Blockchain is the future of financial reporting, but several issues stand in the way of wider utilization and adoption.
A large part of the blockchain and cryptoasset conversation, at least in accounting and financial reporting circles, has been how blockchain is going to influence and change the reporting and disclosure process. Conferences, podcasts, and articles have been populated with different takes and versions on a common theme; how blockchain will both revolutionize the reporting process as well as how it might lead to the demise of the audit and accounting profession.
Think about it. A blockchain, if operating properly, creates a tamper resistant (some would say immutable) record of transactions and information that have occurred between network members. In addition to the increased data integrity a blockchain provides, there is also the fact that transactions, and by extension the blocks that form the blockchain, have been approved via some sort of consensus methodology. Specifics vary from blockchain to the blockchain, but the fact remains that at least some network members have approved every bit of information stored on the blockchain itself.
Let’s take a step back and think about what the financial reporting process entails.
Organizations maintain records internally on a continuous basis, but the external reporting process relies on the confirmation and verification of this information via some sort of attestation or audit process. Importantly, a traditional audit does not entail a review of every single transaction.
Rather, a traditional financial statement audit involves the company in question hiring (and paying for) an external accounting firm to audit, test, and otherwise attempt to verify the information being reported to the marketplace. This process may vary from organization to organization, but routinely involves some sort of testing, confirmation, and verification of the amounts put forward by the organization.
Blockchain, with a tamper resistant record of transactions and a group based consensus related to said transactions, would seem to render this entire process obsolete. Peeling back the layers, however, and there are several issues that need to be addressed prior to the promised blockchain reporting revolution actually becoming reality.
Without understandable and consistent reporting, the information stored on a blockchain is not worth much. In other words, better reporting is key to wider blockchain utilization and adoption.
Obstacles to mainstream blockchain reporting
Interoperability. The consideration around interoperability is not a new one for the blockchain space, but is of particular importance when it comes to financial reporting and attestation. If blockchain, regardless of the type, is to fulfill the promise of enabling the real time assurance and reporting of information, the data stored therein must be able to exported and analyzed by other software tools. Organizations that include, but are not limited to, Polkdot and Cosmos continue to develop and refine blockchain networks with interoperability at the core of the value offering. While it is difficult to forecast what model or method will prevail, the fact that these developments are occurring is encouraging for improved blockchain reporting.
Governance. A permissionless blockchain might have been the initial idea and concept behind the blockchain and cryptoasset space, but as far as commercial and enterprise adoption is concerned, this type of blockchain seems to have been superseded. Permissioned blockchains continue to accelerate the adoption of blockchain in the commercial space, but an issue that is still emerging is just how these permissioned blockchains will be governed. Specifically, what safeguards are in place to authorize different network members access to different levels of information, including the external financial professionals seeking to verify and confirm financial information?
One key question related any governance service or option is how this service will play out, i.e., will blockchain governance default to proxy votes, or will members be required to be active participants?
Reporting requirements. Blockchain has changed how individuals both think about, and treat, financial information and financial assets, but the reporting requirements for organizations have not kept pace. For example, what types of information and data are actually going to be appropriate to satisfy regulators and other market actors? Will a smart contract hold up in every jurisdiction as equivalent to a traditional contract? Issues like this will need to be addressed and resolved prior to wider adoption of blockchain based reporting. The fact that the Public Company Accounting Oversight Board (PCAOB) has issued some (non-authoritative) commentary on this issue is extremely encouraging news.
The financial reporting process and conversation is, by its very nature, a complicated process that involves inputs, reviews, and comments from an array of market actors. Blockchain based applications have the potential to streamline and improve financial reporting, but before that can occur there are several fundamental issues that must be resolved.
Financial reporting and accounting might not be the most scintillating of blockchain conversations, but it remains one of the most relevant and market moving applications of blockchain.
Accounting and finance professionals, all too often relegated to the back office, might just be the professionals who make sure blockchain goes mainstream after all.
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