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News — The adoption of blockchain in financial auditing has been a recent research focus of , professor and cofounder of the  at the University of Maryland's Robert H. Smith School of Business. “A lot of auditing firms want to use blockchain and they want to apply technology,” he says. “I wanted to build a use case for blockchain that works for auditing firms.”

Cao’s “,” recently published in Management Science, examines how “permissioned blockchains disrupt traditional financial reporting and auditing processes and enable collaboration without sacrificing client data privacy.”

Co-authored with Lin William Cong of Cornell University and Baozhong Yang of Georgia State University, the paper states that because “unbiased financial reporting is crucial in financial markets,” regulatory agencies look for ways to “improve reporting integrity.” In order to ensure the financial statements are correct, the auditing team must confirm the transaction. Cao says the difficulty in this is it is time-consuming, the transaction partner does not want to reveal information due to privacy concerns and there is often a low response rate from the transaction partner.

“It is labor intensive and you cannot verify all the receipts,” Cao says. “You’d have to do a random sample. But there would be errors because it is really random.”

Using a blockchain-based distributed ledger, Cao states that the developed system in the paper can help address these issues by automatically verifying all receipts in an efficient and cost-effective manner. Additionally, it enhances privacy protections when sharing information between different auditors or clients.

“The only thing it cannot replace is when a transaction requires discretion,” Cao adds, but says overall it's a 70% cost savings for the auditing firms to adopt this method.

Cao says global adoption of this process is needed for it to have an impact, so the team built a mathematical model to model the incentive for auditors, clients and regulators. “We are trying to maximize the unity of the three parties,” he says.

Cao previously published research on the design of the system, a prototype, in “,” in the IEEE publication Computer in 2020. Cao also worked, here, with Cong and Yang along with Meng Han of Kennesaw State University and Qixuan Hou of Georgia Institute of Technology.

Cao says he has already received interest in this research from executives at Grant Thornton, an audit and assurance firm. He hopes to do further research in this area that continues to inspire and make an impact in the industry.