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Northern Trust Offers Blockchain Technology to Audit Private Equity

The blockchain is a ledger where a private equity firm’s activity can be recorded and reviewed by auditors.

  • By Alicia McElhaney

The next private equity audit could take place on the blockchain. 

Asset manager Northern Trust Corp. announced Monday that audit firms can now scrutinize private equity activity using the firm's blockchain technology. Auditors can access information on the deals private equity firms are doing in real time, potentially cutting down the amount of time needed to complete their work, according to Justin Chapman, Northern Trust's global head of market advocacy and innovation research.

“We see this as a massive step forward for audit capability,” Chapman said in a phone interview. “Auditing is a timely, expensive process that happens each year.”

Here’s how the technology works: The blockchain is a ledger, or a spreadsheet, where all of a private equity firm’s activity can be recorded. That ledger can’t be tampered with, because it’s stored in a decentralized manner on a number of computers. This decentralization makes blockchain attractive. 

Northern Trust's new software, auditors are given a “golden copy,” or a master record of that data, which they’re able to access from their own computers, rather than having to travel to a private equity firm’s office. “The audit firms can then either transfer the required data into internal applications to complete the audit process or develop new tools that allow them to complete the audit directly from the blockchain itself,” Northern Trust said in the announcement.

The Chicago-based firm began offering blockchain technology for the private equity industry in February 2017. To determine what data from private equity firms should be used in the auditing process, Northern Trust said it partnered with PwC and unnamed audit firms in Guernsey, a British Crown dependency in the Channel Islands. 

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“Every time the data is created in the blockchain, it’s copied into the audit node of the blockchain,” Chapman said. 

For PwC, the addition of auditing software is exciting, according to Nick Vermeulen, partner at PwC in the Channel Islands. “Our ability to directly access distributed ledgers such as the one within the Northern Trust system will allow us to build upon our own blockchain investments,” he said in the asset manager's statement. “Such innovation assists clients as they invest in the opportunities arising from emerging technologies.”

According to Chapman and Northern Trust, this auditing offering is just the beginning. 

“This is just an example of the ecosystem we hope to grow out,” said Chapman. “We look to use as much of the blockchain as possible.”

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