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Another Audit Scandal or Systemic Failure?

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by Helena Ross · 5 min read
Another Audit Scandal or Systemic Failure?
Photo: Coinspeaker

Auditchain Labs AG, based in Switzerland is about to launch a decentralized financial disclosure and audit infrastructure for issuers of securities and digital assets.

In June 2020, Wirecard, a German payments processor, filed for insolvency after ‘mislaying’ €1.9 billion Euros. Beyond accounting irregularities, aggressive acquisitions, and profit inflation, the primary link connecting this situation to numerous other corporate debacles was a failure by the auditor to be sufficiently skeptical. 

The Auditchain Protocol may provide the solution. Auditchain requires more than one validator to sign and be bound to its digital engagement contract. The Auditchain whitepaper refers to it as an External Validation Contract “EVC”. The Auditchain EVC is the blockchain equivalent of the comprehensive audit engagement agreement between the company and its auditors. 

In this case, the community of holders of AUDT decides the minimum number of validators required to be parties to the EVC. If investors think more auditors are required, they will propose it and a vote will be cast. 

Cash and Performance

Media coverage focused on the failure by Wirecard’s auditor to properly confirm €2 billion in bank balances. Instead, the auditor relied on scanned documents sent to them by Wirecard itself. The auditor issued an opinion, knowing that the bank balance was not confirmed properly and was over 70% of Wirecard’s 2018 cash reserves. The scandal further showed that the auditor should not be the only party that confirms bank balances as the process obviously contains vectors.

Beyond falsifying large cash balances, aggressive acquisitions further accelerated Wirecard’s failure and its auditor failed to flag this. Their Going Concern assumption was meant to be supported through strong performance and a healthy balance sheet. While the magical €2 billion in bank balances held offshore favored their liquidity, their revenues of over €2 billion were inflated by €600 million using revenues from smaller companies acquired in that year. Wirecard’s true performance was actually weaker than its 2017 equivalent and showed signs of a highly-leveraged, shrinking company. 

Systemic Failure

The audit procedures used in 2017 may likely have been reused, giving little consideration to the company’s shrinking size or its price-to-book disparity, especially when Wirecard’s share performance in September 2018 doubled beyond its January 2018 price. The €600 million in consolidated revenue was simply another number to audit. In reality, their specialist audit work would be based on written representations and memorandums issued by various teams – Due Diligence, Data Analytics, Valuations and others – rather than understanding how Wirecard’s share-price explosion was supported by its aggressive acquisitions, instead of organic growth.  

Wirecard highlights that the problem with reliability, independence and competence in the audit industry is systemic. Systemic due to its 800-year old audit process that officially became obsolete on 3 January 2009. Emerging technologies have already automated many aspects of the traditional financial world, and blockchain will provide a greater level of transparency. This is especially true in the audit industry, where the Big Four firms act as sole validators of over 99% of the S&P 500’s $20-25 trillion market capitalisation. While the audit profession emphasizes the drawbacks of materiality and reasonable assurance, they have yet to adopt blockchain in a manner that benefits society.

What Transformation?

Every major fraud is followed by comments made by members of the audit profession that the system is broken. Do they do anything about it? No. This is the real reason why the Chancellor was on the brink of a second bailout for banks, as immortalised in the Bitcoin Genesis Block in January 2009. It’s the integrity and reliability of the world’s business and financial information that led to the financial crisis. 

In comparison, Auditchain Labs AG, based in Switzerland is about to launch a decentralized financial disclosure and audit infrastructure for issuers of securities and digital assets. The Auditchain Protocol is a community-owned and governed financial disclosure protocol that is addressing the problematic integrity and reliability of the world’s business and financial information. 

The Auditchain Protocol is a Web3 based professional services and financial disclosure protocol that incentivizes and enables accountants, CFOs, CFAs and other professionals to create Process Control NFTs that automate immutable accounting, financial reporting, audit and analysis processes on the Auditchain Protocol. 

Each time Process Control NFTs are used, royalties are paid in AUDT, the native staking, settlement and governance utility of the Auditchain Protocol. AUDT is paid to the creator of the control and to the validators that provided assurance that the control works correctly. 

Exchange support for the AUDT Token is hotly anticipated and is expected to occur this quarter. 

The Auditchain Protocol will be formally launched on 8 June 2022 live at the Digital Accountancy Show – Powered by Auditchain held at Tottenham Hotspur Stadium in London in front of thousands of members of the accounting and assurance profession.The Auditchain Protocol is designed to transform the €550 billion assurance and financial disclosure profession in a manner that benefits society.

The People’s trust in governments and centralized financial systems is at an all time low. To those who ask why the Auditchain Protocol is independent, we ask, “Did Satoshi Nakamoto hire a bunch of bankers to transform money?”

Guest Posts
Julia Sakovich
Author: Helena Ross

Helena Ross is a crypto, financial journalist based in London. She is a believer in decentralized finance and supporter of innovations.

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