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How strong are blockchains?

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  • Publish date: 11 September 2017
  • Archived on: 11 September 2018

Blockchain technology is presented as transparent, decentralised, auditable and immutable records and applied to everything that uses a ledger.

What can blockchains offer?

Blockchains are considered to hold the key to integrating other emerging technologies such as IoT, Big Data, cloud computing, AI, robotics and biotechnology. Do blockchains pose any challenge to accountants in fraud prevention and detection in a digital age, or will the profession be redundant? We investigated the existing research to find out.

Blockchain can create a verifiable, cryptographically secured and interlocking system of accounting which is visible to all stakeholders online real-time thereby reducing reliance on auditors to verify the authenticity of the financial records. Blockchain ledgers require no third-party confirmation from auditors because the technology is transparent with automatic and reliable data verification mechanism. However, it is thought that continuous and online real-time audit of an entity will be needed. A blockchain cannot prevent or detect fraud nor protect itself from malicious attacks. The adoption of blockchain will affect the core finance functions of accountants and auditors, but it is too early to ascertain if the technology can eliminate the work of forensic accountants and the external auditors. The question is an old one: do you audit round the computer or through it?

Potential appeal for financial crime

One group of researchers note that an unusual combination of features, scalable, irrevocable and anonymity of the blockchain, could make it very appealing for criminals involving fraud or money laundering. Law enforcement could find it difficult to detect fraudulent suspicious activity, identify users and obtain transaction records. Another argument is that the technology is a risk to the global economy because it bypasses intermediaries upon whose governments have relied on to implement regulatory safeguards for checking AML and other dark web activities.

The recent hack on DAO built on Ethereum Blockchain shows that this technology is subject to malicious attack. The hacker was reported to have stolen $50 million worth of Ethereum bitcoins. Other potential risks for blockchain include the 51% attack, account takeover, digital identity theft, money laundering and hacking. Making complex applications with absolutely zero bugs is hard and, indeed, this is the subject of the plot of the prescient 2003 novel, The Cryptographer, by Tobias Hill, where an e-currency is found to have a subtle flaw. However, the DAO hack took place outside the blockchain because it was Ethereum built on top of the technology that was exploited. However, these concerns felt by users about new technology will be overcome when the technology comes into full use.

Blockchain limitations

The limitations of blockchain lie in its features, such as anonymity, the irrevocability of transactions, decentralisation and P2P, which make it appealing for criminals. This involves fraud or money laundering and challenges the law enforcement agencies to track suspicious transactions. Further, it cannot verify the correctness of source documents. Other envisaged challenges are a lack of proper regulation, disintermediation of regulators, the possible distortions to the existing e-commerce, the high cost of data mining blocks, lack of paper trails and interoperability. How will conflicts or disputes be resolved? Our study shows that dispute or conflict resolution will be difficult, if not impossible, because transactions on blockchain are irreversible and have no central control authority. 

What will forensic accountants need to learn?

The training focus for auditors and accountants has always been to provide concise information extracted from a large volume of business data to relevant stakeholders for decision making.  But are the traditional accounting core skills around technical, communication, analytical and leadership skills adequate for forensic accountants in a digital age? Most commentators think that auditors and forensic accountants do not have requisite IT knowledge to explore innovations such as AI, Audit Expert, bitcoin and blockchain. The audit and assurance of algorithms is likely to be as much a feature as that of inputs and outputs.

Blockchains are set to revolutionise the way business is done by working across and outside traditional routes for contracts, banking and accounting. But they are not impregnable and forensic accountants need to think “outside the block” to see how everyday frauds might be perpetrated or prevented by the technology.

By Musbaudeen Titilope Oladejo and Lisa Jack, Portsmouth Business School