Auditing and Blockchains: Pricing, Misstatements, and Regulation

36 Pages Posted:  

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: September 09, 2018

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

Suggested Citation

Cao, Sean and Cong, Lin William and Yang, Baozhong, Auditing and Blockchains: Pricing, Misstatements, and Regulation (September 09, 2018). Available at SSRN: https://ssrn.com/abstract=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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