Distributed Ledgers and Secure Multi-Party Computation for Financial Reporting and Auditing

Abstract

To understand the disruption and implications of distributed ledger technologies for financial reporting and auditing, we analyze firm misreporting, auditor monitoring and competition, and regulatory policy in a unified model. A federated blockchain for financial reporting and auditing can improve verification efficiency not only for transactions in private databases, but also for cross-chain verifications through privacy-preserving computation protocols. Despite the potential benefit of blockchains, private incentives for firms and first-mover advantages for auditors can create inefficient under-adoption or partial adoption that favors larger auditors. Although a regulator can help coordinate the adoption of technology, endogenous choice of transaction partners by firms can still lead to adoption failure. Our model also provides an initial framework for further studies of the costs and implications of the use of distributed ledgers and secure multi-party computation in financial reporting, including the positive spillover to discretionary auditing and who should bear the cost of adoption.

Keywords: Accounting, FinTech, Misreporting, Monitoring, Permissioned Blockchains, Privacy Preservation, Interoperability, Technology Adoption

JEL Classification: D21, D40, G32, G34, M42, M48