In the realm of information systems, ensuring data integrity, security, and transparency are paramount. Traditional audit and control mechanisms have often faced challenges in keeping pace with the dynamic nature of digital transactions. However, the emergence of blockchain technology has ushered in a new era of trust and accountability, transforming the landscape of audit and control processes.
Blockchain Basics
At its core, blockchain is a decentralized and distributed ledger technology that records transactions across a network of computers. Each transaction, or block, is cryptographically linked to the previous one, forming a chain of blocks. This immutable and transparent nature of blockchain ensures that once a transaction is recorded, it cannot be altered or tampered with, providing increased integrity and auditability.
At its core, blockchain is a decentralized and distributed ledger technology that records transactions across a network of computers.Challenges of Auditing Blockchain
Auditing blockchain technology poses several challenges, primarily stemming from its decentralized nature. The distributed ledger system means that transaction records are spread across multiple nodes, making it difficult for auditors to access and verify data in a centralized manner. Additionally, the immutability of blockchain records means that once transactions are recorded, they cannot be altered, making traditional audit trails obsolete.
Furthermore, blockchain changes the way auditors access data by providing a transparent and tamper-resistant ledger. This reduces the need for complex reconciliation processes since all transactions are securely recorded in real time. However, auditors must adapt to new tools and techniques for analyzing blockchain data effectively.
Despite these challenges, blockchain technology offers benefits for auditing, such as increased transparency, traceability, and efficiency. Auditors can utilize cryptographic techniques to verify the integrity of transactions and ensure compliance with regulations. Overall, while auditing blockchain presents unique challenges, it also opens opportunities for more accurate and reliable financial reporting.
Supply Chain Management
In supply chain management, companies can use blockchain to track the movement of goods from the point of origin to the final consumer. Each transaction or transfer of ownership is recorded on the blockchain, creating an immutable and transparent ledger of all activities. This transparency helps to ensure that all parties involved can verify the authenticity and integrity of the products, reducing the risk of fraud or tampering. By recording every step of the supply chain journey on a blockchain, stakeholders can verify the authenticity and origin of products, thereby minimizing the risk of fraud or counterfeit goods companies like Walmart and IBM have successfully implemented blockchain technology to enhance transparency and traceability.1 Walmart has partnered with IBM to use the IBM Food Trust platform, built on Hyperledger Fabric, to track the provenance of food products from farm to fork. This system records each transaction in the supply chain on an immutable blockchain ledger, allowing all parties to verify the authenticity and integrity of products. For instance, Walmart's blockchain solution significantly improved the traceability of mangoes in the U.S., reducing the time needed to trace their origin from seven days to just 2.2 seconds. Similarly, in China, Walmart applied the blockchain to track pork, ensuring the authenticity of products and increasing transparency in the supply chain. This system helps prevent fraud, ensures compliance with quality standards, and reduces the risk of counterfeit goods.
To audit the supply chain, auditors can utilize blockchain explorers to trace the history of a product, verify timestamps, and ensure that each transaction matches the recorded data on the blockchain. For example, auditors can check if a product labeled as organic has verifiable data points from the farm to the retailer, ensuring compliance with quality standards and regulatory requirements.
Smart Contracts
A smart contract is a digital agreement signed and stored on a blockchain network that executes automatically when the contract's terms and conditions (T&C) are met; the T&C is written in blockchain-specific programming languages.2 Smart contracts can be implemented on the blockchain to automate certain aspects of auditing and control processes, further increasing efficiency and accuracy. A perfect example of a smart contract on the blockchain is the use of these contracts for royalty payments in the music industry. Traditionally, tracking and distributing royalties to artists and copyright holders involved complex and often opaque processes prone to errors and delays. With blockchain-based smart contracts, music industry stakeholders can automate royalty payments based on predefined rules and conditions encoded into the smart contract. For instance, when a song is streamed or downloaded, the smart contract automatically triggers the calculation and distribution of royalties to all relevant parties according to the agreed-upon terms. This process is transparent, auditable, and eliminates the need for intermediaries, reducing costs and increasing trust among stakeholders.
One of the real-life examples of blockchain application in the music industry is the partnership between Imogen Heap, a Grammy-winning artist, and Ujo Music, a blockchain music platform.3 They developed a smart contract-based system called "Mycelia" to enable direct and transparent royalty payments to artists. This system ensures that artists receive fair compensation for their work while maintaining transparency and accountability throughout the process.
Another example of blockchain application in the music industry is the acquisition of MediaChain4 (now a part of Spotify). MediaChain is a peer-to-peer, blockchain database for sharing information across different applications and organizations. In addition to organizing open-source information by issuing unique identifiers for each piece of information, MediaChain also works with artists to ensure they are paid fairly. The company issues smart contracts with musicians that directly state their royalty stipulations without the hassle of confusing third parties or contingencies.
To audit smart contracts, auditors can examine the code of the smart contract to ensure it is properly designed and implemented. They can also use blockchain explorers to verify that the terms of the contract are being executed as intended, with each royalty payment accurately recorded on the blockchain.
Financial Auditing
In the financial sector, auditing processes have traditionally been labor-intensive and prone to errors. Blockchain technology streamlines these processes by providing a single, immutable record of financial transactions that organizations can trust. This "single source of truth" ensures that all recorded transactions are accurate, transparent, and verifiable. For example, auditing enterprises can leverage blockchain to reconcile transactions in real time, verify the accuracy of financial records, and detect anomalies or discrepancies more efficiently. This reduces the time and cost associated with audits and enhances the overall reliability and trustworthiness of financial reporting.
To audit financial transactions on a blockchain, auditors can use blockchain analytics tools to trace transactions, verify balances, and ensure that all records are accurate and consistent with the organization's financial statements. These tools can also help identify any unusual or suspicious activities that may indicate fraud or financial misconduct.
Healthcare Data Management
Healthcare organizations are increasingly adopting blockchain technology to improve the security and privacy of patient data. By storing medical records on a blockchain, patients can maintain control over their health information and grant access to healthcare providers on a need-to-know basis. Moreover, blockchain-enabled systems ensure the integrity of medical records, preventing unauthorized tampering or manipulation of sensitive data. This not only enhances compliance with data protection regulations like the Health Insurance Portability and Accountability Act (HIPAA) but also facilitates seamless interoperability among disparate healthcare systems.
Blockchain can securely manage and share Internet of Things (IoT) generated data, such as vital signs, patient monitoring, and medical device data.5 This ensures data integrity, confidentiality, and interoperability across different systems and devices.
One notable example of a real-life organization using blockchain technology to manage and secure data from IoT devices in healthcare is Mediledger.6 Mediledger is a blockchain-based platform designed specifically for the pharmaceutical supply chain, but its principles can be applied to healthcare IoT data management. Mediledger uses blockchain technology to ensure the integrity, confidentiality, and traceability of data. While Mediledger is primarily focused on the pharmaceutical industry, its approach illustrates the broader application of blockchain technology in healthcare IoT data management, ensuring that sensitive health data remains secure, confidential, and trustworthy. Other organizations and platforms like Chronicled and IBM Watson IoT are also exploring similar applications of blockchain in healthcare to enhance data security and integrity.
Conclusion
Blockchain technology holds immense potential to transform audit and control processes in information systems across various industries by providing a decentralized, immutable, and transparent platform for recording transactions. Real-life examples in supply chain management, financial auditing, and healthcare data management demonstrate the tangible benefits of integrating blockchain into existing systems. As organizations continue to embrace digital transformation, blockchain will play a pivotal role in shaping the future of audit and control mechanisms, ensuring a more secure and trustworthy ecosystem for managing information.
Endnotes
1 Hyperledger Foundation, “Case Study: How Walmart Brought Unprecedented Transparency To The Food Supply Chain With Hyper Ledger Fabric,” 8 July 2023
2 IBM, “What are Smart Contracts?,”
3 Burchardi, K.; “The Blockchain will Disrupt the Music Business and Beyond,” Wired, 20 January 2018
4 Coleman, L.; “Spotify Acquires Blockchain Startup Mediachain,” CCN, 4 March 2021
5 IBM, Watson
6 Morris, N.; “MediLedger: Pharmaceutical Industry’s Blockchain Network,” Ledger Insights, 27 July 2018
Adeleke Ayobami
Is a results-oriented certified information systems auditor (CISA) and certified cybersecurity professional with over a decade of experience in IT support, asset management, and internal controls. With a background as an IT support specialist and internal control specialist, Ayobami has demonstrated expertise in fortifying IT systems' security and efficiency through the crafting and management of comprehensive internal controls. Ayobami has a proven track record of designing and implementing internal control frameworks, enhancing existing SOX controls tailored to organizational requirements. Committed to elevating organizational security and efficiency, Ayobami holds a B.Sc. degree in Computer Science/Statistics from the University of Nigeria Nsukka and a national diploma from Federal Polytechnic Ede, Osun State, Nigeria.