter audit delays and lower audit fees. It could also enhance the whole process of audit work and improve ARTICLE IN PRESS ARTICLE IN PRESS outcome-level audit quality, manifested as lower discretionary accruals and fewer restatements. Ultimately, the implementation of the BPBC platform will enhance the auditor’s personal benefits as well.”
The report also revealed that the improvement in audit quality with BPBC was even more impressive for client companies that had a history of financial restatements due to human error, higher fraud risk, or audit firms with weak project quality controls.
Apart from this, the adoption of blockchain-based bank confirmations, the adoption of BPBC has created better outcomes for audit reports, including shorter audit report delays, lower audit fees, reduced discretionary accruals, and less financial restatements.
“Blockchain technology could effectively reduce the financial pressure on audit firms in their digital transition. It can facilitate the widespread adoption of technology, advancing a market-wide elevation of professional caliber in the audit industry. For audit practitioners, especially those in small and medium-sized firms, this points to a path that balances audit efficiency and quality. By using blockchain-based confirmation with lower technological costs, they can avoid intentional or unintentional violations of auditing standards driven by demands for timeliness and cost-efficiency,” stated in the report.
Other Relevant Developments in Blockchain for Auditing and Finance
China’s Blockchain Platform for Bank Confirmation (BPBC) is part of a global trend of blockchain adoption for audit trails and transparency. Earlier pilots, such as tests by Big Four auditors with Taiwanese banks back in 2018, had already shown that immutable confirmation processes could reduce turnaround times from weeks to just days.
The BPBC platform was designed to resolve major issues in the audit process by leveraging blockchain technology. The old traditional paper-based system was not only slow, but it also had some major risks, such as operational errors, delays, and even the potential for document tampering. In the past, these kinds of errors have created audit failures and in some cases, it has led to financial scandals.
According to some reports, the enhanced information security provided by blockchain can lead to quality gains of up to 20%.
However, there is still regulatory ambiguity around blockchain-based audit reports. It is important for governments around the world to recognize the potential of blockchain-based audits and implement regulatory guidelines for the same.
“The participation of regulatory nodes helps mitigate the risks associated with technological advancement and effectively addresses concerns over data security and other issues in the audit digitalization process,” stated the report.
Apart from this, to boost the adoption of blockchains in various sectors, it is important that these networks stay bug-free. Vulnerabilities or even a small bug on the blockchain could create an adverse impact on the operations. For example, there was a major bug hidden in Zcash for more than 4 years. By using this buy, anyone could create fake tokens. However, this bug has been fixed after its revelation in the recent audit, though Zcash witnessed a sharp drop in TVL.
