BLOCKCHAIN: The New Financial Auditor

Asia Blockchain Review
September 11, 2019
BLOCKCHAIN: The New Financial Auditor

 With a combined gross domestic product (GDP) growth of 5.3% in 2018, Southeast Asia (SEA) is one of the fastest growing regions in the world. The continuous expansion of the region’s commercial landscape has brought into focus the need for a more efficient way to conduct external financial audits and for SEA companies to remain in compliance with the law, as regulators and auditors alike explore emerging technologies for more systematic solutions.

The Mounting Costs of Global Financial Auditing 

In the lucrative business of auditing, there’s the ‘Big Four’ — PricewaterhouseCoopers (PwC), KPMG, Ernst & Young (EY) and Deloitte. These four auditors, all of which have operations in Southeast Asia, collectively earned a staggering US$134.28 billion in 2018. Despite the high cost of external financial audits, the process is far from foolproof.

The weaknesses in the existing financial auditing framework were laid bare by the 1 Malaysia Development Bhd (1MDB) scandal, which reportedly involved irregular transactions worth a combined US$4.2 billion, eventually triggering investigations by regulators from a host of countries and territories, including Australia, Hong Kong, Indonesia, Singapore, Switzerland, the United States, and the United Kingdom. Ultimately, the tremendous embezzling of state funds was exposed by foreign media watchdogs reporting leaked email correspondences — not auditors, the traditional watchdogs of the financial world.

Regulators & Auditors Form United Front in SEA

In February 2017, the ASEAN Audit Regulators Group’s (AARG), comprising Malaysia’s Audit Oversight Board (AOB), Indonesia’s Finance Professions Supervisory Centre, Singapore’s Accounting and Corporate Regulatory Authority, and Thailand’s Securities and Exchange Commission, reached an agreement with the Big Four to establish measurable goals to improve the quality of financial audits of companies in the region. 

The goals are part of ASEAN’s efforts to ensure that financial statements are reliable, thereby boosting investor confidence in the region’s capital markets. It is clear, therefore, that both regulators and auditors in Southeast Asia have found common ground in their desire to elevate the standards of the region’s financial audit industry.

However, as it is with many aspects of our social and economic lives that depend on trust and transparency, blockchain may offer a solution. As the 1MDB scandal originated in Southeast Asia, it may be fitting to examine the potential of this emerging technology in the region’s emerging economies.

Blockchain as a New Tool for Auditors

In an increasingly digitized and interconnected global economy, it is impossible not to consider the potential role of distributed ledger technology. With major corporations establishing branches across different countries, the interoperability of blockchain would be very useful in terms of streamlining the transaction monitoring and record-keeping processes of multinational corporations. Take, for example, EY’s Blockchain Analyzer — a multipurpose blockchain analytics tool. Blockchain Analyzer operates using the zero-knowledge protocol to facilitate financial audits on a global scale to meet professional standards.

As more blockchain startups choose to operate out of Southeast Asia, particularly those involved in cryptocurrency, there is a need for financial audit services that specifically cater to such businesses. On this front, PwC has announced in March 2018 that it will be offering auditing services for blockchain companies to stimulate industry adoption of the technology. For cryptocurrency businesses, PwC will be using its Halo suite of tools, which is able to establish ownership of cryptocurrencies by verifying the pairing between private key and public addresses. As a show of support for the crypto industry, PwC accepts liquid cryptocurrencies such as Bitcoin as a means of payment for its services.

Given the rapid development of the region’s economy, the need for financial audit services in Southeast Asia will likely see continuous growth, which will, in turn, pose a growing challenge to meeting industry demand and the professional standards of auditing. Given the tedious nature of data entry and verification found in audit work, blockchain’s technology features of automation and interoperability will undoubtedly find its place in the auditor’s toolbox. Blockchain could enable the growth of SEA economies to continue unabated, without sacrificing financial integrity.

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