Integrated Reporting

Abstract

Integrated reporting (commonly abbreviated to <IR>) is a form of corporate reporting which is growing in adoption and acceptance in many international financial markets. Conceived as a way for the firm to tell its own story of its purpose and value creation, it promotes financial and nonfinancial corporate reporting in a concise and holistic way, describing the firm’s reliance, use, and impact on six different capitals: financial, manufactured, intellectual, human, social/relationship, and natural. <IR> is designed to inform users of corporate reports of the inherent sustainability of the firm, across the short, medium, and longer term, encompassing its mission, vision, and business model. This chapter introduces the concept and evolution of <IR>, the perceived advantages and disadvantages of this form of corporate reporting, and the challenges in implementing it. The chapter also concludes with a discussion on current thinking on <IR> and its likely future direction.

Appendix 1

Table 3

	Source	Description/focus	Justification	Difficulties	Progress
Balanced scorecard	The Balanced Scorecard: Translating Strategy into Action (1996; based on a 1992 article) – Professor Robert S. Kaplan and David P. Norton	The balanced scorecard reports performance on four perspectives:   Financial  Customer  Business process  A learning-and-growth Kaplan and Norton envisage that the scorecard, although primarily a management tool, should also become a basis for external reporting	The current accounting model is historical, promotes short-termism, and fails to capture intangibles.	Ernst and Young (1997) identify several reasons why scorecard projects sometimes fail:  Managers mistakenly think that because they already use non-financial performance measures, they already have a balanced scorecard  Senior executives misguidedly delegate scorecard implementation to middle managers  Businesses try to use the best measures used by the best companies, rather than developing their own.  Businesses try too hard for perfection  Senior executives wrongly think that the scorecard is just about reporting; in fact, it is a new way of managing the business While these difficulties refer to the internal use of the scorecard, unless it is used internally successfully, it won’t be used as a basis for external reporting	Since the original publication of Kaplan and Norton’s ideas, balanced scorecard approaches have been adopted for management purposes by many companies. While few firms refer to the balanced scorecard in their external reporting, firms are now disclosing far more non-financial information than they used to, and it is possible that this derives from data used in a balanced scorecard approach to management The authors do not appear to have monitored the use of the scorecard as a basis for external reporting. Recently, however, they have launched a subscription newsletter, Balanced Scorecard Report, giving information on balanced scorecard implementation by businesses
Jenkins report	Improving Business Reporting: A Customer Focus (1994) – American Institute of Certified Public Accountants	The report recommends  (a) More information with a forward-looking perspective, including management’s plans, opportunities, risks, and measurement uncertainties  (b) Focus on the factors that create longer-term value, including non-financial measures indicating how key business processes are performing  (c) Better align information reported externally with the information reported to senior management to manage the business	Concern that if business reporting does keep up with the changing needs of users, it will lose its relevance. Therefore, the recommendations of the Jenkins report aim to address the problem of insufficient focus on user needs	Where the competitive costs or litigation costs of providing information are potentially significant, it is not required. Also, “other than for financial statements, management need only report the information it knows, therefore management is under no obligation to gather information it does not have, or need, to manage the business”	The Jenkins report led to a number of follow-up reports by FASB, but the last of these appeared in 2001. As with other reporting proposals that it could be said that its calls for more forward-looking and non-financial disclosure have now to a degree been met. However, actual disclosures have not precisely matched the report’s recommendations or followed the model that it recommended
Tomorrow’s Company	Tomorrow’s Company: The Role of Business in a Changing World (1995) – Royal Society of Arts and Sooner, Sharper, Simpler: A Lean Vision of an Inclusive Annual Report (1998) – Centre for Tomorrow’s Company	Tomorrow’s Company’s main emphasis is on how inclusiveness can improve business performance and recommend;  Financial report  Value chain report (information on customer satisfaction, etc.)  A people document (information on skill level and knowledge bank)  Sustainability document (community and environmental impacts)	Argue that financial performance does not gauge the overall company health as it is not forward looking and fails to define competitive performance and fails to recognize growing importance of intangibles	Does not deal with any practical difficulties that may be encountered in implementing its proposals	Tomorrow’s Company’s work was influential in the subsequent UK Company Law Review, which led to major reforms embodied in the Companies Act 2006, and particularly in proposals, subsequently overturned, for a mandatory operating and financial review. The organization remains active in “creating a future for business which makes equal sense to staff, shareholders and society.” It also retains an interest in business reporting issues. As with other proposals for reform, business reporting could be said to have followed the general direction indicated, without adopting the specific model suggested
21st Century Annual Report	The 21st Century Annual Report/Prototype plc (1998) and Digital Reporting: A Progress Report (2004) – both ICAEW	They propose that businesses publish a wider range of leading indicators of financial performance, take a more inclusive view of stakeholders, and harness advances in information technology in their reporting being;  Framework based  Forward-looking financial information and better information on risks	Identifies the following principle factors challenging the present accounting system:  The exponential growth in financial instruments and other derivatives, which it is impossible to reflect properly using historical cost accounting  Increased importance of intangible assets in the generation of corporate wealth and the very tenuous link between the cost and value of these assets  Advances in information technology, making possible radical changes not just in how we communicate information but also in what information is published, to whom and when  The strong influence of international institutional investors, e.g., from the USA, pressing for more transparency in corporate reporting	Striking the balance between transparency and not giving away too much competitively sensitive information as well as determining how frequently information should be updated Achieving environmental benchmarking across industries and the possible impossibility of developing objective indicators for measuring a company’s social performance Auditing and verification will demand significant resources, skills, management time and capabilities which may simply be lacking in smaller organizations	It could be said that the world has indeed moved in the direction called for in these reports, though not yet to the extent predicted. The technology issues have been followed up in the Making Information Systems Work thought leadership program of ICAEW’s Information Technology Faculty, including Digital Reporting: A Progress Report (2004)
The Inevitable Change	Business Reporting: The Inevitable Change? –ICAS (1999)	To meet users’ needs, the report proposes that businesses should use advances in information technology to make available a wider range of information faster than at present, rather more frequently, and recognizing different stakeholders’ differing requirements. In particular, it recommends  - “Electronic library-type resource” for external users, with information layered, linked, and prepackaged for each stakeholder group In particular:  - At three to five yearly intervals, selected prospectus type information be provided - Certain non-financial information currently captured by management information systems be provided, e.g., performance indicators  - Certain information not currently captured by management information systems can be provided, e.g., intellectual capital, biographical information on directors…	Business reporting at the moment is producer driven, rather than meeting users’ needs	The report’s voluntary and incremental approach is intended to avoid potential difficulties	As with the other report models, it could be said that things have moved in the desired direction, with an increasingly wide range of corporate disclosures and ever-growing use of the internet. But the particular proposals in the report have not been adopted. Subsequent research reports from ICAS have explored various aspects of internet-based communication and the measurement, management and reporting of intangibles
Inside Out	Inside Out: Reporting on Shareholder Value ICAEW (1996)	Company ambitions  Strategic direction  Description of strategic decision-making process  Preferred measures  Key drivers of value  Measures of performance appropriate to the business	Annual reports give a historical perspective and are not forward looking. Users today want information about a company’s potential for creating shareholder value	Inside Out, like the Jenkins report, avoids some of the major obstacles by fitting its recommendations around them. It proposes “the disclosure only of information already available to management.” It also addresses the issue of commercial sensitivity	Once again, there has subsequently been rather more disclosure of strategies and other non-financial information, including some KPIs, but not of the particular information proposed in the report. The questions explored in Inside Out have been pursued in later ICAEW reports, including Prospective Financial Information: Guidance for UK Directors (2003), New Reporting Models for Business (2003), and Developments in New Reporting Models (2009)
Value dynamics	Cracking the Value Code: How Successful Businesses are Creating Wealth in the New Economy (2000) – Boulton et al. (2000)	The authors argue that old methods of managing and measuring are simply not up to the task and that companies should be more transparent and user driven in their disclosures; in particular, they should disclose the current values of all their assets, including intangibles not currently recognized in financial reporting. They therefore recommend  Better disclosure of intangible assets  54 boxes showing different kinds of asset-related information	Leading-edge companies are finding that their management and measurement systems are no longer aligned with the assets that they are using to create value; therefore, businesses must recognize that the old models of information for decision-making – including measurement and reporting – are becoming obsolete	Recognize that required changes in information management, measurement, and reporting cannot be achieved overnight, given the challenges of replacing legacy systems, complying with today’s regulatory requirements, and developing the tools required for hard-to-measure intangible assets	Judging from the increased volume of disclosures, there has indeed been greater openness since this book was published, but – as ever – it has not followed these authors’ particular prescription. Arthur Andersen ceased trading in 2002, and there has therefore been no follow-up to Value Dynamics
Brookings Institute	Unseen Wealth: Report of the Brookings Task Force on Understanding Intangible Sources of Value (Blair and Wallman (2001) and Professor Baruch Lev’s Intangibles: Management, Measurement, and Reporting (2001) – both Brookings Institution	Focused on the problem of reporting intangibles and put forward proposals to allow companies to move toward systematic reporting of relevant information on these assets being  Value of intangibles, e.g., Lev’s value chain scoreboard  Quantitative standardized and relevant measures	Focused on the problem of reporting intangibles that allows companies to move toward reporting the values of all relevant intangibles. Identify that the paucity of good robust models and consistent vocabulary for intangibles stands in the way of development of performance or measurement data that would be comparable across firms	A large number of practical issues are anticipated and are intended to be tackled through government or regulatory action. For example, conceptual, technical, and measurement problems are to be dealt with through continuation of the research begun by the Task Force and Professor Lev. Concerns about commercially sensitive disclosures will be resolved through FASB and SEC requirements. Liability fears will be addressed through enhanced safe harbor protections	Both publications call for action by the authorities – the US government, the SEC, and FASB – to help develop standardized frameworks for disclosure. Compliance with these would initially be voluntary, but it is envisaged that as practice evolves some mandatory requirements would also be developed. However, there has not been any follow-up by the relevant authorities to these calls to action
Value reporting	The ValueReporting™ Revolution: Moving Beyond the Earnings Game (Eccles et al., 2001) and Building Public Trust: The Future of Corporate Reporting (DiPiazza and Eccles 2002) – both PricewaterhouseCoopers	Businesses should report information to the market on all the measures they use internally to manage including  Market overview  Strategy  Value creating activities  Financial performance	The ValueReporting™ Revolution argues that the corporate reporting model has failed those whom it intends and ought to serve best and has not even begun to keep pace with the extraordinary changes in how executives manage their companies. Building Public Trust comments that every aircraft in the world would be grounded if air traffic control relied on the same type of system that companies use today to report their information. Argues that the lack of a broad set of performance information has contributed to inaccurate stock prices and extreme volatility. Stated there is an emphasis on short-termism and is therefore not meeting user needs	Certain disclosures might put the company at a competitive disadvantage. They might be easily misleading. Some information might be unreliable, too detailed to be clarifying, or too costly to assemble. A need for safe harbor legislation and concludes that companies should weigh the risks and costs of disclosure against the benefits	As with the other reporting models proposed, it could be said that there has been a substantial move in the direction of non-financial reporting, but the particular prescription in ValueReporting™ has not been adopted. However, PWC continues to develop and actively pursue the ideas in ValueReporting™:  Through its publications, services, and research, including the website www.corporatereporting.com  Through recasting the reporting model  Through its Building Public Trust Awards  Through its participation in a number of collective endeavors to reform business reporting, such as the Enhanced Business Reporting Consortium, the CEOs of the International Audit Networks, the Report Leadership group, and the World Intellectual Capital Initiative
Hermes principles	The Hermes Principles: What Shareholders Expect of Public Companies – and What Companies Should Expect of Their Investors (Watson et al. 2002) – Hermes Pensions Management Limited	General requirement about disclosure of WACC and ability to deliver returns ahead of WACC and cash-based reporting	Short-termism is criticized in existing models. Encouraging the maximization of returns on capital can detract from the creation of shareholder value Therefore, according to the Hermes principles, investment decisions should be made, and their success judged, using “the present value of the cash flows from investment, discounted at an appropriate cost of capital.” Indeed, Hermes expects every company to have a view about what its weighted average cost of capital (WACC) is and to disclose it	No practical difficulties are identified	Judging from the increase in the volume of reported information, companies are indeed displaying greater openness. But as with other reformers’ proposals, it is doubtful whether the progress to date meets the demands of the Hermes principles