To what extent could blockchain be used to address specific reporting challenges?
The report considers how blockchain technology (also referred to as distributed ledger technology) may eventually impact, and whether it could be used to potentially improve, different aspects of corporate reporting. More specifically the report identifies three 'challenges' with the current system of corporate financial reporting and considers in each case, whether/the extent to which blockchain could assist in addressing them. The challenges are:
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Production challenges: The cost and complexity of recording and aggregating transactions across multiple entities. The report considers whether transactions processed on a blockchain might assist in improving accounting records.
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Distribution challenges: The difficulty of identifying a single source from which users can obtain credible, up-to-date/prompt company reporting across multiple-jurisdictions and companies. The report considers how a blockchain based European corporate reporting platform (European Financial Transparency Gateway) might help to open up access to corporate reporting.
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Consumption challenges: Challenges associated with making reporting engaging and flexible in a multiformat and multi-stakeholder environment, 'whilst maintaining an assurance/regulatory boundary'. The report considers whether 'blockchain might help to rethink the way that reporting content is defined'.
Is blockchain the answer? Report conclusions and recommendations
Ultimately, the report concludes that 'blockchain is not going away, but its growth in corporate reporting is likely to be gradual and restricted to certain use-cases'.
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Blockchain will not address product challenges: The report concludes that though use of blockchain could potentially improve the 'efficiency and timeliness of error/tamper-free records (across markets, industries and companies) and increase the speed of consolidation within groups, particularly where there are multiple participants' this is dependent on solving cost and interoperability issues.
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Blockchain will not address distribution challenges: The report concludes that the use of blockchain as 'a single source of credible, useable corporate data across Europe is a real possibility (and it is already being worked on by the European Commission), but ultimately success is dependent upon any solution being easy to use'.
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Blockchain will not address consumption challenges: 'Using blockchain to form an unalterable group of communications (to meet reporting requirements) across different formats and entities has some potential, and could lead to different ways to meet regulatory requirements, perhaps leading to more engaging reports. However, the need for wider adoption may reduce the likelihood of its use' the report states.
Recommended next steps for interested parties
The report goes on to say that 'as a source of disruption to the current financial process, blockchain merits consideration and cautious experimentation by preparers, regulators and others involved in the corporate reporting ecosystem'. The report recommends specific actions for regulators and industry; the technology community and for preparers and users of reports. These include the following.
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Actions for the regulatory community, professional bodies and the accounting industry: The report states that 'The regulatory community, professional bodies and the accounting industry need to monitor the developments and invest in their knowledge and skills'.
Creation of a blockchain forum? To facilitate this, the report suggests the creation of a forum (Reporting, Accounting and Auditing on the blockchain forum). The proposed forum would have a number of benefits including: providing a space to discuss ideas, risks and opportunities; provide support education and learning on blockchain across participants; promote standardisation efforts and encourage innovation an experimentation as well as provide a 'focal point for relevant opinion and help support governments or other appropriate consultation activity'.
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Actions for preparers and users of corporate reporting: The report recommends that 'preparers and users should focus on gaining a greater level of understanding and consider experimentation and cautious innovation when costs and benefits are balanced'. More specifically the report recommends report preparers and users should: actively seek to understand the impact and opportunities of blockchain and its potential to change business processes; interact with government, regulators and others to ensure concerns, issues and opportunities are fully understood; recognise the fact that adoption of 'blockchains don’t remove the need to have robust controls and processes over data. Before adopting a blockchain, users should ensure that they are comfortable with the design of the chain, as well as inbuilt and supplementary controls'.
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Actions for the 'technology community': The report states that there is 'a real risk that expectations about the technology may create a significant expectation gap in the minds of business and the public' and that the 'technology community' should act to mitigate this by supporting efforts to educate businesses and boards, to engage with auditors and audit standard setters to 'explore how blockchain might fit into the assurance environment'; engage in discussion with regulators and continue 'to support standardisation efforts (such as ISO/TC 307), where relevant and effective'.
The Digital Future project
In 2016, UK Financial Reporting Council (FRC)'s Financial Reporting Lab (the Lab) the Lab launched the Digital Future project, an initiative to investigate the impact of technology on corporate reporting communications.
The Lab will next investigate and report on how Artificial Intelligence (AI) and related technologies are, and will be, used in the production and consumption of corporate reporting.