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Distributed Ledgers and Secure Multiparty Computation for Financial Reporting and Auditing

Author

Listed:
  • Sean Shun Cao

    (Accounting, Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20740)

  • Lin William Cong

    (Finance, SC Johnson College of Business, Cornell University, Ithaca, New York 14853; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Baozhong Yang

    (Finance, J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30342)

Abstract

To understand the disruption and implications of distributed ledger technologies for financial reporting and auditing, we analyze firm misreporting, auditor monitoring and competition, and regulatory policy in a unified model. A federated blockchain for financial reporting and auditing can improve verification efficiency not only for transactions in private databases but also for cross-chain verifications through privacy-preserving computation protocols. Despite the potential benefit of blockchains, private incentives for firms and first-mover advantages for auditors can create inefficient under-adoption or partial adoption that favors larger auditors. Although a regulator can help coordinate the adoption of technology, endogenous choice of transaction partners by firms can still lead to adoption failure. Our model also provides an initial framework for further studies of the costs and implications of the use of distributed ledgers and secure multiparty computation in financial reporting, including the positive spillover to discretionary auditing and who should bear the cost of adoption.

Suggested Citation

  • Sean Shun Cao & Lin William Cong & Baozhong Yang, 2025. "Distributed Ledgers and Secure Multiparty Computation for Financial Reporting and Auditing," Management Science, INFORMS, vol. 71(5), pages 3852-3872, May.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:5:p:3852-3872
    DOI: 10.1287/mnsc.2023.02577
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