Pub. 1 2019 Issue 3

27 nebraska society of cpas W W W . N E S C P A . O R G to assist in the auditability of the public blockchain: fault-tolerant system, digital timestamping, and a currency ledger using cryptographic primitives. A fault-tolerant system, when applied to the Bitcoin blockchain, is the process of building blocks by independent miners. If there are any attempts atmalicious behavior or attacks on the system, a miner can identify and halt the process. Miners verify transactions on the Bitcoin blockchain and are chosen at random. Currently, the exact number of miners on the network is unknown, but estimates have reached as high as 100,000 miners, according to the news source Brave NewCoin. These miners can halt and report a transaction in order to prevent it frombeing completed. The process of building blocks on the Bitcoin blockchain is that once a group of transactions has been mined, they are grouped together into a single block and presented to the blockchain for authentication to be added to the chain of blocks, hence the name blockchain. Digital timestamping is a core feature to external users and provides critical accountability through reliably verifying that the service operates in the intended way. This feature is a technique that leaves a digital fingerprint of the original data in the correct order within the blocks when added to the blockchain. A currency ledger using cryptography is the most notable feature of the Bitcoin blockchain. When a transfer of Bitcoin occurs, it is publicly posted onto the blockchain for full transparency. This feature offers a use case for the blockchain for its users to transact upon it. Utilizing the first two features in conjunction with the third provides the key characteristics and functionality of the Bitcoin blockchain. These three features offer accountability and third-party verif ication from an independent source. Auditing a Private Blockchain Auditing a private blockchain involves creating an audit plan similar to that of an informationtechnology audit, or information systems audit, where the infrastructure of the technology system is evaluated to accurately reflect the blockchain’s internal controls and effectiveness. Installing and maintaining effective controls is critical for an information technology. Anaudit of an internal databaseor blockchain ensures that the appropriate controls are in place aswell as tests the system’s functionality, specifically end-to-end. This involves performance testing on both the system’s inputs and outputs. Generally, an auditor would create a sample transaction to test the entire process. Auditors may also create “test” transactions, or fake transactions, in order to review and verify the controls in real-time. Benefits for Auditors The technological benefits of utilizing a distributed ledger, whether public or private, in the auditing process include: • Decentralization—the peer-to-peer design of blockchain eliminates the use of a trusted central third party; • Encryption—preservation of client privacy through encrypted communication; and, • Immutability—virtually fraud-proof database of information. Auditing has a unique need for distributed ledgers and blockchai n technology distinct from other industries since this new technology can greatly increase audit efficiency. Is it important for accounting firms that efficiency is managed to help with audit pricing, the number of clients managed, and overall customer satisfaction. An audit can be extremely meticulous, with auditors obtaining suppor ting documentation to verify transactions. Audit teams will need to adapt to utilize this new technology in an effective manner. With the current technological disruption that distributed ledgers and blockchain have to offer, this could drastically change the future auditing landscape. t This article was originally published in the March/ April 2019 issue of New Jersey CPA magazine (njcpa. org/newjerseycpa). Mark Eckerle, CPA, is supervisor at WithumSmith+Brown, PC. He is amember of the NJCPA Emerging Leaders, Cannabis, Accounting & Auditing Standards, and Emerging Technologies interest groups. He can be reached at meckerle@withum.com .