Blockchain technology and corporate reporting
Is blockchain the future?
14 December 2018
The Financial Reporting Lab (a part of the Financial Reporting Council which provides thought leadership in effective corporate reporting) has recently published a report on "Blockchain and the future of corporate reporting – how does it measure up?" .
The Report examines the possible future use for blockchain in assisting companies with their corporate reporting obligations. The Report concludes that the use of blockchain in corporate reporting is "likely to be gradual and restricted to certain use-cases".
"The process of collating, amalgamating, packaging and presenting underlying financial and nonfinancial information expressly intended for external release by a company or organisation."
Companies (particularly those which are listed) are subject to a wealth of reporting requirements. This includes ongoing requirements to prepare and file annual accounts as well as in many cases an annual report. The Report considers the possible use of blockchain as a tool to enable them to meet their reporting requirements in a timely and cost-efficient way.
One way in which blockchain could prove useful is via interplay with traditional accounting layers and systems. Blockchain could operate alongside these systems and act as a secure, credible record of assets, liabilities and transactions, storing this information until it is transferred into a traditional system for validation and/or audit.
An additional use for blockchain in production is in connection with the preparation of an annual report. Some listed companies choose or are obligated to consolidate their accounts and the accounts of their subsidiaries / group entities into a consolidated financial statement. This consolidated document is then included within an annual report. The process by which accounts are consolidated within a group (which could encompass any number of entities) can be laborious and costly, with a common requirement for entities to report up the chain into a central team who compile and adjust data to reflect the overall group position. The Report suggests that blockchain could provide use in such a consolidation exercise by acting as a central ledger into which each entity inputs. However, it should be considered on a case by case basis as to whether the possible efficiency of implementing a blockchain solution outweighs the cost of implementation, and more generally versus the perceived simplicity of implementing a single accounting system.
"The dissemination of packaged information to regulators and external stakeholders."
Companies are required to disseminate information to their regulators, the markets in which they operate and the shareholders for whom they operate, at a national and international level. This can be a timely and costly process to which the Report contends, blockchain may provide a solution to enhance accessibility.
Listed companies must, pursuant to European and national law, submit certain documents and communications to an "Official Appointed Mechanism". Currently, if a company is required to release information or documentation in multiple European Member States, they do so by making individual filings to each Official Appointed Mechanism in the jurisdiction requiring the disclosure. Each Official Appointed Mechanism may prescribe different requirements (as each operates pursuant to different local law) and therefore, in theory, 27 different filings may be required – all taking a different form. As such, a solution which permits disclosure in a single, consistent and compliant way would be advantageous to companies, regulators and stakeholders alike – but, is blockchain the answer?
In the Report, the authors highlight the European Commission's proof-of-concept, "European Financial Transparency Gateway" or "EFTG". The EFTG is a blockchain-based gateway, which at a high level, currently operates as follows:
- Company submits information to their National Official Appointed Mechanism.
- National Official Appointed Mechanism connects via the EFTG blockchain across Europe.
- Stakeholders access information on the company via the EFTG.
Clearly, the EFTG currently improves the ability of a stakeholder to access information as it is contained in a single database. However, it is also mooted that, in future the EFTG could become a central database, which could ease the burden on both companies and regulators. It should be noted, however, that this would require a huge cost and would pose a technical challenge to the European Commission as it looks to unite 27 different Official Appointed Mechanisms each operating on different legal and statutory bases. As such, the Report contends that the use of blockchain "to augment the local filing system, rather than replace it, might be preferable", using blockchain distribution technology to release various regulatory filings (such as gender pay reports) whilst avoiding the cost and technical challenges posed by a single database. The Report concludes that blockchain's use in distribution could "enhance accessibility" and also "enable the prompt filing of multiple requirements" of reporting at a national and international level.
" The analysis and use of distributed, packaged information."
Stakeholders are hungry for information – in the digital age they are hungrier than ever. Companies face a constant battle to ensure that the information they publish is clear, transparent and of use to stakeholders in evaluating performance.
The Report highlights the possible use of continuous disclosure, coined a "Disclosurechain", which would, it argues:
- provide an up-to-date picture of a company's position at any given time;
- provide a full and complete history of a company's disclosure (thereby allowing proper analysis as to changes that have occurred over time); and
- provide stakeholders with assurance as to the credibility of information.
Additionally, blockchain could conceivably allow companies to meet reporting requirements (such as an annual report) in an easier way. In overview:
- Company produces underlying content (e.g. video, strategic report and key performance indicators).
- These links form an annual report "block".
- The block is co-signed by the company's auditors (thereby providing credibility);
- Company files signed block with the National Storage Mechanism.
It is not however, the authors suggest, clear as to the use of blockchain for this. The Report notes that unless this system is adopted by entire industries, the use of blockchain is likely to be limited as end-users "do not want to access multiple different systems that work differently".
A futher possible use for blockchain is in performance reporting. Blockchain may be an effective tool where stakeholders are interested in reviewing for example the entire supply chain, or environmental impact. This would require a standardised blockchain to be adopted widely across a range of entities, audit and regulatory users – so again, building a critical mass of corporate actors poses a significant limiting factor to development.
Use of blockchain in corporate reporting – a possible timeline?
- Production – the Report suggests that the use of blockchain in production is "imminent but not widespread". Many companies and sectors are currently exploring the use of blockchain in transaction reporting and this looks set to increase. The Report highlights standardisation of blockchains, such as that proposed by the International Standards Organisation, as an area which must be developed and more widely accepted before blockchain can become part of mainstream reporting and accounting architecture.
- Distribution – the Report suggests that the use of blockchain in distribution is "medium/long term". It notes that although the EFTG is at an early stage, the European Commission is currently consulting on the EFTG, and has also announced a new, single gateway (this has a five year implementation timeline).
- Consumption – the Report suggests that the use of blockchain in consumption is "longer term". Blockchain could provide suitable infrastructure for aggregate information consumption or thematic reporting, if stakeholder demand to consume information beyond entity-only information increases (for example into the impact of an entire industry or full supply chain) and wide adoption of standardised systems so allows. However, to date, the development of blockchain has focused on transaction recording. Further development is needed if blockchain is to develop into a tool for consumption.