Author: Mohamed Hamza Ghaouri
Fraud and the lack of transparency which allows for it are a growing problem for businesses around the world. According to the Association of Certified Fraud Examiners (ACFE), the total loss caused by fraudulent events in 2016 exceeded $ 6.3 billion, with an estimated loss of 5% of annual revenue in a typical organization. Changing or deleting information from a corporate’s accounting systems, modifying electronic documents, and creating fraudulent electronic files were, according to the (ACFE), the primary means of concealing fraud. For these reasons, in order to reduce the risk of fraud or even prevent actual fraud, a more secure accounting information system that can deter tampering by third parties (e.g., cyber attackers) or internal parties (e.g., employees) is necessary.
In fact, fraud prevention is a critical and ongoing consideration for businesses around the world. However, the debate recently has shifted to the potential of blockchain to prevent fraud, not just in the financial sector but in different areas. Blockchain as a decentralized public ledger has the potential to serve as a secure accounting information system. It is regarded to have the potential to identify fraud in the areas of identity, finance, supply chain, and many other fields.
As the technology underlying bitcoin, the first generation of blockchain began as a public ledger that securely records transactions in the form of a chain of interlocked blocks. Any party can participate in trading and contribute to the verification of transactions on the basis of pre-encoded rules. Validated transactions are published on the blockchain ledger. Once a transaction is published and confirmed, the entries related to it will be cryptographically sealed and shared across the chain. This makes it virtually impossible to forge or destroy documents to cover up fraudulent activity. The second generation of blockchain has evolved into a new type of application called “smart contract”. Smart contracts are defined as user-defined programs that specify transactions governing rules. The main characteristics of the blockchain are:
- Decentralisation: A blockchain is a type of distributed digital ledger containing transaction data that is shared over a peer-to-peer network and constantly reconciled. Every node in the blockchain network can access the full list of transactions, and they jointly operate and control the entire system.
- Strong authentication: The identity of each participant in blockchain transactions can be verified.
- Inviolable: Once a transaction is posted on the blockchain, it becomes immutable and irreversible
The aforementioned features of the blockchain give it enormous potential to serve as a secure accounting information system and make it the awaited technology to prevent fraud. Accordingly, Finterra offers the next generation of blockchain technology known as Gallactic Blockchain. Its architecture of this internally developed blockchain aims to address the pressing challenges and limitations of the existing blockchains. The Gallactic blockchain provide multiple participating nodes the opportunity to jointly verify transactions according to certain predefined rules that have been built into the system. To avoid a single point of failure, the transaction verification process is controlled by all nodes, rather than centrally managed. The nodes jointly supervise the operation of the system and prevent the falsification of the ledger information. Due to this functionality, Gallactic blockchain can effectively prevent one or more individuals from overriding control, or from unlawfully altering or deleting official accounting records.
The convergence of accounting and blockchain could create a whole new accounting information system in which every transaction ever executed is publicly available and verifiable in real-time. By integrating Gallactic blockchain into their accounting information systems and cybersecurity strategy, companies could reduce the risk of cyber fraud by maintaining a clean and secure database and a strengthened control system. Since blockchain keeps the record of asset transfers, any type of misappropriation can be detected by tracing it through the chain history. These characteristics allow Finterra’s blockchain platform to serve as the basis for a new accounting information system that prevents the modification or deletion of accounting records or associated electronic documents. Sharing accounting information with many parties (e.g., business partners, stakeholders, managers, auditors) allows everyone to participate in an independent review of transactions and provide real-time assurance.
Gallactic blockchain could, also, be used to combat financial reporting fraud, such as overestimating income by providing valid evidence showing any irregularities involving revenue recognition. This allows forensic accountants to easily access and review important transactions between related parties. Moreover, its transparency, irreversibility and irrevocability could prevent management from creating fictitious transactions or backdated options. It allows, also, to avoid the risk of receiving checks without sufficient funds. Therefore, Gallactic blockchains not only increase the chances of detecting fraud but also put pressure on management to reduce revenue manipulation.
Although financial institution fraud tends to gain more attention, supply chain fraud is just as much of a problem, if not a bigger one. Gallactic blockchain is designed to meet the demand of clients in different fields. It can help reduce and even prevent fraud in the supply chain through greater transparency and product traceability. If a product is digitized on the blockchain, it can easily be traced back to its origin because the information is in a shared and distributed ledger. Gallactic blockchain can be deployed between different and relatively independent parties such as suppliers, customers, creditors and banks. These parties could become independent auditors tasked with uncovering fraudulent transactions, in particular transactions involving third parties. By bringing various parties, such as business partners, creditors, and investors, into the loop, it could enable a real-time alerting scheme for fraud prevention.
The wisdom behind using Gallactic blockchain to prevent cyber fraud is to increase information transparency and allow many independent parties to perform verification to ensure the validity and accuracy of transactions. It offers the potential opportunity to prevent fraud in advance or to detect it shortly after it occurs.