Blockchain adoption and internal control

The potential benefits of blockchain are clear: improved efficiency, reliability, and compliance. But the risks are just as glaring. A full understanding of blockchain related-risks and how to address those risks is needed if a company is going to responsibly put it to use. Knowing the COSO perspective is a great place to start.

As blockchain becomes more mainstream, it’s worth focusing on how this technology intersects with an entity’s internal control. With careful blockchain implementation and integration, the unique capabilities of blockchain can be leveraged to create more powerful controls for organizations. Additionally, blockchain-enhanced tools have the potential to boost operational efficiency and effectiveness, improve the reliability and responsiveness of financial and other reporting, and improve compliance. Of
with laws and regulations. At the same time, blockchain creates new risks and new control needs. The Committee of Donors of the Treadway Commission Integrated Internal Control Framework (COSO) (Framework 2013) provides an effective and efficient approach that can be leveraged to design and implement measures. controls that address the unique risks associated with the blockchain.

Blockchain Adoption COSO
Blockchain adoption

When an organization assesses blockchain usage through the COSO lens, it can enable boards and senior management to better understand the context and be able to make more informed judgments about the situation. potential and applicability of internal control technology. This allows the organization to perform detailed risk analysis and thereby develop appropriate controls to address those risks, thereby facilitating blockchain adoption and use. effective.

Control environment

Blockchain can be a tool to help facilitate an efficient control environment (for example, by recording transactions with minimal human intervention). However, many of the principles in this component mainly deal with human behavior, such as management that promotes integrity and ethics; which even with other technologies, blockchain cannot be evaluated. The biggest challenge, as noted above, concerns how an entity intertwines with other entities or participants in the
blockchain and how to manage the respective internal control environment.

Risk assessment

Blockchain creates new risks, while helping to reduce risk, promote accountability, maintain record integrity, and provide irrefutable records (a person or organization cannot deny or challenge their role in authorizing or sending messages or recordings).

Control activities

Blockchain can serve as a tool to help facilitate control activities. Blockchains and smart contracts can be a powerful way to conduct global business efficiently and effectively (e.g., minimizing human error and opportunities for fraud). However, blockchain implementations can introduce additional complexity when the technology is shared with others, especially when the technology is decentralized and no party is responsible for ICFR systems.

Information and communication

The inherent properties of blockchains promote greater transaction visibility, data availability, and can create new opportunities for management to communicate financial information to key stakeholders quickly. faster and more efficient. In particular, one aspect that management needs to consider when adopting blockchain is the availability of information to support financial books and records, as well as the associated auditability of the information processed on the blockchain. block chain.

Monitoring activities

The promise of blockchain to make monitoring easier – more often, on more topics, in more detail – has the potential to dramatically change practices. The use of smart contracts and standardized business rules, combined with Internet of Things (IoT) devices, could change the way monitoring is performed.

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