Auditing and Blockchains: Pricing, Misstatements, and Regulation
49 Pages Posted: 25 Sep 2018 Last revised: 9 Nov 2018
Date Written: October 9, 2018
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: Suggested Citation