Blockchain and corporate fraud
| DOI | https://doi.org/10.1108/JFC-09-2020-0187 |
| Published date | 09 December 2020 |
| Date | 09 December 2020 |
| Pages | 702-721 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Hugo Benedetti,Ehsan Nikbakht,Sayan Sarkar,Andrew Craig Spieler |
Blockchain and corporate fraud
Hugo Benedetti
ESE Business School, Universidad de Los Andes, Santiago, Chile
Ehsan Nikbakht
Department of Finance, Frank G Zarb School of Business, Hofstra University,
Hempstead, New York, USA
Sayan Sarkar
University of Mary Washington, Fredericksburg, Virginia, USA, and
Andrew Craig Spieler
Department of Finance, Frank G Zarb School of Business, Hofstra University,
Hempstead, New York, USA
Abstract
Purpose –The purpose of this paper is to develop conceptual designs for blockchain implementations
aimed at reducing corporate fraud. The proposed framework consists of different levels of implementation
with specificexamples for each level.
Design/methodology/approach –The paper uses a multi-levelframework to highlight the properties of
blockchain technology as suitable for reducing corporate fraud. The five levels of technological complexity
designed for this researchinclude information storage, information flow, informationprocessing, information
enhancement and information and financial integration. Specific cases of corporate fraud are discussed to
complementthe proposed methodology.
Findings –The potential ability to limit fraud and increase transparency could greatly improve faith in
financial reporting.These benefits accrue to all capital marketparticipants. The blockchain infrastructurecan
significantly improve the existing monitoring system and provide value added in detecting, deterring, and
documentingpossible fraud.
Originality/value –The paper contributes to the growing field on corporate fraud and blockchain
technology. The paper is novel in the implementationof the nascent blockchain methods to detect and deter
fraud at the organizationallevel. The proposed five conceptuallevels provide practical use.
Keywords Sarbanes-Oxley, Blockchain, Corporate fraud, Enron, Hybrid Blockchain, WorldCome
Paper type Research paper
1. Introduction
Research on the causes and effects of corporate fraud is both important and incomplete.
Egregious cases of corporate fraud at companies like Enron, WorldCom and Global
Crossing directly led to numerous policy changes including Sarbanes-Oxley (SOX) in the
USA and in many other countries. Despite these groundbreakinglegislative efforts, it is not
clear that fraud has decreased or thatchanges in corporate governance have been effective
(Coates and Srinivasan, 2014;Dyck et al.,2013). The prevailing view is that SOX has
reduced or deterred corporate fraud. However, as Baker et al. (2020) note, after nearly two
decades there is far fromenough empirical evidence to support this contention.
SOX was the direct result of the US Congress to draft legislation to maintain investor
confidence and increase transparency in financial markets. In July 2002, the regulation was
potentially a knee-jerk reactionfollowing the scandalous fraud cases that surfaced atEnron
JFC
28,3
702
Journalof Financial Crime
Vol.28 No. 3, 2021
pp. 702-721
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2020-0187
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
and WorldCom to namea few. This legislation triggered other countries includingJapan, the
European Union and the UK to develop their own versions of SOX (Kim and Lu, 2013).This
was truly a global shift in behavior with support from the most visible international
organizations including the Organization for Economic Co-operation and Development
(OECD), (2017), International Criminal Police Organization (INTERPOL), World Bank and
the United Nations Officeon Drugs and Crime (UNODC).A discussion of major international
and US fraud cases can be found in Sarkar and Spieler (2020) and Petra and Spieler (2020),
respectively.
While corporate fraud is relativelywell explored in the accounting and finance literature,
the means to detect and prevent fraud through emerging technologies is clearly an
important area beset with a dearth of research. The purpose of this paper is two-fold and
interrelated. The first goal is to examine corporate fraud, both in the USA and other
countries. This discussion is used to highlightthe impact corporate fraud can have on both
internal and external stakeholders. Second,in light of these events, the primary goal of this
research is to develop a conceptual framework outlining how emerging blockchain
technology can help detect and prevent fraud. In essence, the dramatic improvement in
technology can shift the research focus from ex-post effects of fraud to ex-ante deterrence
and detection. Another motivation for this paper is to help fill a large void in connecting
blockchain to corporate fraud.To our knowledge, this research is the first attempt to bridge
these two fields. The remainder of the paper has four sections. Section 1 provides a brief
literature review of corporatefraud. Section 2 discusses blockchain, its associatedproperties
and applications to corporate fraud. Next, a conceptual framework based on blockchain for
detecting and preventing fraud is developed in Section 3. Finally, Section 4 provides a
summary and conclusions.
2. Section 1: a review of corporate fraud cases
Classification of corporatefraud cases is not always straightforward because of the intricate
detail and complexity employed. Nevertheless, almost all fraud cases can summarily be
categorized intothree broad types:
(1) asset misappropriation;
(2) financial statement manipulation; and
(3) other forms of corruption.
A broad definition of corporate fraud is any “omission”or “misrepresentation”with the
intent to mislead any party to obtain a financial benefit(
Asian Development Bank, 2019).
Empirical and survey evidenceshow that asset misappropriations is the most common type
of fraud (Kiymaz, 2020). The Treadway Commission’s Committee of Endorsing
Organizations (Pricewaterhouse Coopers (PwC), 2013) reports that the effects of financial
statement fraud can be quite serious, ranging from bankruptcy proceedings to ownership
changes to stock market delisting. Potential costs to executives include the loss of personal
stock ownership value, forced resignation or outright dismissal, legal sanctions and other
serious penalties (Rezaee, 2005). Corporate fraud does not occur in a vacuum. Rather,
corporate fraud is the result of a perfect storm of opportunity and greed exacerbated by
advances in technology. This confluence has only marginally improved corporate fraud
detection despite the increased collaboration between international organizations including
the World Bank and Group of 20 (G20).
It is not surprising that corporate fraud is more prevalent and complicated than in the
past because of technical advances. For the steadily increasing number of businesses
Corporate
fraud
703
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