Integrated reporting: Will the benefits outstrip the costs?

A brave attempt is under way to get companies’ annual reports to tell investors, workers and society what they really want to know. Not just the short term, financial bottom line of its performance, but the big picture. The aim is to cut through to an outline of where the company is headed, by considering such salient factors as: whether its operations are environmentally sustainable and ethical; what are the big risks in implementing its strategy and, how the board rates its chances of getting there.

Integrated reporting promises clear answers to the questions that analysts and journalists sometimes have to drag out of chief executives in briefings after a traditional annual report is released. These are the same answers that investors, who often prefer a long-term focus, also want before they decide to chance their money.

With global competition for scarce capital, the capital markets also want the whole story so they can properly evaluate different investment opportunities. “The integrated reporting framework is designed to bring reporting closer to the information that management uses to run business day-to-day,” says Jane Diplock, a director of the Singapore Exchange and formerly chairman of the New Zealand Securities Commission.

The Big Four accounting firms have been aware of the underlying problem for a decade and are on board to devise a solution that replaces the current 200-year-old system. “The accounting profession – supported by leading corporations, investors, industry groups, legislators and regulators – has been pushing for the development of better business reporting,” says Michael Bray, a partner at KPMG in Melbourne.

Bray argues the current regulatory reporting model is a result of layers of new information gradually being added to the foundation historical cost information. “Such reporting drives capital markets and other stakeholder decision-making, (and) it is clear it has reached breaking point. No amount of analyst and investor relations activity can make up for an impure historical cost reporting model,” he says.

There’s a collective desire to end the trend for annual reports to become longer and more complex, according to Roger Simnett, an accounting professor and associate dean of research at the Australian School of Business and this is a major benefit to come from integrated reporting. He confirms that over time, reporting requirements have accumulated through a patchwork of laws, regulations, standards, codes, guidance and stock exchange listing requirements, which can mean lots of additional reporting to bodies outside the annual report, with lots of overlap.

Selling the benefits

Simnett is on the content taskforce of the International Integrated Reporting Committee (IIRC), which was set up in 2010 to develop a globally accepted framework that brings together environmental, social and governance (ESG) information with financial reporting in a clear, concise, consistent and comparable format. He describes the IIRC as “a powerful network of interested parties that has come together to do something about a reporting system that’s not achieving what it is supposed to achieve”.

One pressing reason to bring on integrated reporting is that some organisations have to meet multiple – up to 100 – reporting requirements, Simnett highlights. “We want to see if we can bring the multiple sources of information together and report them in a simple format that addresses what people want,” he says. “People are setting up corporate structures and reporting silos according to all these different requirements and it is not necessarily the most beneficial approach.”