One trend that many users of company compliance services will have noted lately is the rise of distributed ledger technology, otherwise known as blockchain, which was the subject of a recent report by the Financial Reporting Council’s (FRC) Financial Reporting Lab.
What is blockchain?
Blockchain is a procedure entailing the creation of a shared database that is distributed across many participants in a network. Data is packaged into identifiable ‘blocks’ that the participants verify to create linked ‘chains’. This enables the writing of new information onto the ledger, but the previous information is stored in blocks and cannot be edited, adjusted or changed.
Furthermore, if any change was to be made to the data, all participants would be able to see it, which affirms the resilience of both the data and network. Blockchain is distinguished from traditional database in the way it creates trust and resilience. The technology therefore theoretically presents interesting possibilities for corporate reporting.
Blockchain, after all, offers an alternative means of creating trust between parties without the need for a trusted third party, which it achieves by using the network and mathematical proof instead. This quality has led to much discussion as to whether blockchain could be used as a single source of credible corporate data across Europe, as the European Commission is already working on via the European Financial Transparency Gateway.
What is the focus of the report?
The FRC’s report provides an exploratory review of the role that blockchain could play in corporate reporting, when the technology is sufficiently developed. The lab has suggested three areas in which blockchain could assist in removing a layer of administration with regard to corporate reporting: the production of reports, the distribution of transparency and reporting consumption.
However, the report also warns about the immaturity of blockchain, including the importance of appropriately nurturing the technology if its potential is to be realised.
The report states: “Blockchain has the potential to change some aspects of accounting, reporting and auditing, but this is unlikely to be imminent or all-encompassing. Blockchain therefore merits consideration and experimentation by preparers, regulators and others involved in the corporate reporting ecosystem”.
Preparers and users are advised by the report to focus on gaining a greater understanding, while considering experimentation and cautious innovation when there is a balance between costs and benefits. They are also told to be open to sharing views and ideas, and to understand blockchain’s impacts and opportunities and how it drives changes in business processes.
The Lab’s Director, Phil Fitz-Gerald, commented: “At its heart, blockchain is a technology that promises greater trust and resilience in the recording of transactions and information. These are both essential elements in the system of corporate reporting.
“Whilst it is not clear whether blockchain is the answer, the current rapid developments in blockchain use mean that it has the potential to have a significant disruptive impact on corporate reporting processes.”
Contact London Registrars today to learn more about the company compliance services that could best serve your organisation in the months and years to come – whether or not you are contemplating the merits of blockchain for your own firm’s corporate reporting.