Auditing and Blockchains: Pricing, Misstatements, and Regulation

Abstract

To understand the implications of blockchains for financial reporting and auditing, we study in a unified framework auditor competition for clients, endogenous audit quality and client misstatements, and regulatory policy. We first 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 a zero-knowledge protocols that preserves data privacy. The technology disrupts conventional audit pricing: instead of pricing based on client size, auditors charge competitive fees dependent on clients' counter-parties’ auditor association and corresponding transaction volume. Moreover, blockchain adoption reduces client incentive to misreport and that auditors can reduce sampling costs by focusing on off-chain transactions. Importantly, auditors’ adoption of the technology exhibits strategic complementarity, leading to equilibrium multiplicity. A regulator can help select an adoption equilibrium that reduces misstatements as well as auditing and regulatory costs.

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