This article was first published in the April 2016 UK edition of Accounting and Business magazine.

Chances are, you’ve heard of blockchain. It is, after all, the technology platform on which the notorious digital currency bitcoin is built – a currency that threatened to rewrite the rulebook of modern finance. But while bitcoin has received all the headlines since entering the scene in 2008 because of its disruptive nature, pricing volatility and occasional use by the criminal underworld, what is now making the news is blockchain, the distributed ledger technology that underpins bitcoin (see box). 

Speaking at the London School of Economics in March, Ben Broadbent, deputy governor for monetary policy at the Bank of England, described the impact that distributed ledgers might have. ‘In principle, this technology could be applied to many things, not just the exchange and registering of financial assets,’ he said. ‘Distributed ledgers might eventually be used for a wide variety of government services, including the collection of taxes, the delivery of benefits – potentially including new “smart” transfers that could target particular groups, the keeping of business registers and other things besides.’

For finance professionals, this is all well and good, but the real interest lies in understanding how distributed ledgers might affect the financial reporting and audit process – whether CFOs and their teams will soon be recording their organisation’s cash position in a distributed ledger rather than a centralised ledger. And for this, the picture is much less clear. 

In January this year, the government published a report by chief scientific adviser Mark Walport, called Distributed ledger technology: beyond blockchain. The report explores in detail the impact that blockchain technology could have on our financial system, and its ability to ‘record, enable and secure an enormous range of transactions’.

Real-time reporting

When the report was published, many observers were quick to get involved and ride the wave of enthusiasm and interest that has exploded around the subject, not least from the Big Four. 

‘Blockchain will do to corporate reporting and financial transactions what the internet did to knowledge,’ proclaimed Hywel Ball, UK head of assurance at EY, in a statement released shortly after the report’s publication. ‘It could fundamentally change the role of the finance function and has huge implications for us as auditors,’ he declared.

He went on to argue how the blockchain technology that underpins bitcoin has the potential to ‘transform the speed of corporate reporting’. And, because transactions can be recorded and logged in real-time, ‘blockchain could allow a company to publish its “annual” results on an almost daily basis’. 

Speaking to AB, however, Ball is a little less bullish in describing just how impactful blockchain might be on the finance function – at least in the short term. ‘You can imagine, if you’ve got an immediate, single version of the truth, your ability to do corporate reporting very quickly will be accelerated,’ he says. 

This may well be true, but the concept of individual companies using their own distributed ledgers for real-time corporate reporting seems far-fetched, at least in the near term. The technology seems better suited to supporting more isolated and defined applications. 

‘We were talking to a blockchain company in the US recently that’s trying to develop a private blockchain for the oil service industry,’ explains Ball. ‘So you actually have payment processing, services, goods and transactions for an area – and that could be, for example, the Gulf of Mexico – so the whole supply chain then gets paid using the blockchain.’

How to interact

While such scenarios are by no means unlikely – there are several similar projects already taking place today – they are isolated and designed to support a closed group of organisations and individuals for a given purpose. And, in such scenarios, there will quickly be implications for the accounting and audit profession, says Ball. ‘You better start thinking – maybe not this year, but fairly quickly – how you then interact with that blockchain in order to get the information you need for your corporate reporting,’ he says.

Not everyone, though, is convinced. Michael Mainelli FCCA, a member of ACCA’s Corporate Governance Forum, chairman of commercial think-tank Z/Yen and blockchain expert, believes the profession won’t be immediately affected. ‘If we divide the profession into accounting and audit, I can’t imagine the profession is going to see much change, really,’ he says. ‘These are ledgers. They’re databases. It doesn’t even have to be financial data.’

Mainelli’s argument is that while distributed ledgers will be disruptive, their use in corporate reporting will be more limited and ‘only in cases where there is some sort of large, mutual operation; so, for example, wholesale insurance’. 

However, Mainelli does concede that distributed ledgers could be used to provide a more timely view of corporate cash positions, and he is working with two organisations on projects in this area. ‘They’re looking at using these distributed ledgers as ways of ensuring that they’ve got a common ledger across the group that will give them a much better, overall real-time position of where they stand,’ he says. ‘That’s an interesting example, where EY sort of has a point.’

It seems, then, that the jury is still out on the impact that distributed ledgers will have on corporate reporting and audit. As always in the case of new, intellectually stimulating and often complex technological developments, there is a degree of spin and hype surrounding the whole subject. 

But watch this space. After all, it’s not every day that something as fundamental as the general ledger gets disrupted.

David Rae, journalist