This article was first published in the November/December 2016 international edition of Accounting and Business magazine.

Integrated reporting (IR) is steadily gaining momentum. According to the International Integrated Reporting Council (IIRC), more than 1,000 businesses across the world are using IR to communicate with their investors, and companies listed on the Johannesburg Stock Exchange in South Africa are now in their fourth year of IR since the King report recommended that listed companies issue integrated reports.

So now seems like a good time to take stock of the impact of IR and assess whether it is delivering the decision-useful information that it promises. Two recent and comprehensive academic studies, both supported by ACCA, the IIRC and the International Association for Accounting Education and Research, have done just that.

The first, Meeting users’ information needs: the use and usefulness of Integrated Reporting, looks at IR from a demand perspective, by directly examining the views of 37 senior capital market users of financial information. Overall, the report’s authors, Professor Richard Slack of Durham University Business School and Professor David Campbell at Newcastle University Business School, found ‘mixed views on IR’ among equity market participants and other users. ‘There is some, although limited, evidence of use and demand [of IR] from buy-side fund managers,’ says the report, but mainstream investment fund managers and equity analysts on the sell side ‘were not aware of or familiar with IR, which was reflected in their current lack of demand for IR and their perception that it lacked decision-usefulness.’

Lack of awareness

The authors found that the ‘capitals’ model, a fundamental concept within the Integrated Reporting Framework, which was issued in 2013, was of particular concern. The model is intended to provide insight about the resources and relationships used and affected by an organisation, as well as the changes in value of capital caused by the organisation’s business activities.

The study found a ‘general misunderstanding of, and concerns expressed about’, the model and the authors felt that scepticism about its reporting of the six capitals (and a lack of a specific reporting template) was impeding demand for IR. ‘A more focused discussion of strategy linked to the business model would be welcomed,’ said the report, ‘and this might increase the relevance and usefulness of the six IR capitals for investment decision-making purposes to them.’

The report identifies a number of barriers to the wider use of IR, including:

  • users’ general lack of familiarity with IR
  • concerns about the measurability and connectivity of the capitals model
  • a lack of widespread engagement and discourse around IR.

‘Although an increased number of IR reports from preparers may help achieve a critical mass, a more demanding challenge is the culture within equity markets and the incentive-led demand of equity analysts,’ the report concluded. Its recommendations include that more research should be carried out to establish the market benefits of IR, and that those already supportive of IR should be encouraged to promote its inclusion in client meetings and at market events generally.

A second report, Factors affecting preparers’ and auditors’ judgements about materiality and conciseness in Integrated Reporting, examines emerging practices in the early years of IR adoption. Covering reports from 28 countries, it looks at how preparers decide what to include and to what extent they are transparent about the decision-making process.

The authors – Marvin Wee, Ann Tarca and Lee Krug of the University of Western Australia, Walter Aerts of the University of Antwerp and Tilburg University, and Penelope Pink and Matthew Tilling of BDO in Australia – found that many companies using IR had a specific process in place for determining materiality, which involved both internal and external stakeholders and typically involved interviews, surveys and focus groups. Generally, companies followed the advice of the IR framework, which recommends that companies consider the magnitude and likelihood of occurrence when deciding if something is material. Few companies, though, described the process of evaluating and prioritising items, most likely for commercial reasons.

The study found that items that appeared in the financial statements were more likely to be considered material than social or environmental; this, the authors argued, is consistent with the conventional interpretation of value as a monetary concept. The report suggests, as ACCA chief executive Helen Brand highlights in her introduction, that the judgment of professional accountants will become even more critical in the future as reporting becomes more multi-faceted and complex.

Reluctant to get involved

The report’s authors interviewed corporate report preparers in Australia, Canada, Denmark, Germany, Netherlands, Singapore, South Africa, Spain, Sri Lanka and the UK. In particular, the interviews highlight where there is still work to do in promoting IR and in articulating its benefits. While some interviewees were positive about their experiences, others were reluctant to get involved because the benefits are not entirely clear to them. The interviews also suggested that many see IR as a potentially expensive activity because of the resources involved and the degree of cultural change needed in an organisation, and that it is not apparent to everyone where integrated reports fit within the various national corporate reporting regulatory frameworks.

That said, The Use and Usefulness of IR is clear that there is ‘ample evidence’ that the current corporate reporting framework is broken. The report explains that the evidence from buy- and sell-side analysts is that the cluttered and voluminous format of corporate reporting, and the annual report in particular, ‘is of increasingly limited use to them as users. Excepting the financial statements, much narrative reporting was criticised as being too backward-looking and lacking connectivity and measurability.’ Instead, there was a clear demand for a reporting culture that has an emphasis on the disclosure of material risks and provides more information on strategy.

In other words, there is demand for the information that IR brings and a momentum for change from the status quo; it seems the problem is not that users do not want the information that IR provides, but that they are not familiar enough with IR to exert the influence that would widen its use.

It is clear from both reports that there still is a lot of work to do in raising awareness of IR to the point that equity investors and other users begin to demand integrated reports, and corporate preparers see the benefits that an IR report can bring.

Liz Fisher, journalist