Blockchain: The smart solution

Blockchain as a service has manifold benefits when it comes to its application across domains in Finance in general and accounting of transactions in particular. We will go through one such incident in history which actually made it evident of the fact that if we keep on maintaining transactional data in transcripts or manual records, we would reach a phase which will turn out to be catastrophic as well as error prone and will induce theft into the system, because of the simple fact that tracking of transactions would become so cumbersome that it would invite fraud into the system. 

Let us go back in history to look at what events unfolded when the “Satyam Scam” shook the very foundations of the Finance world and brought about a very blatant truth which still stares at us in the eyes with regards to advancement of technology or adoption of it in Finance and transactional data. The CEO of the company, Ramalinga Raju, had been successfully creating shell records of the number of employees that he never had and used to draw salaries in favor of those to benefit himself and also led to the inflation of the quarterly profits. 

He along with the global audit head of the company created fake bills and invoices in order to inflate the running revenue of the company to a point where the company became the “blue-eyed” boy of stock market in the year 2008, by showcasing a CAGR of 40% which made the stock prices soar by upwards of 300%. The backdrop to such catastrophic practices was to showcase a company with huge potential of growth which would in turn allow the stakeholders to raise good amount of capital from the market which would in turn make them wealthy without being deserving of it. This would also happen without the investment of gestation period which every company goes through in its journey to growth. 

 Now let us analyze the blockchain technology which would help us understand how we could have avoided such an event in the history. In any blockchain infrastructure, we have 3 basic components – The data, The Hash and The Hash of the previous block which can be understood by the below infographics.

With the help of blockchain technology we would have dodged such a bullet, this is shown below in the process diagram. If all the invoices as well as the transactions that Satyam Computers had with their partners and vendors were stored in blockchain server it would allow the auditors access to a host of transactional data without the hassle of manually going through transcripts which is error-prone and a costly process. This would have not allowed the company to even dare of creating fake bills and invoices as the data on the server would not have tallied and would always show a difference between both sides of account. The servers would also have caught those fake employees which were used by Mr. Raju to withdraw fake salaries, since the system would have caught duplicate entries which were made and would show an error in the system. This would also have helped the auditors from going through the pain of manually accessing ledger and with help of encrypted keys would allow the auditors to access a host of transactional data in a matter of minutes. Also, since the data stored is decentralized it allows easy access to the auditors to access the data from anywhere possible.  

The benefits to blockchain as a technology surmount storage as well as easy access of data. If adopted on a larger scale this would remove all the hassles of manual recording of transactions and would induce transparency into the system. This would further entail the auditors to access transactional data at the touch of a button which would also save a lot of man-hours and cost which in turn would help the company improve the bottom-line of the rganization.

The article has been written by Ritika Aggarwal, PGPM student at Great Lakes Institute of Management, Gurgaon