Executive Summary


‘Blockchain’ is more than just a buzzword. It is changing the way businesses and people operate and creating a roadmap for the next big change.
With a ‘shared distributed ledger’—as opposed to the traditional form of business transactions with excessive reliance on third parties—blockchain technologies are significantly altering the business landscape. With its active deployment in business transactions, the concept of the blockchain is leading not only to increased transparency and cost efficiency but also to a greater degree of trust through peer-to-peer collaboration and advanced coding. The blockchain is set to revolutionise the way in which transactions and payments are made and goods and services are traded. The three pillars of the blockchain—existence, authenticity and confidentiality—will make transactions and businesses transparent and fraud free. While it will take time for organisations to fully realise the various benefits of the blockchain, none of the leading banks are sitting back and waiting passively.


Impact of the blockchain

Cost-effectiveness: Hundreds of banks the world over are using similar databases for transactions, settlements, etc., which are maintained in silos. This practice of maintaining multiple databases and servers is proving to be very expensive. The blockchain is a universal system that serves as a central repository and can be used by many institutions, bringing much more efficiency and also uniting various systems.

Security: Blockchain technology helps in tracking and settling digital assets and transactions in a cryptographically secured environment, which leads to secure transactions and settlements.

Complexity: Implementation of blockchain technology will help in reducing the complexity and number of intermediaries involved in existing transaction processes.
Risk management: The process of managing digital risks—e.g. settlement risk, custodial risk, counterparty risk—and verifying historical transactions will be much easier with the blockchain.

Transparency: Since blockchain technology is built on rule-based mathematically controlled transactions, there will be transparent audits with minimum fraud.
The concept of the blockchain rests on three pillars—authenticity, existence and confidentiality.

How the blockchain is changing the face of financial statement frauds

According to Charles Hoskinson, former CEO of Ethereum, ‘With blockchains, you have transaction histories back to the beginning. If you can internalize it and merge with GAAP [generally accepted accounting principles] then every single penny could be accounted for by this incorruptible entity.’ (1)
The blockchain helps in reducing financial statement frauds in the following ways:
 
Curbing fictitious revenues: Transactions and records go hand-in-hand in the blockchain. The record of every transaction is permanent and immutable and presents a more comprehensive and in-depth view of an organisation’s transaction history. Thus, it constitutes an invaluable asset for the company. The blockchain can allow accounting systems and risk managers to proactively prevent the company from cooking its books.
 
Concealed/overstated liabilities and expenses: To overstate expenses and cook the books, companies often play with their expenses and liabilities and deliberately hesitate to record them. This is largely done by throwing away or manipulating company invoices rather than posting them in the company’s account payable systems, thereby increasing the reported earnings by the full amount of the invoices. Such manipulation will be very difficult in the case of the blockchain as every transaction is recorded in real time and all members of the network are authorised to view the same.
 
Timing differences: In financial accounting, this term refers to the time interval between the point at which a transaction affects the items of financial statements for accounting purposes and the point at which it affects the items for taxation purpose. A potential fraud can occur during this time period. The introduction of the blockchain can prevent fraud in such cases as all transactions are recorded quickly and efficiently in real time.

How the blockchain is changing the face of transactions and potential frauds

Illuminating the supply chain
The concept of the blockchain is not restricted to payments and financial assets but extends to valuable goods, stocks, bonds, high-end watches, designer bags and fine art, whose provenance might otherwise be determined by paper certificates and receipts (that can easily be lost or tampered with). To secure transactions involving such goods, the blockchain provides a comprehensive supply-chain network which is transparent and visible to all so that chances of fraud are minimised. A very prominent example of the use of the blockchain in transactions is an immutable ID on a device that sits within an immutable ledger.
The blockchain has had a positive impact in sectors such as financial services, healthcare, and the music and entertainment industry. That said, there are a few risks and challenges associated with the blockchain, such as market disruption and consumer protection.

 Source <http://blogs.pwc.in/2017/03/beyond-the-blockchain-the-emerging-fraud-landscape.html
 
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