This article was first published in the October International edition of Accounting and Business magazine.
For 20th-century physicists, a ‘theory of everything’ has been an allusive goal that would explain and link together all known physical phenomena in the universe. For 20th-century accountants, we have the international integrated reporting framework.
Pithy as that may sound, the condensed wisdom of many interested parties is that, while valuable, the current framework needs to transform from a high-level conceptual model that attempts to capture all that companies do – and how they do it – to one that CFOs can actually hang their hats on – ie more succinct, based on case evidence and offering practical guidance. This is not surprising, given the complex nature of many of the concepts underlying the framework.
More specifically, the framework, among other things, ambitiously called for companies to consider six forms of capital in their assessment and reporting of the value of the firm: financial, manufactured, intellectual, human, social and relationship capital.
Late in August, the International Integrated Reporting Council (IIRC) published comments on the draft from interested parties around the world. The results underscored the fact that, while these forms of capital (although somewhat out of sync with the intellectual/knowledge capital literature) are generally considered to be the building blocks or stores of value of an organisation, measuring and describing these elements and their interrelationships remains a concern. There were also issues with the concepts of ‘business model’, ‘outcomes’ and a variety of other key concepts. This subsequently calls into question the value of ‘a theory of everything’ when it comes to corporate reporting.
Some suggest that without a more succinct form of authoritative guidance, the framework will be applied willy nilly across the globe, if at all, resulting in integrated reports that are neither comprehensive nor comparable between companies.
Furthermore, without specific standards, subjectivity will make interpreting the narrative of an integrated report extremely difficult. Others question the wisdom of adding yet more disclosure and reporting to the plate of the CFO; and, without force of law, whether there’s any hope of adoption at all.
After all, one of the primary concerns of CFOs today is the increased regulatory and compliance burden that already distracts them from their role as senior financial strategist.
This is even more true of smaller or private company CFOs who are unlikely to replace financial management objectives with voluntary reporting projects. Finally, confusion remains around whether the integrated report is to be an overarching report with links to subreports that are traditionally required – such as the financials – or whether elements of the integrated report are incorporated into existing reports.
There is much to sort out going forward. It was hoped that the next iteration of the international integrated reporting framework would be ready by December 2013. However, it is my best guess that the IIRC will heed many of the recommendations for it to slow its approach, and wait until it has more concrete reporting examples from the 100 companies worldwide that are now taking the framework for a test drive.
See also the feature on page 36 examining the integrated reporting debate more closely from the perspective of the accountancy bodies, regulatory community, investment community and corporate sector.
Ramona Dzinkowski is an economist and business journalist