The University of Greenwich - Essay Example

Reporting The report synthesises scholarly views and opinions regarding integrated reporting. Integrated reporting is a recent concept and has been developed due to certain deficiency in financial corporate reporting. Integrated reporting presents a comprehensive report that provides both financial and non-financial information to stakeholders. Integrated reporting was selected for assessment because it is an emerging concept and the underlying scope of research is relatively broad. Integrated reporting was primarily developed post corporate scandals in 2010 by the International Integrated Reporting Council (IIRC) as a method to promote transparency, accountability and corporate governance in corporations. The paper has been heavily drawn upon various peer reviewed academic articles published with respect to shortcomings in financial reporting, accountability, transparency, and need for sustainability disclosure. The report prominently depends on secondary research as integrated reporting is highly subjective in nature and primary data would not have proved effective to support conclusion. It was determined that integrated reporting enhances overall reporting of corporation and strength sustainability ecosystem thereof. The scope of future research is very strong and as a result, certain recommendations have been proposed in the paper for improving quality of reporting in organisations. Table of Contents Introduction 4 Background 4 Aim and objective 4 Rationale for undertaking the paper 4 Concepts 5 Literature review 5 Evolution of integrated reporting 5 Scope of integrated reporting 6 Developments in integrated reporting worldwide 8 Existing gap in the integrated reporting process 9 Future scope of research 10 Recommendations 11 Conclusion 12 Reference list 13 Bibliography 15 Introduction Background Numerous corporate scandals in past two decades (1990-2010) in various developed economies have reignited long going debate on incorporation of corporate governance in organisational framework (Ntim, Lindop and Thomas, 2013). Authors such as Mallin (2002) and Iartidis (2010) argued that strong corporate governance is essential for enhancing corporate accountability, sound risk management, social responsibility and transparency by means of broader disclosure. Environmental accounting and social reporting are no new concept and has been employed since historical period. In recent times, increasing pressure on management from shareholders has resulted in greater emphasis on profit reporting. However, aforesaid corporate scandals, most importantly financial crisis of 2007/2008, have once again increased the demand of environment and social disclosure (Brown and Dillard, 2014). Aim and objective Numerous authors have argued that despite profit being the primary motive of a business organisation, an enterprise has certain responsibilities towards its society and environment (Ntim, Lindop and Thomas, 2013; Brown and Dillard, 2014). Consequently, shareholders are not the only interested external party to a corporation. Moving ahead with this thought, it was developed that besides financial reporting, non-financial reporting should be undertaken by organisations. The International Integrated Reporting Committee or Council was incorporated in 2010 so as to frame guidelines for corporate integrated reporting and promote the same (Iatridis, 2011). The aim and objective of this report is to assess meaning, importance and future scope of research in the field of integrated reporting. The report, further, aims at weighing up the progress that has been made in this regard so far. Rationale for undertaking the paper Social and environmental reporting, together, is also referred as corporate social responsibility reporting and in this regard considerable research has been undertaken. However, CSR reporting is not free from criticism and certain authors have disapproved CSR practice and disclosure considering profit as the only motive of a business organisation (Iatridis, 2011). The subject has been considered appropriate for the report because it presents critical insight regarding role of integrated reporting in sustainable business practices and future outlook for research as integrated reporting is an emerging field of study. Concepts Sustainability, accountability, corporate social responsibility, integrated reporting, International Integrated Reporting Committee (IIRC). Literature review In literature review, various academic contributions have been carefully evaluated to understand evolution, scope, current development and future scope of development in integrated reporting. Evolution of integrated reporting It is important to discuss non-financial reporting prior to focussing on integrated reporting. Non-financial reporting is referred to the practice of quantifying, disclosing and being responsible regarding organisational performance towards business sustainability to various internal and external stakeholders. Non-financial reporting essentially focuses on CSR exposure of firm in terms of its social and ethical behaviour. Non-financial reporting is also referred as sustainability reporting and is responsible for ensuring transparency in business communication process regarding non-financial performance of a firm (Ernst & Young, 2009). Adams, Fries and Simnett (2011) and Cohen, et al. (2012) put forward from their deduction that traditional reporting practices are insufficient to serve information requirements of various internal and external stakeholders. It has already been discussed that sustainability practice is not a new development; instead, its incorporation in corporate reporting is an emerging subject. Perrini and Tencati (2006) contributed in this regard by suggesting that value creation should be the prime objective of a business organisation instead of profit creation. Profit motives narrow down the scope of business growth and long term survivability. Contemporary societies are facing daunting challenges with respect to resource depletion, global warming, biodiversity loss, climate change and globalisation; to a great extent, organisations have made certain contribution towards the current global crisis. Eccles and Krzus (2010) posited in this regard that measuring non-financial components of a business and reporting the same are essential for not only valuation purpose but also to meet various economic challenges. The authors further argued that transparency in reporting has become imperative because stakeholder has already witnessed the consequences of having limited exposure of a corporation such as corporate scandal of Enron and WorldCom and financial crisis and recession. Eccles and Krzus (2010) proposed integrated reporting as the solution to the ongoing crisis and for wining over stakeholders’ confidence. The consistent demand and pressure of stakeholders on organisations resulted in incorporation of social report and environment report along with annual financial report by several corporations. However, the multiplicity further contributed towards complexity and confusion among stakeholders as the reports clearly lacked specific link and references. Absence of specific framework made it impossible for different stakeholder groups to analyse the reports and as a result, these reports were highly ineffective. The offset of financial crisis of 2008 resulted in development of the IIRC. The inception of the IIRC resulted in formulation of framework regarding integrated reporting (De Villiers, Rinaldi and Unerman, 2014). It was gathered that with the development of IIRC, integrated reporting gathered necessary momentum. In contrast to various stand alone reports on social and environment impact, greater efforts were made to integrate social and environmental disclosure with financial disclosure by a firm. By 2010, organisations took greater measures to present various financial and non-financial in compact and integrated manner resulting to development of integrated reporting. Although the IIRC was recognised as a global organisation with respect to integrated reporting, other organisations were also recognised that took steps towards integrated reporting. It was gathered that besides the IIRC, pioneering efforts have been made by organisations such as South African King Commission and Danish pharmaceutical firm, Novo Nordisk, (Cheng, et al., 2014). Scope of integrated reporting The IIRC is headed by chairs of a number of prominent international organisations and accounting firms. Integrated reporting has been developed with the aim of creating better communication of short term, medium term and long term value proposition of the firm. Furthermore, integrated reporting also helps in communicating organisational strategies, future prospect and performance to various stakeholder groups with respect to various external environment factors. The core idea behind development of integrated reporting conceptual framework is to expand business reporting in such a manner that all kinds of resources can be demonstrated that are consumed by an enterprise as input to its business activities; in this regard, the IIRC categorises all the resources as financial, intellectual, social relationship, manufactured, human and natural capital. Additionally, the framework emphasise on inclusion of business model of an organisation and a clear description of the process by which the abovementioned resources are integrated in the business model (Cheng, et al., 2014). Besides considering the business for ease of understanding of resource allocation, the integrated reporting is superior to traditional reporting in terms of information analysis. Holder-Webb, et al., (2009) highlighted that integrated reporting does not merely highlight a firm’s previous transactions and occurrences but also retort to increasing demand for relatively more updated information by analysing various time frames of different lengths. Consideration of previous and current transactions at the same time and their assessment enables integrated reporting to determine key opportunities available and report them along with various risks that a firm may encounter in the long run. All these information together present a comprehensive idea of an enterprise’s activities and also about its long term viability to its stakeholders (Cheng, et al., 2014). Between 2010 and 2014, considerable level of progress has been made by the IIRC in the development of framework for Integrated Reporting. In 2011, the IIRC also released a discussion paper in this regard and to obtain feedback on the concept. The basic idea of IIRC was to bring about a fundamental change in the method of reporting to stakeholders by organisations and to develop an internationally accepted reporting framework. Stated aim of integrated reporting suggests that the framework should be able to inculcate integrated decision making and thinking in corporations. The integrated reporting framework in its coarse form represents vision of IIRC to develop relationship between various functional and operational units and capitals that are employed by an organisation (Deloitte, 2014). The underpinning concepts of the integrated reporting framework are the notion of value creation by organisations, consideration of various capitals in this regard and the value creation process. The capitals have already been discussed in the paper which IIRC classified for ease of accounting and ensuring accountability. Value creation process primarily focuses on business model of a firm and consequently, prominent blocks of the reporting framework are strategic focus and futuristic orientation, information networking, stakeholder relationship, conciseness, materiality, completeness, reliability, comparability and consistency. Integrated reporting presents a cohesive approach to overall business reporting by drawing on numerous reporting strands and communicating every minute details in a concise yet understandable manner (Deloitte, 2014; Ernst & Young, 2014). Developments in integrated reporting worldwide De Villiers, Rinaldi and Unerman (2014) underlined that in past two decades considerable development has been witnessed with respect to accounting process and accountability system in combined management and performance reporting. Academicians and researchers have consistently evaluated interaction among organisational control system, performance management, strategic propositions and reporting system and recognised for specific frameworks in this regard, namely, balanced scorecard, sustainability reporting, triple bottom line approach and integrated reporting (De Villiers, Rinaldi and Unerman, 2014). The concept of balanced scorecard was introduced by Kaplan and Norton in early 90s and was immediately accepted at several manufacturing concerns, service firms, government entities and non profit organisations (Kaplan and Norton, 2001). The authors appended that balanced scorecard mechanism measured and reported internal performance and control mechanism and integrated corporation’s financial and sustainable measures. Balanced scorecard was considered as an efficient development but it did not specifically focussed on environmental or social issues despite taking in consideration non-financial aspects of a business (Kaplan and Norton, 2001). More recently, triple bottom line approach became popular among corporation as a measure of external reporting developed by Elkington. The author integrated financial, social and environmental reporting in one approach and presented the interlinked components of corporate sustainability thereof (Elkington, 2004). However, the triple bottom line approach was criticised in the lights of the facts that sustainability was only viewed as symbolic while business continued their operations without incorporating the same (Brown, Dillard and Marshall, 2006). Shortcomings in various approaches to development of sustainability reporting gave way to integrated reporting. The integrated reporting framework was published by the IIRC and ever since, reporting has been warmly embraced by various developed and developing economies. It was noted that South Africa was the first country to adopt the framework and implement it as a necessary requirement by all the listed companies. More specifically, King III initiatives were published in this regard in 2010 and the introduction of IIRC defined integrated reporting in 2013 resulted to mandatory development of integrated reporting by all the public companies listed with the Johannesburg Stock Exchange. The Integrated Reporting Committee of South Africa (IRCSA) was instituted in 2011 so that integrative nature of existing disclosures is improved. Report by Ernst & Young suggests that several stock exchanges across the world such as that in Singapore, Sao Paulo, Copenhagen and Kuala Lumpur have implemented integrated reporting for listen firms for elaborate disclosure of social, environmental and government issues (Cheng, et al., 2014). In 2012, the Grenelle II Act was passed in France on integrated reporting and it was gathered that the act requires corporations as well as their third party verification (independent) to report on environment and societal issues. In 2013, the European Commission publicized a proposal to amend the Seventh and Fourth Accounting Directives for encouraging increased disclosure of information related to sustainability by various European corporations (Cheng, et al., 2014). The IIRC database suggests that presently almost all companies in every industrial sector are engaged in integrated reporting so that their strategies, performance and governance with respect to external uncertainties towards value creation is available to stakeholders (IIRC, 2014). Existing gap in the integrated reporting process Recent studies suggest that interest of investors in non-financial information in corporate disclosures has increased significantly in recent years and it has been determined that investors are not yet completely satisfied with disclosures made in corporate reporting. According to various investors, non-financial information published by organisations is mostly related to their CSR policies; however, reports rarely reflect interlink between business risks and strategies and also fails to present sufficient information regarding financial materiality (ACCA, 2013). The ACCA survey also revealed that numerous stakeholders feel quality of reporting is relatively low and information have not been presented in an adequate manner. Investors put forward that usability of non-financial information is determined by scope of comparability. However, no report presents information in a manner where performance can be compared across companies. They additionally emphasised that financial and non-financial information necessitates enhanced integration. The survey determined that only quantitative key performance indicators such as profit measures, revenue growth and others are considered essential for evaluating organisational performance. Qualitative policy statements have been emphasised only theoretically irrespective of its role in financial materiality. Investors suggest that accountability mechanisms should invariably be a part of sustainability reporting by means of board oversight mechanisms, shareholder approval or third party assurance (ACCA, 2013). Bloomberg (2012) suggest that most sustainability reports so far consider nonfinancial data as immaterial in financial reporting. The report recognises sustainability paradox in this regard as when cost is linked with sustainable factors then the factors do take materialistic form and this fact has so far not been evaluated in corporate reporting. Integrated reporting emphasise strongly on social and environmental impact or consequence reporting and should therefore, take into account cost of these impacts as well. The other issues that were recognised in integrated reporting framework that needs to be resolved in long run are: The initial framework of integrated reporting thrust greatest emphasise on various financial capital provider as user of the report instead of other stakeholders. Hence, the report need to be developed in such a manner that it is understandable to all stakeholders. The current framework does not clarify certain concepts and terminologies related to capital. Additionally, more information needs to be provided in the framework regarding trade-off between profitability and environmental impact in terms of capitals. It was also gathered that significant amount of challenges surround assurance practice of integrated reporting. The framework is yet to provide reasonable assurance with respect to accountability principle (Cheng, et al., 2014). Future scope of research Adams (2014) argued that the implementation process of integrated reporting involves development of several new accounting and managerial processes and during the initial implementation phase, the framework is susceptible to failure considering existing structure may prove incompatible for the same. The author appended that corporate social disclosure require significant change in the disclosure pattern as presently the structure is considerably governed by motive of profit maximisation. Adams (2014) further added that scope of integrated reporting to affect the reporting process depends significantly on the extent to which it is successful in developing a dissonance source, strong enough to affect the thinking process of managers within the limits of profit maximising constraints. The author appreciated the fact that idealism and creditable intention have resulted in surfacing of integrated reporting. The reporting framework was considered as a primary force to encourage mainstream accountants to emphasis on value creation and long term viability of business. Adams (2014) indicated that features like encouragement towards broader thinking of value and value creation and long term survivability enable integrated reporting to shift current corporate thinking towards greater assimilation of societal wellbeing and profit maximisation. Adams (2014) highlighted prominent scope of development in the current integrated reporting format and also recognised potential avenues of future research. It was determined that preparation of integrated reporting would bring about certain changes in overall decision making process, communication process, risk identification methods and materiality. In future researches, the areas that can be assessed are better process of risk identification and materiality, methods of internal communication of integrated thinking, modifications in internal system, leadership and other qualitative measures, integration of political landscape, integrated reporting in non-profit and government sectors and role of various kinds of capital in risk and uncertainty identification (Adams, 2014). Recommendations Integrated reporting is a prominent step towards incorporation of sustainability in business and maintaining transparency regarding the same. However, being an emerging subject it comprises certain gaps and in that regard, specific recommendations have been provided in this section: The reporting framework requires greater degree of simplicity as complexity dilutes its main purpose of serving stakeholders with comprehensive information. It was ascertained that present framework emphasise mainly on financial capital providers’ needs in the report. This may detriment the impact of the report on information need of other stakeholders. Materiality of non-financial components needs to be discussed in a succinct yet informative manner. Negligence towards the same may affect reporting quality. Significant confusion exists among investors and stakeholders regarding kinds of capital and their importance and scope. The reporting framework requires significant amendment in this regard. The IIRC need to publicise a consensus regarding nature and features of a faire integrated report. Measures need to be adopted regarding assurance in the reporting processes so as to improve connectivity in reporting process and ensure completeness. Conclusion The global business reporting process is undergoing revolutionary changes as investors are increasingly expressing interest towards greater disclosures concerning their responsibilities and contribution towards society and environment. Financial reporting was determined to be inadequate to represent the complete picture and as a result, integrated reporting was proposed. The paper discusses the introduction of integrated reporting and its advancement in a detailed manner. Additionally, the paper critically assesses worldwide development of integrated reporting and its impact on overall corporate value chain of businesses. However, it was determined that besides preliminary success, integrated reporting framework consists of certain flaws which require serious consideration. Keeping in view the importance of integrated reporting, certain recommendations have been provided so that the gaps in the framework are addressed appropriately. Reference list ACCA, 2013. 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