This article was first published in the November 2012 UK edition of Accounting and Business magazine.
The first of these two articles looked at how corporate reporting has expanded both its scope (or content) and its audience. In this article we look at how best practice might be identified and what the future of reporting might look like.
How to identify best practice
The range of reporting activity mandated for the modern annual report and accounts package has grown significantly, even before voluntary non-financial disclosures are added to the equation. With such a profusion of requirements – some in the Corporate Governance Code, some in company law and some in International Financial Reporting Standards, how does a preparer (or a user for that matter) get a sense of what good practice is?
Every year PwC runs its Building Public Trust Awards. Winners this year were Fresnillo, Shanks, Defence Science & Technology Laboratory and PotashCorp. For those struggling to understand best practice in some of these emerging new reporting strands, a visit to some of these winners’ websites could be a useful way of benchmarking how near or how far your own organisation is from best practice.
Adding new reporting blocks seems to make sense but why do we need to integrate them? Put simply, it is the recent concern over the clash between two related, but contradictory, issues:
- The medium to long-term likelihood of the financial consequences of severe climate change.
- The recent tendency for stock markets (and employers) to prioritise a short-term view of corporate performance.
Many people believe that global warming will increase the probability of severe climate change-related events. These events will have significant financial consequences for many organisations. So will the rapid depletion of non-renewable resources. At the same time the financial markets are often suspected of taking a short-termist view and rewarding actions which might be prejudicial to long-term sustainable value creation.
Whether or not it is possible to meaningfully integrate all the various messages contained in the mass of data now available, either through the annual reports and accounts package or in the separate corporate responsibility/sustainability report, is the next big challenge for report preparers, the accountancy profession and the investment/shareholder community.
In the UK, the Financial Reporting Council (FRC) has already found it necessary to look at how best to eliminate clutter and complexity from the annual report and accounts package.
Integrated reporting (IR) seeks to shift the investor focus of attention away from short-term gains and towards long-term sustainable value creation.
According to the recent International Integrated Reporting Council (IIRC) discussion paper, Towards Integrated Reporting: Communicating Value in the 21st Century, the aim of IR is to ‘demonstrate the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, IR can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing’.
There are several steps involved in achieving this:
- ‘Politicise’ major investors (eg pension funds) to take a lead in seeking performance data which supports long-term, rather than short-term, investment decisions.
- Demonstrate how companies can successfully embrace key sustainability drivers at the stage that their business model and business strategy are being formulated.
- Communicate via an integrated report how the embedding of long-term sustainability drivers has, or will add, to long-term value creation – through reduced cost/risk or through enhanced competitiveness and hence revenue. Many companies claim to draw value from corporate responsibility.
The simplest way to look at IR is to assume that it somehow sits at the top of an information pyramid. Based on the IIRC’s principles of inter-connectedness and materiality, the preparer will determine which information from which source best demonstrates the interconnectedness of the thinking that underpins the business model and the corporate strategy, and links both to key sustainability drivers.
The IIRC’s discussion paper sets out the rationale for IR and also sketches a possible framework via which such reporting could be conducted.
The IIRC’s website also gives explanations for why IR is different from – and by implication why it is better than – conventional financial reporting.
Looking to the future
From what we have seen above, corporate reporting might become more integrated and more fragmented at the same time. Viewed through the integrationist lens, an integrated report sits above, but does not necessarily replace, a series of other separate reports, each having its own purpose and set of stakeholders. Viewed through the lens of increased fragmentation, reporters and users alike will use technologies such as XBRL and real-time reporting to access bespoke data sets via the internet. In the second scenario an integrated report serves to provide a stable core to an endlessly shifting universe of data.
It’s probably too late to return corporate reporting to the relative simplicity of the mid-20th century. But a combination of IR and new technologies might provide companies, stakeholders and our political masters with a new accounting model in which long-term value is prized more than short-term gains and where all stakeholders, not just investors, feel a part of the enterprise and the value creation process.
Roger Adams is ACCA’s director of special assignments