Blockchain technology and internal control effectiveness

Abstract

This paper examines the effectiveness of the internal control mechanisms of blockchain-as-a-service (BaaS) providers. Given the lack of classification in the blockchain industry, we conduct text mining of official filings to identify BaaS providers and compare their internal control issues with those of matched firms in other industries. Our findings, which offer pivotal insights for policymakers and regulators, reveal that BaaS providers are 9.6 % more susceptible to internal control weaknesses compared to firms in other industries. This susceptibility results in an increased probability of financial restatements (3.4 %) and cybersecurity breaches (0.5 %). Furthermore, we show that BaaS providers invest 2.078 times more in audit services to address their internal control weaknesses. However, regulatory bodies have yet to prioritize internal control weaknesses in BaaS providers.