Corporate Reporting: The Future of the IR landscape, by Sue Almond, Technical Director at ACCA

A new phrase in our vocabulary

The phrase Integrated Reporting or may not be part of the business world’s vocabulary at the moment; but the very strong likelihood is that it will become a standard feature of reporting practices in the near future.

is a market-led initiative that will have very real and profound effects on investors, capital markets and the economy.  The key point about is to communicate value, giving a broader explanation of performance than traditional corporate reporting, and identifying and reporting on capitals, either via metrics or being part of the narrative.

Since April of this year, the organisation behind – the IIRC - has been consulting on next developments for the Framework. It has been consulting around the world on what the Framework should look like in the future and how it should develop.

It is not often that businesses and organisations work together in such an open way to decide what corporate reporting should look like, working together to help develop a new corporate reporting model fit for the future.

IR’s history

The IIRC and can be traced back to the Accounting for Sustainability Forum (A4S), of which ACCA is a founding member. This Forum brings bringing together an international group of accounting bodies and was established by HRH The Prince of Wales in 2004.

Back in 2007, A4S developed the “Connected Reporting Framework” (CRF) and the Connected Reporting “how to” guide in 2009, which aimed to show how all parts of an organization’s performance can be presented in a connected, integrated way. The purpose of these documents was to show how an organization’s strategy and the way it is managed could and should be communicated in a connected way.

Following the success of this work undertaken by A4S and others in driving changes to corporate reporting, there was a call to create the International Integrated Reporting Council (IIRC) at an A4S event in December 2009.  His Royal Highness The Prince of Wales, on behalf of A4S, the Global Reporting Initiative (GRI) and IFAC said that the IIRC should be set up to manage the “development of an international, connected and integrated approach to corporate reporting.”

The IIRC was therefore established in 2010, with an international membership from a broad base, including the corporate, investment, accounting, regulatory and academic sectors amongst others.

The IIRC has achieved key milestones since its inception; in 2011, the IIRC called for global action to move towards . Members of the IIRC, including ACCA, called for a new approach to corporate reporting in a landmark Discussion Paper, which defined IR and explained why it is needed.

Bringing it all together

Since then, the IIRC’s proposals for centre on a framework that brings together major strands of reporting – financial information, management commentary, governance and financial remuneration information, and corporate and sustainability information – with the aim of presenting all this in a connected way.

The aim is to provide a broader, more forward-looking explanation of business performance than traditional reporting.

IR is being driven by the need for change. Business values and how businesses operate have changed dramatically over the past few decades, but the reporting of them has not necessarily kept up.Many have called for a new approach to reporting that is fit-for-purpose in the 21st century. Over the years, there has been a massive increase in the amount of information available, but much of that information is disconnected and key reporting gaps exist. Corporate reports are too long and getting longer; reporting has developed in silos, resulting in links between financial and non-financial business performance being missed.

The aim with IR is to unite this information. It was the IIRC’s initial view that reporting must change to meet the modern needs of various stakeholder groups, from preparers of reports through to the investors who have to use them for decision-making purposes.

The IIRC’s original discussion paper Towards Integrated Reporting – a case for global change presented the IIRC’s draft proposals for the development of an International Integrated Reporting Framework as well as the expected next steps towards the implementation of such a framework.

Feedback to the report was positive, and the momentum has been strong. The IIRC commenced a pilot programme in October 2011 to road test the framework, and ACCA published its own 2011 / 12 annual report as an IR report. This was our first integrated report, where we aimed to tell a clear and coherent story about ACCA’s strategic performance and our future prospects.

Most importantly, we used this report to explain how we create value for our stakeholders – ACCA members especially – and explain the place we occupy in societies around the world.  This was a new process for ACCA, and one which we are committed to continuing by publishing our 2012 / 13 annual report as an IR document too.

A strategic focus

Recently, the IIRC launched its second consultation on the framework, with results expected to be published later in 2013.

The IIRC’s approach is one that aims to present a globally co-ordinated solution to reporting, avoiding the current problems with reporting requirements in different jurisdictions developing in different directions and at different speeds.

The IIRC believes that information in corporate reports should give a strategic focus; have a future orientation; show the connectivity of information; demonstrate responsiveness and stakeholder inclusiveness; and be concise, reliable, and relevant.

Corporate reports must show the links between the organisational overview and business model; the operating context, including risks and opportunities; the strategic objectives and strategies to achieve them; governance and remuneration; business performance; and the future outlook.

Creating value and communicating values

To help drive the agenda, ACCA and the Netherlands Institute of Chartered Accountants (NBA) recently published a background paper for IR about capitals.

These capitals are defined by the IIRC as financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital.

The term refers broadly to any store of value that an organization can use in the production of goods or services. Organisations depend on these capitals for their business success and this paper explored the multiple capitals that are recognised as a fundamental concept for . When reported together, these capitals represent an important picture of an organization’s value creation – and that’s important information for investors.

All organizations depend on various forms of capital for their success, including ones they do not own, and the different capitals should be part of the organization’s business model and strategy.

The report provides a sound basis for the role of capitals in the Framework, and suggests new proposals for improving the categorisation and descriptions of capitals adopted by the IIRC. Helpfully, it also provides more background to what may be unfamiliar concepts to help in their practical application.

Rachel Jackson, head of sustainability at ACCA and a member of the steering group for this Paper, said when the paper was launched that: “Although companies depend on the six capitals to different extents, collectively these capitals affect the long term survival of any company and influence its value creation. Reporting on them is therefore a crucial element in future corporate reporting and will be necessary to meet stakeholders’ expectations.”

Dr Andrea Coulson, from the University of Strathclyde, Chair of ACCA’s Global Forum on Sustainability and a member of the project team added: “Exploring the concept of multiple capitals; their definition, relationships and maintenance is critical to an inclusive debate on developments in ”.

Dr Carol Adams, Director at Integrated Horizons, and also a member of the project team, said: “CFOs and Boards have tended to privilege information which can be quantified, focus on the short term and ignore the impact that value creation and depletion of some of the capitals can have on long term business success. All that must change for organisations that want to be around in the long term.”

The report concluded that there is a need to place capitals in a strategic context, which is a prime need for investors who make their investment decisions based on material about a company available to them.

It also looked at possible metrics to help communicate the value of capitals. Quantitative indicators, such as KPIs and other metrics, can be very important in explaining an organization’s uses of and effects on various capitals. The report listed a number of capitals used by some of the companies on the IIRC’s pilot programme, highlighting how simple metrics and be measured and reported on in a way that is transparent and measurable. For instance, with natural capital, the metrics used include:

· CO2 emissions

· Energy consumption per energy source

· Amount of waste

· Environmental accidents

· Recycled waste

· Environmental protection investments

And for Human Capital:

· Number of employees

· Diversity

· Total investment in training

· Employees in corporate e-learning

· Average age

· Average training days per employee

· Employee survey results

· Rate of absenteeism

· Minimum wage ratio

The IIRC says that reporting on such capitals can help businesses and investors understand and assess value for the benefit of long term sustainability of the economy and society.

The future for investors?

ACCA has long been concerned about the need for investors to be at the heart of the reporting system. In 2012, ACCA worked with Grant Thornton on a series of global roundtables to discuss the needs of investors in the standard setting process.

ACCA and Grant Thornton duly collected the thinking from these roundtables and presented the findings in a report called Putting Investors at the Heart of the Financial System.

The overwhelming view form the roundtables was that investors should be placed at the heart of global financial and accounting standards. Many said that their views were not being heard and expressed concern at the piecemeal, fragmented way in which solutions to global economic uncertainty are proposed. They saw the lack of focus on investors in the reform process as prolonging global economic fragility.

Thankfully, they also saw the potential for the development of IR to help fill some of their information gaps. They said that that more closely aligns risk management with performance, together with the provision of clear environmental social and governance reports, could enhance investor confidence in management’s ability to perform in future

The report proposed seven steps to improve matters.

1. Setting an integrated reform agenda with investors' needs at its heart. Investors would like to see new and improved accounting, auditing, and corporate governance standards developed in a more integrated manner. Reform proposals need to be based on a solid understanding of investors' needs and priorities.

2. Continuing to develop globally consistent standards. Global consistency is essential for investors with global portfolios. Investors seek comparable information on financial statements and the application of audit and accounting standards.

3. Broadening the reports issued by companies. Integrated reporting is seen as representing an opportunity to fill some information gaps. Its closer alignment of risk management and performance could enhance investor confidence in management's ability to perform in future.

4. Spreading high standards of corporate governance. The adoption and enforcement of corporate governance frameworks and codes is patchy globally. Wider adoption is seen as valuable by investors. In some regions, improved corporate governance was seen as the highest priority for improving investor confidence.

5. Expanding assurance provision and auditors' reports. There is a desire for more information on the audit process and any issues identified, as well as information on the effectiveness of a company's management and corporate governance. Investors would be willing to pay for greater assurance if it provided more value.

6. Enabling greater investor participation in setting the reform agenda and developing new standards. Investors are keen to raise their profiles with standard setters and regulators to ensure their needs are prioritised when reforms to the financial reporting system are debated.

7. Sharing opinions to encourage further progress. Investors are keen to share opinions and ideas among themselves, to encourage the wider adoption of best practice. They are also supportive of greater dialogue with the auditing profession to increase understanding of the challenges that each party faces.

At the time, I said “'Investors should be the primary focus for global financial and accounting standards, yet their voices are not being clearly heard. Investor opinion is not seen as a reference point against which to prioritise issues, nor does it drive an agenda for a continuous improvement in transparency and measures to meet the needs of shareholders. Investors don't always speak with one voice and the investor community opinion isn't necessarily homogenous, but this doesn't mean all voices should be ignored.”

The end of the Annual Report?

Annual reports have become huge. Listed companies are producing an increasing number of disclosures to satisfy the needs of regulators and shareholders, as well as wider stakeholders.

A great example is the recent global annual report from HSBC; this ran to 548 pages, and was supplemented on their website with numerous other reports including one on capital and risk management – 91 pages long; non-GAAP reconciliations – shorter at 29 pages; and a report about employee share schemes – shorter still at only six pages.

So what do investors want? At the time of writing, ACCA is undertaking a four-stage project examining the investor landscape, post-Global Financial Crisis (GFC), what investors want from corporate reporting, and in what format. While this research was done in the UK and Ireland, its sentiments will no doubt resonate around the world.

Half of survey respondents represent institutions with more than US$500m in assets under management. There was a good spread across sectors: 38% represented pension funds, 30% insurance companies, 10% private banks and family offices, and 11% other asset management firms. A further 9% were investment advisors or analysts, and the remaining 2% corporate treasurers.

A main key finding was a concern amongst respondents with the annual report – this remains the key information source for investors – 63% said it was the most important. Yet there remains a significant minority of investors who express reservations about the quality and relevance of corporate reporting, with 45% arguing that the annual report is no longer a useful tool.

A key concern is clutter – almost two-thirds of respondents say that corporate reporting is now too complex. Asked about where they would most like to see improvements to the annual report, respondents emphasize the cash flow statement, with information on the balance sheet and income statement coming a close second and third.

They also saw a decline in trust in corporate reporting:  more than two-thirds of investors say they have become more sceptical about the information that companies provide since the financial crisis with almost half believing management has too much discretion in the financial numbers they report.

As a result, a sizeable majority of investors say that they place greater value on information or commentary that has been generated outside the company than on traditional corporate reporting. As investment decision-making accelerates, sometimes to rates of milliseconds, investors are on the constant look-out for sources of information that will give them the edge. This means that, increasingly, they rely on non-traditional information, such as analyst presentations, online news and social media.

Investors are also seeking greater assurance: Timeliness of information may be important, but investors in our survey stress that assurance is just as critical – if not more so. Only in areas like profit warning s and emerging risks and opportunities did investors opt for speed over assurance. And 41% - the largest response - wanted to see auditing being extended to quarterly reports.  The decline in trust in corporate information since the GFC suggests there is a bigger role for audit to play in rebuilding trust in company statements.

Respondents said there was a clear demand for ‘real-time’ information, with half of investors keen to receive 30% rather than their current 10% of company information on a real-time basis. Income statement, cash flow statement and balance sheet were the top three preferred areas for this. Three-quarters of investors viewed companies that can provide this more positively in terms of governance and attractiveness to investors than those which could not. The same number of investors said they would be prepared to pay more to have that information externally audited, thus creating the dream scenario of ‘speed and assurance’.  

And to bring us back to , investors indicated a strong interest in .  More than 90% of investors polled believe it would be valuable for companies to combine financial and non-financial information into an integrated reporting model, which would enhance their understanding of the long-term outlook of a company.

But there is still a strong element of uncertainty as to what exactly IR would involve. And almost a half of investors are using XBRL, with another 40% considering doing so. The main benefit of using XBRL, say investors, would be to compare performance between companies more easily, although detractors worry that there remains a lack of standardisation in the use of taxonomies.

Clearly, these findings leave us as a profession with some areas for reflection.

Accounting standard setters and regulators must be concerned over the clear decline in trust in corporate reporting since the financial crash. This is backed up by research from Edelman, the global corporate reputation and PR agency, which each year published an Annual Trust Barometer. Now in its 13th year this year saw a rise in the lack of trust amongst the public in business leaders and governments. Its research showed how banks and financial services were the least trusted in 2012, because of their behaviour and because of their performance.

For policymakers and governments, the issue of quarterly reporting surely needs to be addressed. While investors find it useful, they also accept that it leads to a short-termist approach by companies, with management more concerned with the next 3 months numbers than proper planning. In Europe, there are moves to remove it as a requirement - there might be some logic in leaving it as an option, given the mixed feelings on the individual company and market effect.

For investors, this research shows that there is a responsibility on the investor community to engage more with the corporate reporting process, both at an individual company level and with standard-setting process more widely. Following the age-old mantra that ‘decisions are made by those who show up’, it is crucial that wider engagement – assisted by developments like the UK Stewardship Code, which sets out investor obligations – happens so that the views of the end users of accounts are fully considered.  And if they are truly would be prepared to pay extra to have real-time information externally assured, they need to make that point clearly to auditing standard-setters and policymakers, given the various current international proposals on the future of audit.  

And lastly, what does this mean for the IIRC? ACCA’s survey shows a promising level of interest in . But there is still a considerable degree of uncertainty about it.  The IIRC has some 50 institutional investors involved in the Framework, working with the IIRC to address the needs of providers of financial capital.

We all have a part to play in communicating the value of . As stewards of business, the accountancy profession needs to contribute to work with the IIRC to explain much more clearly what is all about. After all, transparency about value could result in higher levels of trust in finance, in numbers and in the people who run the business world.

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