Appropriate and Acceptable Integrated Reporting Framework - Case Study Example

IS IT РОSSIBLЕ TО РRОDUСЕ АND USЕ АN АРРRОРRIАTЕ АND АССЕРTАBLЕ INTЕGRАTЕD RЕРОRTING (IR) FRАMЕWОRK? What is IR framework? This is a process based on incorporated thinking resulting in cyclic integrated information by a firm concerning the value creation over a specific time and relevant communications as regards value creation aspects. It is a brief communication regarding the way a firm’s governance strategy, and prospects in relation to the external environment, enhances value creation in the short, medium and long term timeframes (International Integrated Reporting Council, 2013). Aims According to Weybrecht (2014), the first aim of the IR is to enhance the quality of information that is accessible to the financial capital providers so as to facilitate a more productive and efficient capital allocation. Secondly, IR is aimed at enhancing the stewardship and accountability of the wide capitals base (such as, human, intellectual, manufactured, financial, natural, social and association) and advances their understanding of their interrelationships. Thirdly, IR intends to aid the integrated thinking, actions and decision-making on the value creation over short, medium, and long term (International Integrated Reporting Council, 2013). The main functions of the IRF entails doing oversight as regards the auditing and accounting standards, setting procedures for private and public sectors, offering strategic advice regarding the quality of audits conducted by auditors, advising relevant authorities on relevant issues so that they affect the financial reporting of a given country (Tapscott, Eccles & Krzus, 2013). Every company aspiring to be successful in future must adopt an integrated strategy in order attain financial results as well as create a long-term value for the business, society and the stakeholders. This value cannot be sustainability and isolated financial reports. Successful production of IR framework is possible through the help of the GRI sustainability reporting framework in three ways (Deloitte, 2011). First, the framework helps companies to identify material topics; that is topics that communicate the main connection between sustainability effects and business goals. Secondly, it helps in engaging stakeholder through dialogue in order to determine material effects, as well as manage opportunities and risks. Thirdly, the framework also helps in creating performance indicators that are essential in managing, measuring, and reporting material concerns through a globally accepted framework (Deloitte, 2011). IRRC guiding principles According to the IRRC, the following guiding principles are essential in the preparation of an accepted IR. The first principle concern strategic focus, as IR offers insight into the firm’s strategic objectives, and how the objectives link to its capability to prepare and sustain value with time and the relationships and resources on which the company relies (Tapscott, Eccles & Krzus, 2013). Another guiding principle entails the information connectivity. IR indicates the relationship between various components of the firm’s business model, external factors affecting the firm, as well as different relationships and resources on which the firm and its achievement rely. Further, consideration of the future orientation also plays a vital role in IR preparation. IR comprises of the expectations of the management as regards to the future and the other information that is helpful to the report users in understanding and assessing the firm’s prospects and risks (Loska, 2013). Stakeholders’ inclusiveness and responsiveness is another key principle in preparing IR. This framework offers insight into the firm’s associations with its major stakeholders and how and the extent to which it understands, considers and reacts to their expectations. Lastly, materiality, conciseness, and reliability form another guiding principle in preparing an IR. Here, IR offers reliable and concise information that is relevant to assessing the firm’s capacity to generate and uphold value in the short, medium, as well as long term timeframes (Weybrecht, 2014). Benefits of IR A successfully prepared and usage of IR may offer a lot of benefits to every firm that has employed it. One of these benefits is that it improves the capacity to identify and react successfully to risks, opportunities, and changes in a corporate environment by focusing on lasting business effects. It also gives a clear connection between the social, environment, and financial performance, as well as governance performance. The framework also helps in enhancing the link between the total performance and executive compensation. Firms using the framework also enjoy a competitive advantage resulting from operations efficiencies, cost savings, innovations, and brand differentiation (Loska, 2013). It is also imperative to prepare and use the IR framework as it aids in improving the stakeholder relations through enhanced handling and management of their needs and expectations. It is also worth knowing that IR framework facilitates the improvement of the compliance with the current and pending rules and regulations of the firm as well as the requirements of corporate requirements. The framework is also crucial for a business because it is instrumental in boosting the credibility with the major stakeholders by autonomously and transparent assured IR. It also facilitates the arrangement and generalization of both the internal and external reporting in order to attain efficiency and consistency (International Integrated Reporting Council, 2013). Problems in producing and using an integrated financial reporting framework One of the issues in creation of IR framework relates to judgment in that employees may incompetent make business decisions. Some of the decisions may later be found to produce undesirable results; hence the need to change them. Therefore, the fact that decisions are always based on human opinion, they cause management override, breakdowns, and benefits versus costs (Loska, 2013). Even though internal controls are designed carefully and well-designed, they are bound to break down. This may happen if a firm’s personnel can misunderstand the given instructions for instance, it is possible that the supervisor of the accounts department whose responsibility is to inspect investigate exceptions may simply fail or forget to trail the examination further so as to enable to make suitable corrections (International Integrated Reporting Council, 2013). Additionally, provisional employees executing control functions for sick and vacationing workers may not perform appropriately. Another problem in executing IR framework may be caused by system changes that could be implemented before the employees are trained to respond suitably to signs of erroneous functioning (KPMG International, 2012). Natural and ecosystem capital is another issue experienced in the creation and use of integrated reporting framework. In fact, there are no set standards used in the evaluation of the natural ecosystem and natural capital used by a firm. Whereas it is possible to value ecology at macro-level, it is hard to allocate between consuming entities. Most of the natural capital services and assets have no market price. Most of their value is context-specific. Additionally, Finance and Management Faculty (2011) points out a problem concerning future orientation. Among the main changes that will be achieved by integrated reporting is a step from just reporting remarkable financial results to concentrate on the lasting viability of the firm. Nevertheless, any material that purports to give information concerning the future views and prosperity of the firm is usually regulated and uncertain for the business directors and other stakeholders. Since it is hard to foresee the future, forecasts are undoubtedly wrong at certain detail level and are reliant on suppositions regarding the future. However, it needs protection from effects of excessive independence by financers (International Integrated Reporting Council, 2013). As well, materiality is another standard that material information must be made accessible. There are standards for establishing what materiality entails for financial information; both on qualitative and quantitative basis (Australian Government, 2013). As per Kass (2012), another issue involved in the creation and use of IR framework is the stakeholders. This issue concerns the source of the material, the target stakeholders, and legitimate claimant of the information. What is more, the creation and usage of the IR framework may also attract an issue of confidentiality. Here, the information is possibly of bigger strategic importance as compared to the standards in the provisional financial statements. According to Deloitte Review (2013), the effective preparation and use of the IR framework can be hindered by inappropriate choice of Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs). This way, a business may lose credibility and waste its efforts. Besides, if a company employs concentrates on metrics that are irrelevant to its business model, if superfluous or excessive data exists, the report can be confusing, if it is material to most of the stakeholders’ needs, then it is useless (Tapscott, Eccles & Krzus, 2013). Audit is another issue that should be considered in order to effectively prepare and use the IR framework. Evidently, auditing IR is constant with the necessity for higher reliability and enhancing consistency. Nonetheless, there is little experience in providing external assurance for those who require non-financial information. The firm processes that produce the information are possible to be simpler and robust compared to the production of the financial data (Deloitte, 2011). Conclusion Undoubtedly, it is possible to create and use a generally integrated reporting system in any firm. This is because of the numerous aims and benefits that it offers to its audience. Nonetheless, there is a wide range of problems encountered in the process that include collusion, materiality, conciseness, credibility, future orientation, as well as reliability. References Australian Government 2013, Consultation Draft of the International Integrated Reporting Framework, Financial Reporting Council. Pp. 1-20. Deloitte 2011, Integrated Reporting. A better View. Global sustainability and Climate Change Services. Pp. 1-15. Deloitte Review 2013, Integrated Reporting; The new big picture. Pp. 1-20. Accessed on 10th February, 2014.http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content- Type/deloitte-review/f44a8df050a05310VgnVCM2000001b56f00aRCRD.htm. Finance and Management Faculty 2011,The Finance Function: A Framework for Analysis. Finance Direction Initiative. Pp. 5-15. International Integrated Reporting Council 2013, Consultation draft of the international Framework. Integrated Reporting. Pp. 1-4. Kass, A 2012, Towards Mainstreaming Integrated Reporting - Theoretical Landscape and Practical Insights. München: GRIN Verlag GmbH. Pp. 20-40 KPMG International Cooperative (KPMG International 2012, Integrated Reporting Issue 2. Pp. 1-20. Loska, T 2013, Integrated reporting. S.l: Grin Verlag. Pp. 14-30. Tapscott, D, Eccles, R & Krzus, M 2013, One report integrated reporting for a sustainable strategy. Hoboken, N.J: Wiley. Pp.207-210. Weybrecht, G 2014, The sustainable MBA : a business guide to substainability, Chichester, West Sussex: Wiley. Pp. 10-35. Read More