This is where the blockchain can play an integral role…
The double-entry book-keeping accounting and traditional audit processes involved have remained relatively unchanged for decades, with miniscule improvements to change the nature of information from paper to digital. The distributed decentralized ledger technology is well suited to address this scenario as it provides a globally distributed decentralized ledger that everyone has the exact same copy of and no one can tamper with. It gives the ability to compare accounting entries between two trading partners, while maintaining data privacy, thus significantly reducing the reliance on auditors for testing financial transactions. Once a match is posted to the blockchain, the transaction is time stamped and irreversibly recorded. Everyone agrees on consensus that those transactions actually happened, providing verification. Thus, we have the debit, the credit, and confirmation by the network.
A blockchain solution could also allow for automated third party verification by a distributed decentralized network to ensure that transactions are complete, accurate and unalterable.
E.g., Let’s say Company X wants to pay Company Y. Traditionally, both X and Y would rely on their accounting systems alone to describe this situation. In a blockchain world, both X and Y can share a “receipt” (the exact same copy), which is cryptographically signed.
Thus, in the above case, there are three parties, each holding a copy of the same receipt – Company X, Company Y and the mediator, which is the blockchain that verifies each transaction and issues the receipt. Thus, every transaction would have a corresponding entry that would have to be verified by the blockchain. Now every transaction is effectively recorded in three places.
The receipt above is itself strong because the payer cryptographically hashes it, and it is cryptographically signed by the mediator (at the least). It represents concrete corroboration that it is practically irrefutable.
Since all participants agree upon the distributed ledger and there are digital signatures to provide a degree of non-reputability, auditors can rely on this ledger, making their job easier.
Since all audit procedures entail confirming transactions and balances on a company’s accounting ledger, blockchain is an ideal solution, as it can do this by itself, without the use of a third party, like the auditor. Everything on the company’s books could occur on the blockchain.
Instead of employing its own auditors to examine the accounting, a company can log all transactions on an internal blockchain. Even external auditors or regulators can inspect the firm’s books in real time. Thus, this technology has value for even the accounting firms that make their money from auditing. Regulators can use this technology to stress-test the corporations and identify questionable practices.