New report considers potential use of blockchain in corporate reporting

The new report (32-page / 890KB PDF), by the FRC's Financial Reporting Lab ('the Lab'), is cautious, intended as an exploratory review of the potential role of blockchain in corporate reporting, if and when the technology is sufficiently developed. Nevertheless, it raises some genuinely innovative proposals for how a technology familiar to most through its association with cryptocurrencies could impact on corporate reporting processes in the future.

Blockchain, also known as distributed ledger technology, is the process of creating a shared database that is distributed across many participants in a network, with data packaged into identifiable 'blocks' which, once verified by the participants, create linked 'chains'. The distributed nature of the database, and the traceable nature of changes to it, means that inconsistencies will be rejected in favour of the majority position. The process contributes reliable and accurate outputs without time-consuming final checking - the checks are built in.

The Lab proposes three areas in which blockchain could help to remove a layer of administration in the context of corporate reporting: the production of reports; distribution transparency; and reporting consumption.

It suggests that, in producing corporate reports, the blockchain process could be used to integrate external transactions into accounting records and/or to automatically consolidate accounting records within groups. The idea is that, if the contributed data from the chain is trustworthy, data sets can be automatically adopted without arduous cross-checking and aggregation. Meeting regulatory requirements relating to distribution networks could be treated in a similar way.

The Lab's blue-sky proposal that blockchain could revolutionise the way in which investors and the public consume company reports is perhaps its most innovative, as well as furthest from the highly publicised 'bitcoin' use of the technology.

It suggests that blockchain might enable composite reporting regardless of medium: formal publications, videos, web announcements, employee events or even tweets could form part of a company's annual report, with each item contributed to a block and filed to some form of central repository.

The addition of an audit sign-off to the block would mark it as the company's report, or a part of it. As blocks are added in respect of that company, the resulting chain would provide a clean, user-friendly picture of changes over time.

Of course, before any of this can become a reality, and as the report acknowledges, a standardisation of blockchain technology is required. Companies would need to be operating on the same, or very similar, platforms for this to be of use to investors; and boards, regulators and auditors would need to both understand the technology and put in place a suitable regulatory environment that is permissive yet sufficiently robust.

Tom Garbett is a corporate governance expert at Pinsent Masons, the law firm behind Out-Law.com.