Integrated reporting – the next evolutionary step in corporate reporting?

Integrated reporting is a relatively new approach to corporate reporting, which is rapidly gaining international recognition through global giants such as Unilever, and has been fully mandated in South Africa. It is founded on ‘integrated thinking’, which helps to demonstrate interconnectivity of strategy and objectives, performance, risk, and importantly helps to identify sources of value creation.

The call for disclosure of non-financial information has grown in response to the awareness that financial statements omit salient information about the company (Adams et al., 2011). Likewise, organisations such as the World Bank and IMF are calling for a greater focus on aspects such as risk and future development, which are weak in current reporting.

The purpose of the integrated reporting framework is to establish guiding principles and contents, allowing judgement to be exercised as to how performance is measured and disclosed on the individual circumstances. The IIRC as contrasted eight differences between current corporate reporting and principles of integrated reporting some of which are more substantial than others (KPMG, 2011). For example, the new report aims to ultimately change the overall reporting outlook, focusing on the past and future, as opposed to just past financial figures. In this respect the narrative reflects both outlooks, promoting trust through transparency, and focusing on the short, medium and long-term objectives of the company, rather than just short-term. Finally the content of the report is subject to each company’s discretion, allowing them to be more responsive to individual circumstances, which in turn will help users make more informed decisions.

These fundamental differences show the broader context of the company’s activities that will be included in the report, showing that integrated report gives a ‘fuller story’. Therefore it may be argued that integrated reporting is a more sensible and holistic form of reporting, as it should better meet the definition that the accounts are ‘true and fair’ in presentation.

The intended user of integrated reporting is specifically investors, however, information which satisfies the reasonable needs of investors should satisfy many, if not all, of the needs of other stakeholder groups. Therefore unlike the current conflict in corporate reporting i.e. historic v forward-looking information, integrated reporting aims to solve the problem by making reports useful to all interested parties.

One of the main purposes of integrated reporting is to demonstrate how businesses really create value over time. There has been a dramatic shift in macro economic value over the last few decades, hence most of the value of the firm is now made up from intangible assets such as good management, possession of contracts or a strong workforce etc. The problem with current reporting is that these assets are not reflected in the financial statements. Integrated reporting aims to change this through concise communication of the organisations strategy, governance and performance. More and more, businesses are expected to report on not just profits and the financial figures, but their impact on the wider economy, society and the environment. Integrated reporting gives a broader view of the company to show these expectations, whilst it should also enable more effective decision-making at both board and investor levels. In a survey conducted by CIMA (2014), they found that 92% of participants (including CEOs, CFOs and COOs located in North America, Africa, Asia-Pacific and Europe) believed that bringing together financial and non-financial information would help to explain how the business creates value. This study confirms the results found by PWC (2002) that most top executives at large multinational firms believe the non-financial performance measures are more valuable than traditional measures in assessing long-term value. These studies therefore demonstrate the globalised opinion of integrated reporting, emphasising the need for change in current reporting, and supporting the argument that an integrated reporting framework would be more sensible and suited to current reporting needs, by providing a more holistic view of the company.

In conclusion, corporate reporting is meant to serve the needs of (largely all) users, and if these needs change, the reports should change to reflect this. There is a strong argument, therefore, that integrated reporting is likely to be the next evolutionary step in corporate reporting. The concise format of the report should make it easier for companies to communicate to users, and the incorporation of both historic and forward-looking information, as well as an increase in non-financial information, should provide a more holistic view of the company and its wider activities, which is better suited to current demands, as shown by the argument that current annual reports are getting longer but not necessarily more useful.

 

Featured image courtesy of https://www.greenbiz.com/sites/default/files/styles/panopoly_image_full/public/images/articles/featured/shutterstock_130076675.jpg?itok=LqA6XWQq

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