Is integrated reporting here to stay?

Corporate reporting fads come and go, and the widespread adoption of reporting frameworks requires considerable advocacy by those seeking to promote their adoption as accepted practice.

Companies today are faced with an ever-increasing number of reporting choices. For example, do they produce a traditional annual financial report, or an annual financial report plus standalone sustainability report, or do they instead include the sustainability information within their annual report?

The KPMG Survey of Corporate Responsibility Reporting 2015 shows that reporting on corporate responsibility (also referred to as sustainability reporting) has become mainstream practice among the world’s largest companies, with 73 per cent of 4,500 large companies surveyed across 45 countries now reporting on corporate responsibility.

This shows a significant growth since KPMG’s first survey in 1993, where only 12 per cent of large companies were engaging in sustainability reporting.

While producing a standalone sustainability report has become the norm, an interesting recent trend among large companies is to include sustainability information within their annual reports. According to KPMG, this practice has grown from 4 per cent in 2008 to 56 per cent in 2015.

KPMG contends that this trend is being driven by stock exchange and government requirements for non-financial information to be included in the annual report, as well as increasing perceived relevance of non-financial information by shareholders.

Just as some companies have started to understand the concept of sustainability reporting, the International Integrated Reporting Council, formed in 2010, is now urging companies to adopt a new reporting regime, namely ‘integrated reporting’, which is codified in the International Framework 2013 (the framework).

The framework defines an integrated report as: “A concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”

The IIRC contends that integrated reporting is more than simply a reporting framework, but rather a way of thinking. Integrated thinking and reporting is said to improve a company’s management and value creation processes in addition to satisfying the information needs of providers of capital.

While integrated reporting has received significant airtime in academic and practitioner circles, the adoption is not widespread, except in South Africa, where integrated reporting is required on a ‘comply or explain’ basis.

Few voluntary integrated reports are currently being produced in Australia. Australian companies that have implemented some (not necessarily all) aspects of integrated reporting include the large diversified property group, Stockland, and National Australia Bank. International examples include Novo Nordisk, J Sainsbury and American Electric Power.

Integrated reporting can be regarded as embryonic, with an undetermined future as it fights for position amongst the myriad alternative reporting frameworks.

Integrated reporting already has fervent supporters, including many large audit firms. The IIRC has been actively promoting the development and spread of the concept by running pilot programs and showcasing companies ‘on the road to integrated reporting’ on its website.

However, integrated reporting is not without its detractors. They argue that the framework does not adequately address the information needs of the broad range of stakeholders (which was one of the original aims) and instead focuses too much on the providers of financial capital. The KPMG report shows 11 per cent of large companies self-declared their reports to be integrated or moving in that direction in 2015.

Part of the reason for the current low uptake of integrated reporting is that the concepts and benefits of ‘integrated thinking’ and reporting are not yet well understood.

The framework talks about the ‘six capitals’ that a company uses or affects (categorised as financial, manufactured, intellectual, human, social and relationship, and natural capital). However, understanding and reporting on business activities using this new jargon is not yet part of the comfort zone of report preparers.

One of the key challenges for integrated reporting is to determine where integrated reports fit within the national corporate reporting regulatory frameworks. Clearly national bodies such as security market regulators, financial reporting standard setters and stock exchanges can influence the extent of development of integrated reporting in their jurisdictions. Some of the interviewees in the A University of Western Australia study headed by Marvin Lee and Ann Tarca, which includes interviews with corporate report preparers from 10 countries, found some are not producing an integrated report because of the likelihood of an increase in legal risk as a result of providing forward-looking disclosures expected in integrated reports*.

Others that have adopted integrated reporting cite the demand from their stakeholders as a reason for their company’s decision to provide an integrated report.

With the passage of time, we will be able to tell whether integrated reporting is just another fad, or if it is a permanent fixture in the future reporting landscape.

* Study commissioned by IIRC, International Association for Accounting Education & Research, Association of Chartered Certified Accountants.

• Dr Lyndie Bayne is an accounting and finance lecturer at UWA Business School; Marvin Wee is an associate professor, accounting and finance, at UWA Business School