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Fraud prevention is a critical and ongoing consideration for companies all over the world. According to the 2016 Report to the Nations on Occupational Fraud and Abuse issued by the Association of Certified Fraud Examiners (ACFE) (http://bit.ly/2rOJGVC), the total loss caused by fraud events in 2016 exceeded $6.3 billion, with an estimated 5% loss of annual revenues in a typical organization. Altering or deleting information in the companies' accounting systems, changing electronic documents, and creating fraudulent electronic files were the main methods to conceal frauds. In order to reduce fraud risk or even prevent frauds, a more secure accounting information system that can deter tampering from either outside parties (e.g., cyber attackers) or inside parties (e.g., employees) is needed.
Blockchain, a public, decentralized ledger first used to enable bitcoin trading, has the potential to serve as a secure accounting information system. A key feature of blockchain is that it decentralizes system management and authorization to a network of computers. Those computers together verify transactions based on certain prespecified rules (controls) that have been embedded in the system. To avoid a single point of failure, the transaction verification process is controlled by all the computers, rather than managed centrally. The computers jointly supervise system operation and prevent the information in the ledger from being tampered with. Because of this feature, blockchain can effectively prevent one or several individuals in collusion from overriding controls, or illicitly changing or deleting official accounting records. Moreover, as the embedded rules are automatically followed without much human intervention, it can enforce the operation of controls. By incorporating blockchain technology to their accounting information systems, companies could reduce fraud risk by maintaining a clean, secure database and a strengthened control system.
What Is Blockchain?
The first generation of blockchain was a public ledger that securely recorded the trading of bitcoin in the form of a chain of interlocked blocks (Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System," October 2008, http://bit.ly/ 2q4tihZ). The Exhibit shows the general process of sending money to another party in a blockchain. Any party can participate in trading and contribute to the verification of transactions based on preencoded rules; the validated transactions are then posted on the blockchain ledger. Once a transaction is posted and confirmed, the entries...