As time drags on, Steinhoff dribbles unhelpful titbits of news to anxious shareholders, bondholders, investors, employees and pensioners. Apart from the apparent complex deals that the independent investigators, PwC, are finding challenging to unpack, how bad can Steinhoff’s record-keeping be?
The auditors are presumably scrutinising contracts, agreements, tracking transactions, sifting through e-mails, and ferreting out possible under-the-table deals with co-conspirators. Complex transactions can cut across borders and flow through different jurisdictions in the flash of an eye. It is all very well being in possession of paper trails and documents, but have the auditors managed to obtain details of the deals that they don’t know exist, which can have an important bearing on establishing and verifying the real figures? And how do they go about identifying all those who have helped create this massive accounting scandal?
The auditors will also be banging their heads on their desks in frustration when a trail dies a sudden death. This can easily be accomplished by interposing special vehicles into a chain of transactions. These are for example trusts, partnerships or entities with peculiar characteristics which create an impenetrable barrier to prying eyes.
An accounting system is based on various components that rely on checks and balances — for every debit there must be a credit. However, these need to be cross-checked with supporting documentation and evidence. There is a large reliance on human intervention to make original inputs, and process entries. Much can be done with journal entries. In my previous life as a tax auditor, I was able to scrutinise printed ledgers and it is surprising how anomalies pop up. Today, an auditor’s job is more complex as they have to audit digital entries. This requires the necessity for a computer-literate auditor to check the integrity of the computer operating system to identify software tools that manipulate or hide data — for example, sales suppression software.
Blockchain technology has the potential to change this, or at least assist the auditor in tracking and verifying transactions.
With blockchain technology, all transactions, including contracts, payments, agreements and records will have a digital code which cannot be deleted or altered. These are held in an allegedly unhackable, decentralised database. The existence of assets will be verified before a transaction takes place. On a cynical note, hybrid and synthetic transactions will still take place. For example, where it appears that a company has sold an asset, but in substance it is merely out on loan. One would hope that these nuances will be contained in the digital footprint.
Digital imprint
With blockchain transactions, entries receive a digital imprint and leave a digital footprint in every step. It will not be possible to change core information, and files will not be able to be manipulated. All transactions can be viewed and monitored in real time. All participants will have an identical copy. The cost saving for accountants will be enormous, particularly in areas of cross-checking, reconciliation and calculations.
Barclays initiated its first blockchain transaction in 2016, utilising a blockchain platform set up by Wave. Not only was the time taken to process the transaction significantly reduced, all the original documents were cryptographically sealed and transferred via the blockchain.
Many experts refer to blockchain technology as being disruptive. However, in an article published by the Harvard Business Review, The Truth About Blockchain, the authors, Marco Iansiti and Karim R Lakhani, advanced the theory that “blockchain is a foundational technology that has the potential to create new foundations for our economic and social systems”.
In a world where technological change is increasing at an exponential pace, it is possible that widespread use of blockchain technology will be sooner rather than later.
While the audit of Steinhoff stumbles on at a snail’s pace, it is tempting to imagine a world where every transaction can be instantaneously verified at the gentle touch on a screen. Unfortunately, though, blockchain technology will not be able to embed an ethical footprint into the dishonest who will find ways of manipulating the system.
- Barbara Curson is a CA (SA) with postgraduate qualifications in tax and international tax
- This article was originally published on Moneyweb and is used here with permission