Do auditors care about firms’ engagement in blockchain? Evidence from auditors’ responses

Abstract

This study examines how auditors respond to firms' disclosed blockchain engagement. While the technology offers potential efficiency gains, it also introduces new risks and complexity. We investigate whether and how auditors use audit pricing and auditor resignation as their strategies to manage blockchain-related risks. This study uses a large sample of Chinese A-share listed companies spanning 2016 to 2022. We extract data regarding corporate blockchain engagement by conducting textual analysis on firms’ publicly disclosed reports. Regression analysis is applied to verify the research hypotheses, followed by a series of robustness tests. In addition, we carry out cross-sectional tests and examine auditors’ responses to distinct categories of blockchain-related activities. We further investigate the relative priority of auditors’ risk management strategies and identify potential channels. There is a positive relation between firms’ disclosed blockchain engagement and audit fees. This relation is more pronounced among larger audit firms, auditors without an information technology (IT) background and those with shorter tenures. Both audit effort and audit risk serve as two plausible channels linking companies’ engagement in blockchain to increased audit fees. Firms engaging in blockchain to facilitate management processes, rather than provide blockchain-related products or services, are associated with elevated audit fees. Although blockchain engagement is also related to a higher likelihood of auditor resignation, we observe a hierarchical pattern in auditor responses, with fee adjustments being the more prevalent initial reaction relative to resignation. Our disclosure-based measure may not fully distinguish the depth of adoption, investor-facing signaling or strategic narrative because doing so would require obtaining in-depth blockchain data from the sample firms. This is highly challenging as such data are not subject to mandatory disclosure by regulators and may constitute corporate confidential information. Our findings should be interpreted as auditors’ responses to “perceived blockchain-related risks” rather than a direct response to “the adoption of blockchain technology.” First, for audit firms, our results underscore the importance of investing in technological training and developing firm-level expertise in emerging technologies such as blockchain. The finding that the fee premium is concentrated among auditors without IT backgrounds suggests that audit firms that proactively build technological competence may be better positioned to serve clients engaging with new technologies while managing their own costs. Second, for corporate managers, our findings alert them that public blockchain engagement, even when disclosed for strategic signaling purposes, may carry tangible costs in the form of higher audit fees, particularly when blockchain is deployed for internal management processes. This cost should be factored into firms’ cost–benefit analyses when making blockchain investment decisions. Third, for regulators and standard-setters, the heterogeneity in auditor responses documented in our study highlights the need for clearer accounting and auditing guidance for blockchain-based transactions, which would reduce the uncertainty that currently drives elevated audit pricing. This study provides evidence consistent with auditors strategically adapting to technological disruptions in their risk management practices. The study offers timely and practical insights for auditors, regulators and corporate managers as blockchain applications continue to proliferate.