Blockchain: will it improve Financial reporting?

Blockchain was born out of the payments industry and in many ways that is where it remains, as technologists, start-ups, and engineers iterate on the original concept.

But payments are just the beginning.

By itself, blockchain will likely change how records are maintained and how value is transferred between counter parties.

Blockchain technology, often described as providing a distributed and continuously growing immutable ledger of transactions, is a record keeping technology as much as it is a value transfer technology.

At its core, blockchain technology allows for the creation of a distributed ledger that records transactions between parties with transparency using a secure system that immediately and permanently verifies data.

That means everything from customer orders to fleet costs can be incorporated into a financial system using distributed ledger technology. When used as such, you basically have a ledger that theoretically can never be altered and whose records can never be destroyed.

How can this improve our Corporate Financial reporting?

The current corporate financial reporting system will go through the following four stages:

• Recording of transactions and consolidating the information.
• Audit/verify the accuracy of the Financial information recorded.
• Production and distribution of multiple forms of reporting.
• Consumption and use of the information by various users, including analysts.

Let’s have a look at how the blockchain improves each aspect of the corporate reporting process.

Recording

Producing of financial information has a cost of recording and aggregating transactions across multiple entities across jurisdictions as well as consolidating the information.?

Blockchain could be used to help solve these problems in the production of accounting records because having a single structured location enhances accessibility.?

Due to distributed ledger technology, blockchain technology eliminates the need for entering accounting information into multiple databases and potentially removes the need for accountants to reconcile disparate ledgers. This could save substantial amounts of time and the risk of human error may be considerably reduced.

Blockchains could bring efficiency and reliability to the consolidation processes.

Audit/Verification of transactions

Users of financial information have to trust the accuracy of financial statements produced. Currently, companies produce financial information and this is certified and verified by an external auditor.

If a company keeps it transactions on a blockchain, then by construction, the blockchain can to some extent replace the auditor in confirming the accuracy of all transactions and balances.

Each transaction is certified and confirmed by thousands of other blocks on the chain and these transactions made in the blockchain cannot be tampered with, ensuring that trust is automatically built into the company’s accounting process.

The blockchain therefore improves the accuracy and validity of financial transactions and making the statements more trustworthy.

Production and distribution of multiple forms of reporting

We currently use a model that relies on reporting numbers from the past within annual, semiannual, and quarterly reporting. Information created through financial accounting is entirely historical and managerial accounting looks at past performance and creates business forecasts.

Blockchain introduces a theoretical concept of real time reporting. With transactions happening in real time and the financial ‘database’ being continuously automatically updated as the transactions occur, it provides users with real-time updates of accounting information.?

This increases the frequency of date of delivery of financial information and provides financial statement users with accounting information that is timely.

Consumption and use of the information by various?users

We live in a world where users want to be able to access financial data freely and currently, financial statement prepares use and combine different means of technology to disseminate the companies financial information.

Regulation of companies and different levels means that companies are required to produce and submit reports to regulators. Blockchain could help solve problems in the distribution of financial reporting to regulators and other users at a national and international level.

A blockchain allows anyone to join. Hence, if a company had a single ledger that contained all its transaction and accounting data, it could be shared instantaneously with regulators, investors, and creditors.

By providing a chain of links at any time to disclosed financial information by the company would allow an up to-date picture of a company’s position to be communicated as well as the relevant credibility/assurance and context around it (i.e. users could trust that it had not changed since it was issued and assured).

This would work effectively if, additionally, the blockchain was set up to connect with audit and regulatory users.

Companies can create “private distributed ledger” (as opposed to Bitcoin’s public ledger) that would allow external parties to see only what is in the typical financial report, but also allow financial executives and leadership to view information in much more detail.

Of course, several questions remain to be answered regarding blockchain and financial reporting, not least of which is its impact on accounting policy and regulation.

But soon every company is going to need a blockchain strategy.

What are your thoughts on this? Leave a comment and share your thoughts in the section below.

This Articles was first published in the?Skrypt Magazine ?May issue. Skrypt Magzine is a Financial magazine that will follow and explore the blockchain, fintech and payments, and Financial management trends across the globe.