Financial audit of cryptocurrency assets - Findings from expert interviews

Abstract

So-called cryptocurrencies powered by blockchain technology have exploded in popularity in recent years, and they are disrupting the transfer of digital money and financial services at large. In the coming years, companies in increasing numbers might have assets in the blockchain, do transactions in the blockchain as well as store information in it. This provides a fundamental challenge for financial auditors who will not be able to rely on their existing processes and routines when auditing blockchain assets and transactions. In my thesis, I identify and analyze the defining characteristics of blockchain technology, examine the accounting treatment of cryptocurrency assets as well as explore the practical risks of the auditing of cryptocurrency assets. For this study, three semi-structured expert interviews were conducted with audit professionals. The discussion with these experts was in line with the initial analysis based on prior research and industry reports. The three fundamental characteristics of blockchain technology identified are the distributed nature of the electronic ledger, the cryptographic security measures and time-stamping of records as well as the consensus protocol. These factors also determine the extent to which blockchain data is appropriate audit evidence as such. Few official pronouncements from accounting bodies exist regarding the accounting treatment of cryptocurrency assets. The experts’ view supported the initial analysis and interpretation in the study. There also exists little regulation related to cryptocurrency assets, something that concerned the interviewees. According to an expert, a distinction should be made between utility tokens and security tokens, as the issuance of security tokens can be likened to an IPO. The results of the study indicate that the auditing of cryptocurrency assets as well as different applications of the blockchain in financial administration will increasingly impact auditors’ work in the near future. According to the experts, the biggest practical risks related to a cryptocurrency audit are related to the ability to make undetected related party transactions using cryptocurrencies. Second-most important were risks related to private key theft, and third-most important were risks related to storage of assets on third-party exchanges. “Existence” was considered the most important assertion, with “rights and obligations” at second and “valuation” third.