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The financial auditing of distributed ledgers, blockchain and cryptocurrencies

Broby, Daniel and Paul, Greig (2017) The financial auditing of distributed ledgers, blockchain and cryptocurrencies. Journal of Financial Transformation, 46. pp. 76-88. ISSN 1755-361X

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Abstract

The internet and digital transfer of money is set to fundamentally change the way financial audits are conducted. This paper critically assesses the way that such assets are currently audited when stored in distributed ledgers, transmitted via a blockchain or whose value is stored in crypto rather than sovereign currency form. In it, we identify the self-verifying nature of such financial data which negates the need for traditional audit methods. Despite the promise of such methods, we highlight the many weaknesses that still exist in the blockchain and how these presents issues for verification. We address distributed transaction and custody records and how these present auditing challenges. We suggest how auditors can use smart contracts to address these and at the same time provide arbitration and oversight. Our contribution is to propose a protocol to audit the movement of blockchain transmitted funds in order to make them more robust going forward.