Auditing and Blockchains: Pricing, Misstatements, and Regulation

49 Pages Posted: 25 Sep 2018 Last revised: 9 Nov 2018

See all articles by Sean Cao

Sean Cao

Georgia State University - School of Accountancy

Lin William Cong

University of Chicago - Booth School of Business

Baozhong Yang

Georgia State University - Robinson College of Business

Date Written: October 9, 2018

Abstract

To understand the implications of blockchains for financial reporting and auditing, we analyze auditor competition, audit quality, client misstatements, and regulatory policy all in a unified framework. We demonstrate how collaborative auditing using a federated blockchain can improve auditing efficiency for not only transactions recorded on proprietary databases, but also cross-auditor transactions through zero-knowledge protocols that preserve data privacy. Consequently, the technology disrupts conventional audit pricing and effort focus: Auditors charge competitive fees based on clients’ counter-parties’ auditor association and corresponding transaction volume instead of client size. Blockchains also reduces clients’ incentives to misreport and auditors’ sampling costs, allowing auditors to reallocate effort from transaction-based auditing to discretionary account auditing. Importantly, auditors’ technology adoption is costly and exhibits strategic complementarity, hence a regulator can help select an equilibrium with lower endogenous misstatements, audit sampling, and regulatory costs.

Keywords: Blockchain, FinTech, Financial Reporting, Collaborative Auditing, Audit Pricing, Audit Sampling, Auditor Risk, PCAOB, Technology Adoption

JEL Classification: D21, D40, M42, M48

Suggested Citation

Cao, Sean S. and Cong, Lin and Yang, Baozhong, Auditing and Blockchains: Pricing, Misstatements, and Regulation (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3248002 or http://dx.doi.org/10.2139/ssrn.3248002

Sean S. Cao

Georgia State University - School of Accountancy ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States

Lin Cong (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Baozhong Yang

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States
404-413-7350 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www2.gsu.edu/~fncbyy/index.html

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