How blockchain could restore trust to the fund management and audit industries
Not too long ago, Neil Woodford was still regularly being heralded as a “superstar” manager and the “Oracle of Oxford”. How different the story is today.
The reasons behind Woodford’s fall from grace have been extensively covered, but can largely be attributed to the fact that ultimately the Equity Income Fund did not do what it said it would, and Woodford ran it unchecked. If investors had been fully aware of the investments being made into unlisted and illiquid stocks, would they have kept their money in?
There can be no doubt that it’s in the best interest of investors that information is readily available to enable timely decisions to be taken. Dissemination of such information should not be left to the whim of the fund manager who relies on investor trust.
Ultimately, trust requires transparency to validate integrity. Adopting technologies such as blockchain into the reporting and audit framework of a public fund could provide a fresh approach so that investors can avoid being caught in a Woodford-like situation.
For instance, an investor-facing blockchain could be programmed to release updates on a fund’s portfolio at regular intervals without further approvals from the fund manager. The constant release of data in a predefined format would provide evidence of the fund’s status, forcing the fund manager to operate within the automated reporting schedules and ensure that the fund’s share price is a fair reflection of its valuation.
Similarly, adopting blockchain in audit and assurance reporting could potentially help to prevent accounting scandals, such as the Patisserie Valerie fraud case earlier this year. Had blockchain been used to underpin the accounting framework of the company, it’s likely the thousands of false entries that were discovered as fraudulent would never have been approved by the distributed ledger technology. The time-stamped links of blocks could reveal alterations or tampering to the recorded transactions, as well as providing an immediate insight into the performance of the company at any given time.
More validated, immutable information will generate trust in the fund management market and audit industry as a whole. The choice between investing in public market funds and private market funds should be left to the investor, and public fund managers should be prevented from changing their reporting framework because it suits them. Likewise, listed companies should adhere to a fully transparent corporate reporting process that is not susceptible to distortion. In both cases, there is a clear argument for an automated blockchain that can act as a “single source of truth” for the benefit of investors, on whose trust the share price of listed entities partially depends.
Nish Kotecha,chairman and co-founder of Finboot, and Bryan Foss, independent director and visiting professor at Bristol Business School
