How blockchain could prevent the next audit scandalby
In the wake of the recent Wirecard and Boohoo scandals, Finboot co-founder Nish Kotecha explores how blockchain can promote audit transparency and prevent malpractice.
With customers, consumers and investors now increasingly conscious about companies’ environmental, social and governance (ESG) activities, it is more important than ever that businesses are transparent about their operations in order to demonstrate their ethical practices.
Technology holds the key to this. Within financial reporting and audit procedures, blockchain could and should be used to ensure that operational standards and financial integrity are upheld.
Auditing and reporting malpractice is nothing new, but recent high-profile cases illustrate how the status quo is failing to keep up with new risks and abuses.
Wirecard and Boohoo scandals
Disgraced payments platform Wirecard’s downfall stemmed from its failure to show a “true and fair” review of its accounts, as defined by the ICAEW. Interestingly, there isn’t actually a statutory definition of “true and fair”, despite the fact that this concept of acceptable accounting conduct has been integral to accounting and auditing practice in the UK for decades, and is a part of English law.
In the case of Boohoo, the business came under fire after an exposé by The Sunday Times revealed it was using suppliers in Leicester that pay their employees significantly less than minimum wage and had poor health and safety records.
The company said it was “shocked and appalled” by the findings, but the question is, should a true and fair audit of Boohoo’s financial statements have flagged up the risks of sourcing around 40% of its supplies from a city that is known to house textile factories linked to labour malpractice?
Boohoo had highlighted in its Section 54 filing under the UK Modern Slavery Act that it expects all its suppliers to sign a statement acknowledging their own full compliance with the legislation. It also stated in its 2019 modern slavery statement that “We continue to work with Leicester Council… highlighting the health and safety issues and risks to those vulnerable workers in buildings not considered fit for purpose and at risk of exploitation.”
Boohoo may have been transparent and compliant with the law by placing these risks in the public domain, but perhaps it was also being crafty in hoping the true risk, sitting at a distance with third party suppliers beyond the typical domain of auditors, would not be noticed.
However, the market certainly sat up and took notice when the scandal broke, wiping away half of the company’s valuation.
Using blockchain to create “trust platforms”
In an age of accelerated digitisation, how can companies – especially those listed – guarantee genuine transparency and visibility to ensure a true and fair audit? This is where blockchain can help.
With blockchain, information is stored in a central depository and certified by a distributed network of computers (“nodes”). Data cannot be duplicated or manipulated, meaning that the information inputted into the blockchain is a single source of truth – indeed, blockchain technologists refer to the technology as the “trust platform”.
A central depositary, tracked to ensure accountability and entirely tamper-proof, is surely the most effective solution when it comes to releasing material information. This would prevent what happened with Boohoo, where information was published in the public domain yet remained almost invisible.
Only by providing more verified and credible data will companies be able to generate trust among their stakeholders. This is just as much for their benefit: after all, if investors trust what a business is saying, they will reward it with a higher valuation.
Audit transparency and accountability
Blockchain introduces transparency and accountability – and therefore trust – into the audit process. For instance, if auditors at Wirecard, where some €1.9bn went missing, had used blockchain to embed the immutable verification of bank balances directly in the audit process, then it would not have been possible to inflate the balance sheet.
Instead, auditors relied on the client for banking information before asking the same bank for verification in an absurdly convoluted process that left itself wide open to foul play, which would go on to cost shareholders around €20bn.
The right technology can bridge the gaps in the current auditing process. By using blockchain, financials and other regulatory disclosures could be recorded in a central depository, which, by virtue of the technology, would be immutable, verifiable and provide visibility of the information’s source. This would minimise risk, reduce costs and reassure investors that the financial disclosures they rely on to make decisions can be traced back to a validated and trustworthy origin.
Ultimately, there is no trust without transparency and with customers, consumers and investors now increasingly conscious about companies’ ESG activities. Blockchain can’t prevent businesses from acting irresponsibly, but it can transform auditing and reporting procedures, establishing the businesses which use it as the gold standard in transparency – an ever-important attribute to all stakeholders.
You might also be interested in
Nish Kotecha is the chairman and co-founder of blockchain innovation group Finboot. He is also the Deputy Chairman of the London Chamber of Commerce, Chairman of the London Chamber of Arbitration & Mediation, and a member of the Blockchain & Climate Institute’s advisory board.