Integrated Reporting Longs for Finance Professionals

Stathis Gould | February 2, 2017 | 3

In assessing the results so far for integrated reporting adoption globally, there are at least two perspectives. A glass-half-full perspective is that over 1,000 private and public sector organizations have begun integrated reporting, at least to some extent. A glass-half-empty view would be that global adoption is patchy with higher levels of activity in some countries, such as Japan, the Netherlands, and Brazil, than in others.

Given the International Integrated Reporting Framework was only launched in late 2013, this is a promising start for the International Integrated Reporting Council (IIRC)’s strategic global momentum phase, which will make way for a global adoption phase in the coming years. So far, the global accountancy profession has proactively supported the IIRC and development of integrated reporting from its inception to now in a number of significant ways, including with a dedicated Integrated Reporting Network for Professional Accountancy Organizations and a policy position highlighting IFAC’s support for integrated reporting.

One important driver for integrated reporting success will be the role chief financial officers (CFOs), and their finance and accounting teams, play in using their influence and practices to help deploy integrated reporting in a way that ensures actionable focus on the information and decisions that matter to an organization and its potential success.

Getting Back to Basics: What Does Integrated Reporting Represent?

Integrated reporting is a journey toward higher-quality, more meaningful corporate reporting that acts as a catalyst for behavioral change, and long-term thinking. Many organizations implementing integrated reporting highlight the strategic benefits arising from what is often referred to as integrated thinking, leading to improved conversations between board and management, and improvements in management information and decision making. The outcome is a better understanding of how value is created over time, more useful information leading to better managed opportunities and risks, and improved performance.

This is important from four perspectives all of which require CFO involvement.

 

  • Corporate governance: A broader perspective of value creation is important for boards of directors and their duty of care and accountability to investors and other stakeholders. Value creation over time cannot be achieved by decisions based solely on financial information and reports. To do so often leads to short-term thinking focused only on achieving near-term returns for the capital markets.
  • Investors: Today only around 20% of a company’s market value can be accounted for by its financial and physical assets, and therefore explained by financial statement reporting. Other factors, particularly customer and supplier relationships, intellectual and human capital, technology, and processes make up an increasing proportion of a company’s value. Value to investors is usefully captured by multi capitals where specific investor groups and other stakeholders are interested in how an organization is planning to create value over time. This is nicely captured by Blackrock CEO Larry Fink’s 2016 communication to CEOs asking them to communicate to shareholders about their “annual strategic frameworks for long-term value creation.”
  • Management: Understanding value creation more fully to guide management’s strategic and operational decisions about resource allocation and value creation over time, involving managing trade-offs between the capitals and the outcomes for business, customers, suppliers, and society.
  • Finance function: Integrated reporting provides a framework for moving beyond measuring the financial impact of decisions.

For integrated reporting to flourish over time, with the change it represents for accountability and transparency in capital markets, private and public sector organizations need to see its value. Top-down sponsorship for integrated reporting, starting with the board and the CEO, is a prerequisite for any meaningful change, particularly because integrated reporting is not just a reporting process, and not something that can be implemented in one reporting period.

Integrated reporting will lead to better reporting for greater transparency when an integrated report is focused on material disclosures that assist decision making, applying the International Integrated Reporting Framework’s principles. The current reporting system, which is widely seen as fragmented, complex, and confusing, can only benefit from an integrated approach that brings together all the relevant matters related to an organization’s ability to create value over time.

A range of stakeholders will have more confidence in management when they gain a clear picture of the business from its integrated reporting and communication. In a time when expectations on the role of organizations has transformed, integrated reporting provides a means to build trust by taking into account the full range of capitals, or resources and relationships that make up its value creation story.

This can be important for all organization types:

  • those in the public sector where leaders are increasingly looking to integrated reporting to improve outcomes;
  • established organizations, including those transforming their business models to unlock value in new ways, for example General Electric; and
  • smaller organizations seeking to secure financing at a reasonable cost and establish credibility with customers and suppliers.

Finance Professionals Needed to Take Integrated Reporting to Next Level

Given their organization-wide perspective and focus on providing business insights and analysis in support of decision making, as well as their leadership in corporate reporting, CFOs and the finance and accounting function are well placed to facilitate and enable integrated reporting adoption within their organizations. For many finance professionals, integrated reporting is a path to becoming a more effective business partner.

CFOs’ and finance professionals’ central role in managing, measuring, and reporting value creation is captured in Chief Value Officer: Accountants Can Save the Planet, a new book by Professor Mervyn King, IIRC Chairman. Prof. King argues that, reflecting this shift toward managing value creation from managing financial performance and impacts, the CFO should now be known as the CVO—the Chief Value Officer.

The shift of title to CVO is thought provoking. It changes the mindset of those in the role, as well as the perception of others around them. It also reflects what the function does in terms of financial and performance reporting, financing/treasury activities, planning and budgeting, and business analysis. The finance professional is ideally placed to work with others to identify the relevant matters potentially impacting value that also need to be built into setting organizational objectives and targets, managing risk and opportunity, undertaking project and investment appraisals, aligning performance to objectives with relevant performance measures, and establishing information collection systems and key metrics for internal processes.

Above all, the role of the CFO and finance function is to ensure that integrated reporting is a core activity and not something done in a corner office. From articulating the benefits of integrated reporting in the context of their own organization, assessing and enhancing internal capacity for integrated thinking and reporting, and enabling integrated reporting implementation with rigor and wide support, finance professionals have the opportunity to shape multicapitalism in the 21st century.

Stathis Gould

Deputy Director, Professional Accountants in Business, IFAC

Stathis Gould heads up the development of international services for professional accountants working in business and industry at IFAC. A key element of his work is developing thought leadership and guidance in support of finance professionals and their roles facilitating sustainable organizational performance. Before moving to IFAC, he was at the Chartered Institute of Management Accountants (CIMA) responsible for planning and overseeing a program of policy and research. Prior to serving the accountancy profession, Mr. Gould worked in various roles in the private and public sectors in the UK. See more by Stathis Gould

Join the Conversation (3)

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Stathis Gould February 23, 2017

Thank you both John and Muhammad for your thoughtful observations. As the IIRC and its partners seek to promote the benefits of integrated thinking and reporting to SMEs, I think we are going to hear a lot more on the perceived benefits for this group - real or otherwise. Reducing the cost of financing is certainly always at the top of the list. This is an area where we might potentially seek to do more research. John, I would suggest that you contact us so we can better understand what current research indicates, and what gaps and opportunities we might consider for future research. This is also an issue that might be of interest to the IIRC Academic Network that is managed by my colleague Michael Nugent. We might use their Linked In discussion group to pose the issue and to ask for feedback on current research in this area.

John Dumay February 21, 2017

There are two issues that need clarifying here. First, is the number of claimed companies producing an integrated report. There are many claims, including those from the IIRC that thousands of companies have taken up integrated reporting. I have asked several times on different forums for a comprehensive list from the IIRC, but this is not forthcoming or made public on their website. I am glad to see that in the post above this number is now pared back to about 1,000. However, according to corporateregiter.com, the number is about 400+, but it is unclear which of these actually use the framework proposed by the IIRC or adapt the One Report Model by Eccles and Kruz, or just simply call their current report integrated. Second, I think we need to be careful about making claims like "smaller organizations seeking to secure financing at a reasonable cost and establish credibility with customers and suppliers." The claim has been bandied about by accountants for intellectual capital reporting and other frameworks exposing the intangible assets of SMEs for many years. However, no research has proven this case and my research shows that almost all SEMs engage in Tax focused accounting, which encourages all intangibles to be written off to minimize tax. Additionally, most SMEs do not have an accounting system capable of recording their tangible, let alone intangible assets. In the end when an SME goes for a loan, the banks want property as security, be it the property of the business or the house of the owner(s). Intangibles don't even come up in the conversation because you can't sell intangible if the bank has to foreclose on the loan.

Muhammad Hadidjaja February 15, 2017

Before we discussed deeper regarding Integrated Reporting (IR) where the financial statements is the core of the IR, we have to take into account the weaknesses of the theoretical concepts of the current financial statements – Balance Sheet, Income Statement, Statement of Cash Flow and Statement of Equity Changes. In the year of 1977, the accounting professor George J. Staubus said:"The failure of the sum to represent a measure of the value of the whole firm (additivity failure) is a limitation of the accounting that we do not know how to overcome. (Staubus,1977). In the mathematics there is assumption of the addition process that:”The sum of two numbers is a unique numbers” and ”If equal number be added to equal number the sums are equal number” (Harry Waldo Kuhn & James Hanry Weaver, 1935) For example: 5 plus 3 its sum is 8 . In the mathematics, the operation of addition needs the uniquiness of property (Harry Waldo Kuhn & James Hanry Weaver, 1935) as Keedy said” the essential property of operation is the uniquiness” (Mervin L. Keedy, 1965). As we know that in the Balance Sheet (Statement of financial position), it only makes the addition of the value of all assets regardless the property of the respective type of assets, it cannot proofed its mathematical truth and it is represents a mathematical failure. This mathematical failure happened in the Income Statement too. Professor Revsine said that: income is an artifact (Revsine, Lawrence, 1971). Whether professional accountants will feed the investors with financial statements that cannot proof its mathematical truth till decades in the future? According to professor Barcuh Lev and Feng Gu financial reports provide only a tiny amount of information about 5 percent used by investors (Baruch Lev & Feng Gu, 2016). It is regrettable the investors who were provided with the 'obliviously' illogical financial statements. The accounting professionals shall make a research to innovate a true, easy making globally comprehensive financial statement as substitution of the current financial statement that can be used to directly calculate Tax charges without any adjustment.

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