Stakeholder Benefits Arising from Integrated Reporting - Term Paper Example

Integrated Reporting Name: Institution: TABLE OF CONTENTS 1.2 INTRODUCTION…………………………………………………………. 3 2.0 MAIN STAKEHOLDER BENEFITS OF INTEGRATED REPORTING… 3 2.1. Greater Clarity ……………………………………………………… 4 2.1. Better Decisions……………………………………………………… 4 2.1. Lower Risk of Reputational Damage ………………………………. 5 2.1. Better Relational Engagement………………………………………. 5 3.0 “VALUE CREATION” IN AN INTEGRATED REPORT VERSES TRADITIONAL REPORTING ………………………………………………………………… 6 3.1. Value Creation Reporting………………………………………. 6 3.2. Advantages of value creation over traditional recording …………... 8 3.2.1 Better analysis of value created……………………………. 8 3.2.2. Connectivity of information……………………………… 8 3.3.3 The ability to compare future prospects from historical ones 8 3.3.4 Understanding of the External environment………………… 9 4.0 FIVE BIGGEST CHALLENGES FACING INTEGRATED REPORTS…… 9 4.1 Lack of Required Wide Range of Skills……………………………… 9 4.2 Issues Arising from Audit Liability…………………………………… 10 4.3 It Is Expensive………………………………………………………… 10 4.4 Lack of Suitable Criteria for Raising Concerns On the Integrated Reports 11 4.5Inadequacy of The Client’s Record Keeping Process…………………. 11 5.0 CONCLUSION………………………………………………………… 11 Novo Nordisk and Integrated Reporting 1.0 Introduction Integrated reporting is a beneficial concept that includes structures that help in record keeping, valuation of assets and liabilities and the overall presentation of information in the most convenient standard. Generally, it has the ability to incorporate risk management concerning the financial reports and the general impacts of societal and environmental aspects. This concept meets the needs of stakeholders and they are generally better placed with their independence protected References (Accountability Assurance Standard, 2008). This has changed the reporting books strategy that has existed before to a much more efficient and reliable level. The International Integrated Reporting Committee (IIRC) has described the importance of integrated reporting as a system that includes everything from strategy to risk with inclusion of all other capitals. Generally, therefore, in the maintenance of the overall stakeholder’s independence, it is bound to affect all other members of the organization. This paper will therefore address the benefits that come with this reporting system and analyze the Novo Nordisk Integrated Report to identify the differences from the traditional reporting and challenges faced. 2.0 Main Stakeholder Benefits Arising from Integrated Reporting Financial statements today are much more complex and technical and therefore require greater financial expertise to reduce the complications. Companies today have a wide variety of financial reports and systems both at the organizational level and Governmental. This helps in keeping track with the societal and the environmental changes as well as keeping a large group of audiences aware. The simplification of all these such that the organizations, the customers, shareholders and other parties comprehend the performance of a company is what has made integrated reporting an attractive solution. Below are the main benefits of integrated reporting system. 2.1 Greater Clarity Sustainability is healthy for a company and especially good for stakeholders. Implementing a strategy that ensures the satisfaction of all stakeholders is not easy. For example, investing on concepts that ensure environmental purism today such as recycling may eventually have advantageous returns but may not essentially ensure cash flow and returns for payment of dividends in due time. The part where integrated reporting comes into play in this case is that it ensures that the financial and non-financial aspects are coherently described. This means that the relationship makes it possible to differentiate the risks that are avoidable, sustainable and the opportunities that are available(Novo Nordisk, 2013). Greater clarity means that this time the organization will ask several questions before embarking on a task such as the taxes involved, the possibility of increase or decrease in revenues, the expenses required to beat competition or scarcity of necessary materials among others. Having this understanding ensures that the business processes are improved and that the effectiveness of the operation may be assured. This therefore is one of the advantages benefits of integrated reporting. 2.2 Better Decisions Making informed decisions is a vital role in ensuring the efficient use of resources in a business and the calculation of the possible returns to the company. There are no universally accepted rules and principles that govern reporting, therefore companies have to strategize and come up with what works out for them to make the best analytical report. A good integrated report may be viable in identifying what exists and what does not, for instance, it is easier to understand which relationship is overall advantageous and which one does not work well with the company. This means that integrated reporting is able to identify which other company that relates to the company that in question is able to evaluate good governance, risk tolerance and compensation (Novo Nordisk, 2013). The best response is to improve on methodologies or come up with new ones that may be more useful that those that already exist hence adoptable to all the partners in question. This cultural exchange within companies ensures collaboration in accounting, finance and policies enabling a stronger alliance and decision making process. 2.3 Lower Risk of Reputational Damage Good integration reporting has many times resulted in better integrated risk management. This means that having clarity on what the company’s involvement with a certain issue may cause, may be a viable importance of integrated reporting. The sustainability of this aspect therefore is what ensures that the reputation of a company is well managed and protected. One of the major examples that shows the destruction of reputation based on poor reporting is the incoherent relationship between the governance and strategy at an oil drilling company that led to an explosion at the Gulf of Mexico in 2010(Accountability Assurance Standard, 2008). However much integrated reporting alone would not have prevented the occurrence, there would have been a better calculation of risk and a better dialog internally and externally to focus on elimination the probability. Generally adopting integrated reporting ensures that there is the adoption of a more sustainable business strategy that grows revenue, reduces costs and minimizes risks. 2.4 Better Relational Engagement Integrated reporting displays all the relationships a company has such as, governance, societal, functional and environmental. The improvement of communication today that has incorporated social media has made it easier for stakeholders to access more detailed analysis than it would have been communicated on paper. This shows that there is the support of full engagement for analysis via the presentations and communication forums. It is also possible to involve a whole team of stakeholders in the discussion of certain issues by merely uploading a report on an easily accessible forum. Creation of an easy access website, blogs and podcasts also facilitates this course. One the engagement platform is made more advantageous, shareholders gain a more holistic perspective and profits are easily earned. 3.0 “Value Creation” In an Integrated Report Verses Traditional Reporting The traditional accounting methods provided inadequate results when giving the actual representation of corporate health. This means that there was need of shifting focus to another form of reporting that supplemented historical financial information and more that ensured value building in both financial and non-financial measures (Auditing and Assurance Standards Board, 2014).Value creation comes in in this case as it refers to the performing of actions by a business or a company such that all the operators are concerned with increasing the worth of the goods and the services. This means that the managers of the businesses are concerned with creating good quality of what they have to offer such that the customers are satisfied, the profits are increased and the shareholders have their stake appreciate in value over time(Accountability Assurance Standard, 2008). According to the analysis by the IIRC framework, the value creation process begins with an increase in capital to the business in question. 3.1 Value Creation Reporting The value reporting model adopted by the Novo Nordisk multinational pharmaceutical company has showed that it broadens and meets the requirements of analysts and investors due to the certainty of the future cash flow. This is because Novo Nordisk has made it possible to handle issues that concern development, manufacture and marketing their pharmaceutical products. The company has held several business panels and one in particular held on February 22nd of 2013 addressed the aspect of sustainable value differing it from the old system of shared value. In this meeting, the essence of value creation was established as not only one that ensured good business but also ethical, political and social development(Novo Nordisk, 2013). This is because having an environment suitable for business ensured continuous improvement of business-related processes and a balanced and effective decision making platform(Auditing and Assurance Standards Board, 2014). Each industry has come up with a number of drivers to help ensure value creation similar to the one adopted by Novo Nordisk. The six factors in consideration in this case are divided such that three are on the financial basis and another three on the non-financial basis. The earnings, the cash flows and the gross margins of the company are under the financial context and the strategy, experience of the team and the speed of growth of market on the non-financial. Figure 2: Showing the value creation Process, Source: IIRC Framework, page 13 For investors to properly value a company, they need to understand the drivers and what is to be achieved. This therefore means that transparency is important to understand the targets, the internal metric and value drivers(Auditing and Assurance Standards Board, 2014). The same also enables strategic sharing of information with their competitors to understand what should be improves and what should not. Generally, there are many advantages that have come in value creation recording over the traditional form of recording. 3.2 Advantages of value creation over Traditional recording 3.2.1 Better analysis of value created. The ability to articulate the resources and sources of capital of a company ensures that the government is able to run a long term evaluation of the creation of value (Novo Nordisk, 2013). Research has often shown that when it comes to traditional financial statements, the statements account for about 20percent of the overall value of the business. This is because it fails to incorporate intangible assets making intelligent capital and human capital the only data relied upon. 3.2.2 Connectivity of information: the ability of value creation to show the connection between various parts of business and the value they bring in, enables the company to understand the interdependency (Accountability Assurance Standard, 2008). Traditional methods were often more tedious and often lead to duplication of information because most reports were done separately. This therefore shows that a more integrated report was clearer and self-explanatory. 3.2.3 The ability to compare future prospects from historical ones. Integrated reporting largely refers to historical data. This means that looking at what has been done before enables the managers to come up with future plans of an even greater value. This increased mixture of future oriented with the past ensures the company remains rooted as it progresses further. This particularly explains why the Novo Nordisk company has been operational since 1925 and still does well today. 3.2.4 Understanding of the External environment. The integrated reports widely look at a business progress based on the impact on the external environment and the value created. There are many corporations that have had the ability to increase size and their power ensuring the management of social, environmental and economic aspects. This strategy is not part of the traditional reporting hence making the value creation strategy more advantageous. 4.0 Five Biggest Challenges Facing Integrated Reports Given the benefits of the Integrated Reports, certain issues concerning the assurance of information are often raised. This is because to enable the financial and sustainability of the company, the report must have evidence of the actual facts and figures that make the report viable(Auditing and Assurance Standards Board, 2014). The table below show some of the elements that a report may effectively address and those that are subject to analysis. The issues that cannot be assured are the same that prevent the effectiveness of the report resulting in five of the biggest challenges that are faced in coming up with a suitable report. Below is the analysis of these challenges. 4.1 Lack of Required Wide Range of Skills Integrated reporting is not a very well developed system and therefore may frustrate the efforts of a traditional audit team. The International Integrated Reporting Committee (IIRC) has highlighted that the multiple competencies of an integrated report may pose as a challenge. This is because it requires understanding of different types of value creation mechanisms and skills obtained from university and audit training (Novo Nordisk, 2013). In many instances, the people that wish to partake in this may lack a skill or two especially if he or she only has relevant knowledge of the requirements of International Standards on Auditing (ISA) and not International Financial Reporting Standards (IFRS) among others. Generally, it is rare to find people with all the required expertise especially as it is a very new system. 4.2 Issues Arising from Audit Liability There are instances where auditors may be unwilling to produce the fully required integration report. This is because audit firms are often conservative in nature as they are uncertain of stating on record that which is not ascertained or confirmed. The fear that something may be blamed on an auditor makes them delusional and may avoid instances that may ‘come back and bite them (Auditing and Assurance Standards Board, 2014). Other instances, the auditor may have the best interest of the company at heart and may avoid disclosing information that reduced the company’s ability or reputable standard. This also comes in play when there is need to avoid litigation issues among others with associate companies. 4.3 It Is Expensive Cost is a major impediment when considering an integrated report. This is because an integrated report covers all areas of company and other factors that relate to it. In addition to this, in the areas that the auditors lack skill and understanding, they seek expert advice that ensures understanding and adoption of specialized skill for the report(Auditing and Assurance Standards Board, 2014). This means that the engagement process becomes expensive and the company may be forced to establish other departments that aid in the process or offer knowledge and skills to the auditors on the same. Once the appropriate skills are leaned the company is able to establish cost saving but it may be long after the company has spent sufficient costs on the project. For future purposes more people will be required to be trained and the general consensus may be of the idea that the number of sections incorporated in the report be reduced. 4.4 Lack of Suitable Criteria for Raising Concerns on the Integrated Reports Numerous studies have shown that despite the efficiency of the integrated reports, the forums necessary for raising concern have not been established. According to the International Integrated Reporting Committee (IIRC), the auditors were of the agreement that there were no suitable principles and forums that allowed the airing of concerns and exchange of information. This is such that, once the report is completed, it becomes almost impossible to have the overall feedback of all those represented (Novo Nordisk, 2013). This makes the judgments and decisions questionable because the completeness and appropriateness of the information is uncertain. 4.5 Inadequacy of the Client’s Record Keeping Process The overall quality in the clients’ management aspect has shown the impossibility of ensuring the records of operations is kept in check(Novo Nordisk,2013).This is in respect to the societal and environmental aspects such that, the resources available for the integrated reporting system was all based on the ability of evaluating the relations between the company and those that the company serve(Auditing and Assurance Standards Board, 2014).Once the capability and skills of those dealing with the client’s staff is in question, the controls may not be able to cover all the relevant operations. This means that the evidence required to be produced alongside the report may not essentially be accurate or may be inexistent diminishing the viability of the report. 5.0 Conclusion Novo Nordisk is a healthcare company that has had over 90 years of experience in leadership and their view on sustainability based on value creation shows fruition in the integrated reporting system (Novo Nordisk, 2013). The need to consider the impact on the social and environmental performance to enable financial performance has been adopted by many upcoming and greatly performing companies. The benefits of the system over the traditional reporting system also shows the greater successes that come with this aspect (Zorio &Sierra, 2013). The few challenges that involve costs, expertise, client record keeping and overall communication are rectifiable to ensure a more efficient operation. This is indeed a promising long term and efficient system. References Accountability Assurance Standard (2008) http://www.siccsr.org/WebSite/crs/Upload/File/201202/20120224111817125000.pdf Auditing and Assurance Standards Board (2014) , Assurance Engagements Other than Audits or Reviews of Historical Financial Information, July 2014 http://www.auasb.gov.au/admin/file/content102/c3/Jun14_Standard_on_Assurance_Engagements_ASAE_3000.pdf International Integrated Reporting Council (IIRC), (2011), Towards Integrated Reporting: Communicating Value in the 21st Century, IIRC: September. http://www.theiirc.org/wp-content/uploads/2012/06/Discussion-Paper-Summary1.pdf International Integrated Reporting Council (IIRC), (2013), The International IR Framework, IIRC: December. http://www.theiirc.org/wp-content/uploads/2013/12/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf Novo Nordisk (2013)Integrated Report http://www.novonordisk.com/content/dam/Denmark/HQ/Commons/documents/Novo-Nordisk-Annual-Report-2013-UK.pdf Zorio, A., & Sierra, L. (November 01, 2013). Sustainability Development and the Quality of Assurance Reports: Empirical Evidence. Business Strategy and the Environment, 22, 7, 484-500. Read More