From financial reporting to integrated reporting

3rd July 2011

The International Integrated Reporting Committee aims to harmonise environmental, social, governance and sustainability reporting practices and integrate them into an internationally recognised and adopted reporting framework that includes financial performance. FSN writer Lesley Meall looks at the progress so far, and considers the implications for finance professionals.

We live and work in a world that has become so interconnected that we are almost all stakeholders in almost everything. So it’s not hard to understand the drivers behind a global reporting framework for integrated reporting. ‘The corporate identity of companies has changed and so reporting has to change,’ says Professor Mervyn King, who has been involved in this transition (for some years) through his roles as chairman of the Global Reporting Initiative (GRI), deputy chairman of the International Integrated Reporting Committee (IIRC), and chairman of the Integrated Reporting Committee (IRC) of South Africa. 

‘Integrated reporting is the evolution of financial reporting,’ says King, but he is keen to point out that this doesn’t mean the end of financial reporting as we know it. ‘It’s important to note that integrated reporting it is not replacing financial reporting, rather it reflects the evolution of reporting and the company’s role in society,’ he explains. Historically, companies have reported largely and often solely on financial performance, and although this remains the case for the vast majority of companies (and other organisations) in the world, corporate reporting is evolving to include a range of non-financial measures. 

FSN regularly looks at this in its KPI & Environment channel, and this is the place to look if you want to get a broad overview. But here, here, and here, you will find detailed coverage on some of the sustainability reporting initiatives and frameworks that organisations are currently trying to grapple with, along with available software support, the impact of sustainability reporting, its audit and assurance, and how organisations as diverse as Huaxin Cement, Marks & Spencer, and M E Heuk are interpreting and measuring all of this, and then using it to wave a big flag about how impressive their sustainability performance is. 

All of this highlights the very many competing and overlapping ‘measuring and reporting’ frameworks there currently are, how useless some of the associated audit and assurance is, and how meaningless this renders much of the reporting. Myriad voluntary guidelines and measurements and reports may reflect our growing environmental awareness and social responsibility, but all they actually prove is that:  a lot of individuals and organisations are trying to do less of the wrong things and more of the right things. Comparability and transparency remain elusive, and if the IIRC and its integrated reporting can provide this, it will be a wonderful thing. If. 

Leaping the divide from where most organisations are today, to where the IIRC would like them to be tomorrow, will take some doing – for a number of reasons. Firstly, there’s that all-important globally agreed framework for integrated reporting: at the moment, the IIRC doesn’t actually have one. A preliminary outline for it will shortly be published as part of an IIRC discussion paper, which will also explain the case for integrated reporting (how stakeholders will benefit), the IIRC vision for integrated reporting (and ways of achieving this), key elements of the ‘integrated report’, and how this will relate to existing regulations and reporting frameworks. 

Then there is the challenge of superseding what’s out there, without removing the complex but meaningful sector-specific information – and getting ‘global’ agreement on this. As anybody who has watched the progress of International Financial Reporting Standards (IFRS) will know, these have taken decades to develop, and they have yet to provide the comparability and transparency they so boldly promised. Pardon the mixed metaphor, but whilst you can push a horse kicking and screaming in the direction of water (or IFRS, or integrated reporting), the proof of the pudding is in the eating, or drinking, (or numerous national implementations). 

South Africa recently emerged as a pioneer of integrated reporting, when it became the first country in the world to legislate for it. In March 2010, Johannesburg Stock Exchange added the King Code of Governance Principles for South Africa to its requirements, and all listed companies will soon need to create an integrated report, or explain why not. The code, known as King III, is a product of the King Committee, named for its chairman, Mervyn King; he of the various national and international committees listed at the start of this article; so guidelines from South Africa’s IRC reflect existing GRI G3 guidelines and the integrated framework planned by the IIRC. 

If you are already feeling confused by all of the abbreviations and committees take heart (or not); it isn’t going to get any easier. Which brings us to another barrier the IIRC will need to overcome: the confusion that inevitably accompanies this type of myriad-stakeholder, multi-jurisdictional project. Again, IFRS is a perfect example. Just figuring out the relationship between International Financial Reporting Standards and International Accounting Standards (IAS) is a conundrum, and that’s before anybody starts trying to apply any of them, or reconcile them with national Generally Accepted Accounting Principles (GAAP) – and let’s not forget convergence.

 Oh the squabbles, or negotiations, as those involved may prefer to describe them. In the case of IFRS, the International Accounting Standards Board (IASB), the IFRS standard-setter, and the US national standard-setter the Financial Accounting Standards Board (FASB), are still negotiating on technical matters such as comprehensive income, and revenue recognition, and whether IFRS should be more like US GAAP, or US GAAP should be more like IFRS. So it will be interesting to see how the plans of the IIRC play out once they require the agreement of countries that already have highly developed corporate and financial reporting structures. 

There will be other challenges too. ‘Short-termism makes it difficult for companies to embrace the profit motive at the same time as being good citizens and acting in the public interest,’ says Nick Topazio, head of corporate reporting at the Chartered Institute of Management Accountants, and a member of the IIRC. ‘Companies will need to stretch the time horizon over which they formulate business strategy,’ he suggests, and finance professionals will need to look beyond their normal horizons too, because as he adds: ‘Non-financial reporting is going to move into the realm of finance, because it has the systems to collect and collate the information required.’ 

This is going to be a mixed blessing for the accountancy profession, not unlike IFRS, perhaps. ‘Accountants need to look at integrated reporting as an opportunity,’ suggests Topazio. ‘Yes, it’s another change,’ he acknowledges, but it’s also a chance to enhance your ability to influence the business. ‘Sustainability is not just to do with managing the planet’s resources, it’s also to do with managing business resources,’ he adds, ‘ things like the long term cash flow of the organisation, and this goes way beyond the normal boundaries of finance, and takes accountants into new areas and decision making processes.’ 

But to exploit this opportunity, accountants will need to extend their skills. ‘The introduction of integrated reporting won’t just happen by accident,’ says Topazio, ‘each organisation affected will need to manage it as a project, and all of the information collected will require audit and verification.’ Accountants will also need to ensure that they have the processes and systems in place to collect all of this data. He says: ‘Even in organisations where systems are set up to collect finance data well, the control boundaries will need extending to bring in non-financial information, and some of this is not going to be available as discrete, hard and fast numbers.’ 

The software industry will have a role to play. ‘We can help our customers to meet integrated reporting standards by providing them with the sort of flexible reporting framework that will allow them to measure, manage and report on all sorts of performance measures,’ says Dave Turner, group marketing director with Unit 4, but it will still be a long time before ‘integrated reporting’ can be integrated from a technology point of view. ‘There seems to be an expectation that companies have systems that contain all of the information they are going to need to report on this wide range of performance indicators, but this is a myth,’ he says. 

Some Unit 4 customers are already going out of their way to report on sustainability, but it isn’t easy. Turner explains: ‘Even an organisation with a top-to-toe Agresso ERP that’s using our Sustain 4 environmental performance management solution to collect information from other parts of the supply chain, can still struggle to find some of it,’ let alone automate its collection. ‘When you talk to businesses about it, you find that they have one guy who sits there and rings up all of the country managers asking them for information, because a lot of it’s still buried in spreadsheets, or it’s being worked out on the back of a cigarette packet.’ 

Even so, a few companies are already producing their own version of integrated reports, including Alstom, American Electricity Power, BASF, Novo Nordisk, and Philips, and South African listed companies such as Altron and Eskom recently joined them. So if you want to see what integrated reporting looks like, you can visit some of their websites and download their latest efforts. They’ve certainly collected, collated and presented information from an impressively broad range of areas, but you don’t have to look at many of them to spot the lack of real transparency, or see how difficult it is to make comparisons. 

So the IIRC and any national standard setting body that follows in the footsteps of South Africa’s IRC, will certainly have it’s work cut out. It helps that the pendulum has already swung in the direction of corporate transparency, social responsibility, environmental awareness, and globalisation, but it remains to be seen if myriad countries can work together to create an international integrated reporting framework and make its use mandatory – or how long this will take them. When a couple of countries first got together and started discussing the development of ‘more international’ standards for financial reporting, the US was at war in Vietnam.