|Global Knowledge Gateway||
Integrated Reporting: An Emerging Opportunity
by Dr. Sean Stein Smith DBA, CMA, CPA, CGMA, CFE, Assistant Professor, Lehman College (CUNY) | November 14, 2016 |
Accounting is a well-known and respected profession, but it is not always one that is automatically aligned with innovation, creative thinking, and new opportunities for industry practitioners.
This is partially due to the reality of the work itself—auditing, attestation, and tax reporting practices must be performed consistently to ensure comparability, reliability, and that the information is of use to end users. In addition to these roles and responsibilities, which of course form the foundation of accounting work and professional reputation, there is an entirely new field of opportunity and possibility emerging in the marketplace.
Integrated reporting, and specifically the multiple capital model that drives the quantitative core of the reporting framework, opens entirely new avenues for accountants to deliver value to internal and external users. Strategic, longer-term thinking requires competent professionals familiar with both the quantitative aspects of business decision making, and the ramifications of this information on business engagement with the broader stakeholder community.
What Is Integrated Reporting?
Integrated reporting is an extension of financial reporting, but drilling down, it represents much more than simply a new framework for reporting financial information. Responding in part to pressures from management professionals and external users, such as shareholders and creditors, the following reality continues to crystalize. As globalization, regulation, and scrutiny increase the demand and expectations for information that complement traditional financial data, accounting professionals have an opportunity to fulfill these requirements.
Clearly, while financial information generates headlines, and forms the criteria by which management professionals are evaluated, a multitude of other factors actually drive those financial results. Operational data, relationships with customers and business partners, employee engagement, sustainability initiatives and objectives, corporate governance issues, and how the organization delivers value to clients and customers represent the drivers of value creation. Integrated reporting provides a framework by which accountants can quantify, report, and transform this information from data into actionable business insights.
The Multiple Capital Model
Transforming qualitative information, such as information linked to sustainability, governance, and the ramifications of employee engagement requires an objective framework to produce reliable information. Accounting professionals, both in public practice and working within industry, already possess the necessary skills to perform such a role, and the multiple capital model provides a template to deliver this data in a consistent manner. Breaking down the different components of an integrated report in a familiar format allows ease of use by end users and a platform from which accounting professionals can achieve a more strategic voice in the decision-making process.
Obviously, different forms of capital will be of more important for different organizations, but every organization should review these capitals, assess the organization’s position, and create metrics that can be used for comparative purposes moving forward.
- Manufactured capital: The idea of manufactured capital brings to mind physical assets and distribution networks linked to transporting goods to customers, but the true definition is much broader. In essence, it represents how the organization delivers goods and services to customers and clients, and how effective this information delivery is. If an organization is not effective in delivering value, whether via goods or services, the odds are that the organization will not remain in business for an extended period of time.
- Intellectual capital: As the business environment, and broader commercial landscape, continue to digitize information at an increasing rate, intellectual property plays an ever larger role. In addition to the importance of intellectual property, the rise of commercial hacking represents a threat to businesses larger and small. As the knowledge and service segments of the economy grow larger, the critical nature of intellectual property and capital will only become more important.
- Human capital: The costs of employee turnover, retraining, and on-boarding new employees, as well as the disruption and damage to productivity that such turnover causes, are well documented. Linking together the idea of intellectual capital, quantifying the benefits of engaged employees with human capital is a logical next step. Introducing the concept of knowledge management and leveraging the employee’s’ existing intellectual capital are logical next steps.
- Social and relational capital: Social capital can and should of be thought of as two distinct areas. First, how engaged and active is the organization with their customers and clients, and what steps are being taken to improve this engagement? Second, does the organization have quality relationships with stakeholders and the commercial market? Funding new objectives, expansion plans, and joint venture opportunities requires the ability to raise capital and engage in constructive dialogue with different market actors.
- Natural capital: At first glance, the idea of natural capital might seem to only apply to organizations operating within extractive industries, such as oil, natural gas, and mining. In addition to the clear connection to these organizations and industries, service organizations also must factor this component into business decision making. Companies ranging from Google to Tesla have launched entire business lines leveraging sustainability credits and the increasing importance of environmental issues to consumers and end users.
- Financial capital: In short, how do the five capitals listed above tie into the financial results and performance of the organization? Organizations, regardless of industry, must create more resources than are consumed by operations in order to remain in existence. Management professionals must allocate resources, in the short and long term with the creation of value along a broad spectrum of areas remaining the primary goal.
The Path Forward: Integrated Reporting & Accounting
As the business landscape continues to evolve and become multi-faceted in nature, the need for strategic planning that is robust and inclusive continues to increase. Accounting professionals have the professional training and mindset to evolve into more strategic decision makers and align themselves with management professionals and organizational objectives. Integrated reporting, and the multiple capital models embedded within this reporting template, provide accountants a roadmap and platform to leverage existing competencies in emerging areas of growth. Strategic planning, integrated thinking, and the development of a more robust business model and strategy represent areas of growth for accounting professionals. The tools exist, the knowledge is already embedded within the profession, and the time is now to enact changes to add value for the profession, organizations, and the individuals working therein.
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