It is fair to say that the accounting and auditing profession is currently going through a period of contemplation and reflection. While much of this is focused on expectations, quality and trust, it is also true to say that technological change is another challenge. Since its inception, the profession has been focused on a physical and often paper-based document – the annual report. However, modern technologies such as blockchain, artificial intelligence (AI) and augmented/virtual reality might be about to radically disrupt the annual report, its process and ultimately the industry that has been built around it.

The shape of things to come

In our Digital Future project, the Financial Reporting Council’s Financial Reporting Lab (the Lab) has been looking at how the concepts that underpin corporate reporting in paper format will be translated into the digitally centred reporting of the future. We have looked at technologies, including blockchain and AI, to see where and how they might affect corporate reporting, and how they might help to improve quality and trust. What we have found is a complex environment where different technologies will build upon each other to create a new structure for reporting.

Quality data = Structured data

In our previous article (see A short history of the digital reporting future, July 2018) we talked about how structured data programs (such as XBRL) will lead to new ways to collect, present and package data. However, this is just the beginning. Greater demands are being made on companies to disclose environmental, social and governance information in a more structured way. The resulting data canal (ie, a structured data pool) becomes the key input into the corporate reporting process of the future. Technologies such as blockchain and AI will power this quality, contextual data.

Blockchain = structured trust

XBRL and other technologies can underpin structured data but how can the users of that information rely on its authenticity? One way may be through the use of blockchain. A blockchain is a type of shared database that creates a permanent record of a transaction. Because it is distributed across a number of participants in a network, and therefore not under the control of a single participant, it is robust. This robustness, combined with the fact that any changes made to the data are visible to all participants, ensures that both the data and the network are resilient in a way that creates structured trust. The business community can use blockchain to rethink how it builds and communicates trust and it is that potential that makes blockchain disruptive.

Using our framework of digital reporting (which expresses the qualities that preparers, users and others value in digital reporting), we considered the case for blockchain in specific aspects of the accounting and reporting process. Our review concluded that:

• For the production of accounting records – blockchain has the potential to improve the efficiency and timeliness of creating error/tamper-free records (across markets, industries and companies) and may increase the speed of consolidation within groups, particularly where there are multiple participants. However, there are issues of cost and interoperability which need to be solved.
• For the distribution of corporate reports – the use of blockchain to create a single location for credible, usable corporate data across Europe is a real possibility and would be highly valuable. While such a system is already being worked on (by the European Commission through their transparency gateway project), ultimate success is dependent upon any resulting solution being easy to use.
• For consumption of corporate reporting – the potential for using blockchain to form an unalterable group of communications (to meet reporting requirements) across different formats and entities is worth investigating as it could lead to different ways to meet regulatory requirements, perhaps leading to more engaging reporting. However, the need for broader adoption may reduce the likelihood of its use.

While it is clear that blockchain is not the only possible answer (or even always the best), it does have the potential to solve some of the challenges of corporate reporting. Blockchain, therefore, merits consideration and experimentation by preparers and regulators.

AI = structured processes

If structured data and structured trust are achieved, the next question is how to analyse the structured, trusted data efficiently and effectively. AI presents a way to do this. In the world of business and finance, the term AI acts as a shorthand for a range of different technologies and techniques (from robotic process automation to machine learning and natural language processing) that represent the current leading edge of computerisation and automation. It is this more comprehensive range of AI and related technologies that are now finding a home in the world of corporate reporting. The Lab explicitly considered corporate reporting processes where both the level of repetition and standardisation as well as the amount of data makes it difficult for a human to undertake the task efficiently or effectively and therefore creates an opportunity for structured processes. In considering the case for AI in specific aspects of accounting and reporting, our review concluded that: 

• To produce accounting records – AI is being used to improve productivity by replacing repetitive human processing of underlying transactions and the recording of those in accounting and management information systems, ultimately feeding into annual reports.
• To distribute accurate annual reports – AI is being used to efficiently and effectively support auditors and boards in the internal and external validation processes ensuring that annual reports are credible and compliant.
• To consume annual reports – AI is being used by investors to enhance the effectiveness of investment analysis by extracting meaning and value, not only from company reporting but also from various sources of alternative data.

Our work on AI leads us to conclude that it is not a question of whether AI will become important for corporate reporting, but when. However, as this AI-powered world of reporting develops, it will be essential for all stakeholders to understand how corporate reporting, empowered by AI, needs to evolve in a way that enhances trust.

Structured data + structured trust + structured process = new possibilities

Our work points to the possibility that by combining the benefits of structured data, trust and process, corporate reporting can evolve from the static annual report process to a dynamic, real-time communication process. However, that will take change and action.

What do you need to do?

Across the Lab’s technology projects, we have heard from many who consider that this new structured future offers significant promise. However, that promise can only be met if everyone involved in corporate reporting looks forward. To do this, we recommend some simple actions:

• Build your understanding, knowledge and experience. Combining technology, governance and finance skills will be the key.
• Cautiously innovate. Try out new technologies in a controlled way.
• Get involved. Change only happens if we all get involved. Take opportunities to feedback to professional bodies, regulators and others.

What's next?

The Lab’s next technology report will be focused on virtual reality, augmented reality and video in reporting – structured experience. We will also be feeding the results of all our work into the FRC’s project on the Future of Corporate Reporting.

The Lab’s reports provide more detailed examples of blockchain and AI in action and can be found at frc.org.uk/lab/reports

About the author

Thomas Toomse-Smith is project director at the FRC’s Financial Reporting Lab.