HEAD OF ACCA UK
THE annual review, the management commentary, the chairman’s review, year-on-year summaries, the corporate social responsibility (CSR) report, the operating and financial review… we could easily go on. Today’s big businesses produce an eye-watering number of corporate reports at the end of each financial year. The whole package contains hundreds of pages of data and detail.
The problem is, this doesn’t necessarily deliver value for the report users. Granted, every piece of information in those reports is there for a reason: regulators and shareholders demand parts, other stakeholders demand other parts. Still, although the reports tell us a lot individually, they tell us very little where it matters: the long-term view, how pieces of information connect with each other and how a company’s performance relates, effectively, to the business model.
“There’s certainly not a shortage of information, but there is a confusion of information,” says John Davies, the technical head at the Association of Chartered Certified Accountants. “There’s not a report that links all the information in a coherent way, or that links business sustainability, long-term objectives, and performance. Corporate reports today risk being ghetto-ised. If the annual report is a mirror for business, then it’s cracked.” Idioms about woods and trees spring to mind.
Take sustainability issues, for example. Natural resources and the natural environment each have a significant impact on the long-term viability of a business: short-term growth might look good in the financial statements, but longer-term growth isn’t guaranteed unless resources are used sustainably or if the business doesn’t have a full grasp of climate risks. Today’s corporate reporting doesn’t make linking things easy though: most companies publish their CSR report separately from their financial statements. Some don’t even publish the reports at the same time.
What we have then, is a corporate reporting landscape that’s been strait-jacketed. Every time there’s been a new reporting requirement, a new report has been created. The trouble is, as the corporate world moved into the twenty-first century, creating inter-linking risks and opportunities, corporate reporting didn’t move with it.
All the information in corporate reports should be linked. Short-term information tells you if the long-term plans are realistic. Long-term information tells you if the short-term achievements are something to be proud of.
Individual reports only tell you one side of the story. A bigger, forward-looking picture is missing. We’re missing the box for our corporate reporting jigsaw puzzle.
This is a problem that has been recognised by almost every significant corporate reporting stakeholder there is: preparers, users, regulators, and academics. Over 40 of these organisations – from big businesses to sustainability organisations via the big accountancy bodies and firms – have given their backing to the newly-formed International Integrated Reporting Committee (IIRC).
The IIRC was set up in August 2010 by the Prince of Wales’ Accounting for Sustainability project, the Global Reporting Initiative and the International Federation of Accountants. It focuses on developing exactly the kind of inter-linking report that is currently missing. A first discussion paper was launched this week.
“All matters which are important in assessing an organisation’s performance and position, past and prospective, need to be reported, but not by making annual reports ever longer and more complex,” says Sir Michael Peat, the Prince of Wales’ principal private secretary, and chair of the IIRC.
“The information needs to be provided clearly and concisely with the connections between financial, environmental, and social impacts demonstrated and the clutter removed. This is what integrated reporting seeks to achieve.” How exactly integrated reporting is going to achieve this is still far from clear, but those involved are optimistic about the potential of the project.
“Integrated reporting is a radical attempt to make corporate reporting more useful,” says Davies. “We have an opportunity to breathe new life into how businesses view the preparation of their reports. The project can be considered a success if it changes the behaviour of preparers and users by getting them to focus more on the long-term.”
For South Africa’s professor Mervyn King, godfather of modern-day sustainability reporting and IIRC deputy chair, integrated reporting is a key tool in creating a more sustainable business environment: “[We will see] companies showing that they’ve embedded sustainability issues into their long-term strategy and into the very fabric of management, so that companies actually become agents for change in hopefully making life on earth sustainable.”
One of the things that makes the IIRC project worth keeping an eye on is the level of global buy-in that it’s already achieved. This may help avoid some implementation problems, such as those experienced by International Financial Reporting Standards (both the IASB and FASB are involved in the IIRC), and it means any final framework is ready to use as a globally recognised report.
Of course, the project has quite a few steps to go through before any framework is ready, including the current consultation process, closing in December, and a pilot programme taking place later this autumn.
Nevertheless, the IIRC could well be onto something. Introducing an integrated report would help greatly increase the value of existing reports. After all, it’s not that reports are lacking in information. What they are lacking is the big picture, something that the ideal integrated report would provide – the picture on the box for the corporate report jigsaw.
Ultimately then, the integrated report is about making the corporate report more useful to those that use it. Hopefully, integrated reports might help businesses find their way towards an integrated strategy.