Will blockchain replace audit?

CAN BLOCKCHAIN REPLACE AUDIT?

Doshex founder Alex de Bruyn believes that blockchain technology will begin to replace external audit.

If transactions can be reconciled and verified in real-time, and be traceable, there will be no need for a third-party auditor. This is why blockchain technology will kill audit as we know it, says Alex de Bruyn, founder and CEO of Doshex, a South African company that was a Blockchain Trailblazer Award finalist at IBM Think 2020.

“Audit began with the mismanagement of trust,” Alex says. “People didn’t trust the books that one party held, so we then moved from a single accounting entry point of view to a double accounting entry point of view where both parties held a record of transactions. We then said we had to get independent people verify that those records were true. Basically, the more people we get to say something is correct, the more we can trust that it is true. The problem with that is we are still human and we’re still flawed and we’re still malleable to corruption, so, as recent history has shown us, there is still an element of mistrust with an auditor.”

Alex, who comes from a management accounting background, believes that with the evolution of technologies such as blockchain, mistrust between parties can be removed completely. “With blockchain, we no longer have to rely on third parties to either facilitate something or to confirm something,” he says. “Simplistically, a blockchain is really just making sure that the records both parties hold are accurate and transactions are only confirmed to each other’s records if they do reconcile. Blockchain ensures everyone’s ledgers are in sync, accurate and valid – in real-time. A transaction cannot be completed unless it reconciles to everyone’s ledger and everyone agrees to that.” Blockchain therefore replaces the need for an auditor, as verification happens in real-time. “With blockchain, we can inspect transactions independently. We don't need to trust third parties to get audited for us,” he says. “Blockchain deals with the idea of data mistruth in realtime. We can understand what did or did not happen, as it happens. The consequences of that may still require a human opinion or judgment to be passed, but that’s the role of a judge rather than an auditor. What blockchain does is take the issue of inaccurate data off the table.”

There is a caveat, however, which is that many enterprise blockchain solutions cannot guarantee the quality of the inputs into the system. Yes, everyone might agree that a data entry is correct and so it will be logged, but what if everyone was wrong? There is still room for human error. Alex’s company, Doshex, provides a smart contract solution called Sherlock, and this seeks to remove human error at every point in the system by using technology like IoT and biometrics to verify data.

A case for Sherlock

Sherlock was born out of trying to remove the complexity and lack of transparency from enterprise contracts management in the construction sector. “In construction, there are so many opportunities for mismanagement and a lack of trust between parties,” says Alex. “Nobody knows in real-time what’s actually happening in everyone’s systems. With Sherlock, we built three layers. The first one is what we call the blockchain event log. That takes any data point, whether it’s general telemetry, IoT devices, systemic inputs – anything that's happening in-field, across systems, across the processes – and it captures that to an object within the blockchain. That doesn't give us any sort of logic; it doesn't give us any sort of output. All it does is help us to understand what actually did happen. So, that's essentially our audit record.” The layer on top of that is the “integrated rules engine”, which comprises the smart contract construction element or configuration elements. These plot all the likely scenarios that will occur and what will be required in terms of verification and actions at each point. “We look at the condition, the proof and the result,” says Alex. “We ask how many people we need to agree that that condition occurred, what proof we need to attach to that, and what the result is for the next flow.”

In the construction context, these are aligned to all existing standard contracts for capital project builds, as well as custom fit-for-purpose smart contracts. “We codify scenarios into conditions, proofs and results and look at what is required to self-execute based on certain events that happened,” Alex says. “Those are the two major parts of our system that can flow across any industry. We've modularised to cater for specific needs, for example time and attendance, occupational health and safety, activity monitoring or even vegan standards in agriculture and carbon credit issuance in manufacturing.” The final layer comprises applications to manage either input or output of data. Alex notes that most enterprises have existing, well-defined systems, so Sherlock offers the means to take trusted data into their systems and pass that back to be tracked. “In the lower parts of the value chain, such as the ‘bakkie brigade’ guys who don’t have those systems, we give them the tools to manage the input data a lot better, to ensure its trustworthiness,” he says. The benefits of implementing smart contracts extend beyond no longer needing to pay audit fees, Alex says. They include real-time tracking of cash-flow and project progress (and therefore improved ability to manage risk), as well as a holistic, verified view across

“Blockchain deals with the idea of data mistruth in real-time. We can understand what did or did not happen, as it happens.”

all projects. “The whole point of this is that it has to be collectively beneficial so everyone gets the benefits of process improvements. Everyone gets the benefit of faster payment cycles. The process efficiency is distributed across all the participants in the value chain.”

Pace of change

Alex admits that uptake has been slow from a payments tracking process, as construction firms remain wary of financial transparency. “There’s money in the mess,” he says. “But where we have seen interest is anywhere there’s a big risk (such as occupational health and safety) and where there’s need for independent verification (such as confirming that farming standard SOPs have been followed).” However, Alex believes that the tipping point for widespread adoption of blockchain will only be reached when big players in the risk space (banks, insurers and revenue authorities, for example) begin to enforce it. “When SARS says they will accept a record from a blockchain that’s captured every single transaction into SAP for a large corporate without an independent audit, that’s when the tipping point happens,” he says. Of course, the risk in blockchain requires assurance too, and Alex says auditors might begin to explore the skills sets to offer auditing of blockchain code as a consulting service. “I think auditors need to admit that if they don’t evolve, they won’t have jobs,” he says. “The longer they resist change, the less agile they're going to be to be able to find a new place in the world. My advice would be to adopt the tools that are there that will replace them, and be on the leading edge of the change.” l