The role and nature of accounting and statutory reporting is likely to change in the years to come if some of the profession’s leading figures get their way.
Since August last year, a committee of experts convened by Prince Charles has been working on ideas for integrated reporting. This week saw the publication of their initial findings in a discussion paper modestly titled, ‘Towards Integrated Reporting – Communicating Value in the 21st Century’. Published by the International Integrated Reporting Committee (IIRC), the paper looks forward to clearer, more user-friendly company reports that make the connections between an organisation’s financial performance and its social, environmental and economic context.
According to the report authors, integrated reporting “provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates value, now and in the future”. By combining elements that currently appear in separate strands into a coherent whole, the new reporting approach seeks to explain how organisations can create and sustain value.
The integrated report that the IIRC anticipates will become a company’s new primary statement and point of reference for investor presentations, detailed financial information, compliance/operational data and sustainability information. Much of this associated information could move online, allowing the integrated report to focus on the things that matter most to the organisation’s success. The new style report will replace rather than add to existing requirements, the committee anticipated.
Just in case you think this is pie-in-the-sky thinking, the IIRC will be starting a pilot scheme next month to road test its new framework.
It’s also worth pointing out that the IASB and other accountancy bodies back the initiative and a several documents issued in the past year that reflect how the IIRC agenda is being taken seriously by regulators and standards-setters:
- IFRS practice statement on ‘Management Commentary’, an international framework offering guidance on interpreting an organisation’s financial position, financial performance and cash flows;
- Global Reporting Initiative’s ‘G3.1Sustainability Reporting Guidelines’
- International Auditing and Assurance Standards Board discussion paper, ‘The Evolving Nature of Financial Reporting: Disclosure and Its Audit Implications’.
The UK government and the Financial Reporting Council are also looking at ways to beef up and clarify narrative reporting requirements.
KPMG got in on the act with its own integrated reporting paper, entitled, ‘Integrated Reporting: Performance Insight Through Better Business Reporting’. KPMG audit partner and IIRC working group member David Matthews said: “Progressive companies should get actively involved in the discussion around integrated reporting. It will not all be plain sailing – innovation never is, and is not for the uncommitted. However, the prize for those that get it right is capital at a reasonable cost through a better relationship with investors and the capital markets. It is in everyone’s best interests to make integrated reporting work.”
The IIRC paper fleshes out what were previously fairly threadbare exhortations and statements of intent. The new document emphases the underlying business model. There is no single, generally accepted definition of the term “business model”, it notes, but a common consensus might define it as the process by which an organisation seeks to create and sustain value.
The integrated report should show how the organisation’s business model interacts with external factors. These resources include the following kinds of capital:
Financial capital: funds available to the organisation to invest in production and services
Manufactured capital: Manufactured physical objects for use in the production of goods or services
Human capital: People’s skills and experience, and their motivations to innovate
Intellectual capital: Intangibles that provide competitive advantage such as patents, brands, software and organisational systems
Natural capital: resources such as water, land and minerals and issues such as biodiversity or eco-system health that could also constrain the organisation’s activities
Social capital: The institutions and relationships within which the organisation operates.
Integrated report content
Following the IIRC’s framework, the integrated report should tackle the following issues:
- Organisational overview and business model: What does the organization do and how does it create and sustain value in the short, medium and long term?
- Operating context, including risks and opportunities: What are the circumstances under which the organisation operates, including the key resources and relationships on which it depends and the key risks and opportunities that it faces?
- Strategic objectives and strategies to achieve those objectives: Where does the organisation want to go and how is it going to get there?
- Governance and remuneration: What is the organisation’s governance structure, and how does governance support the strategic objectives of the organization and relate to the organisation’s approach to remuneration?
- Performance: Qualitative and quantitative performance indicators are recommended to show how the organisation has performed against its strategic objectives and related strategies. While other reports and communications (such as financial statements, sustainability reports and so on) may be referenced or linked for those who want additional detail, the integrated report should be more concise and connected, with the linkages clearly drawn.
- Future outlook: What opportunities, challenges and uncertainties is the organization likely to encounter in achieving its strategic objectives and what are the resulting implications for its strategies and future performance?
Assurance issues
It’s hard to fault the underlying reasons behind the initiative as the integrated report takes shape. As set out in the IIRC paper, it even begins to make sense. But the paper acknowledges that if the integrated approach is going to take over as an organisation’s primary report, it is going to need independent assurance. Information in integrated reports is going to be more difficult to assure than what is disclosed under traditional reporting frameworks. In its paper on current reporting frameworks, for example, the IAASB noted, “Recognition that not all disclosures are verifiable creates uncertainty about what auditors are presently doing with such disclosures and the appropriate response to unverifiable information.”
New techniques, standards and reporting mechanisms will need to be developed to support assurance on integrated reports - but for the moment, the UK audit profession has more pressing things on its mind like the impending Competition Commission probe into audit concentration.
To give an idea how reporting is likely to evolve, the IIRC paper offers examples of what companies like Akzo Nobel, BHP Billiton, Anglo American have done in their reports to implement the ideas behind integrated reporting.
The examples confirm the impression that integrated reporting is taking hold in the corporate world, but we have seen many instances before where initiatives at the upper echelon have spread throughout the profession. If you have some spare CPD hours and are interested in the future of financial reporting, the IIRC discussion paper is not a bad place to start.
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John Stokdyk sadly passed away in June 2023. He had been with the site since 1999, rising from news editor to editor in chief, global editor and head of insight. As a roving editor, he investigated the profession's use of technology around the world. He devoted his spare time to technology history and an oddball collection of stringed...