A new report by the Institute of Management Accountants (IMA) and the Association of Chartered Certified Accountants explores why integrated reporting is gaining a bigger foothold in corporate reporting and why accountants are playing a key role in that process.
From Share Value to Shared Value: Exploring the Role of Accountants in Developing Integrated Reporting in Practice is based on participants’ observations within a multinational company – the pilot of the International Integrated Reporting Council (IIRC) – as well as interviews with international experts and other multinational companies, and evidence collected from 2011 to 2015.
Though the first corporate integrated reports emerged in 2002, the trend has built momentum slowly. Basically, integrated reporting has three hallmarks:
- It’s a reporting and management tool that helps create shared value for stakeholders.
- It includes management’s future expectations.
- It should provide information material to assessing and sustaining short- to long-term value.
The bottom line? It’s about growing a successful business, of course, but in terms of internal returns and external social and economic returns.
“Ultimately, creating shared value acknowledges both the work that corporations need to do to reduce negative impacts on society, as well as, and more fundamentally, how they can be part of progress on global challenges, such as climate change and the enforcement of human rights,” the report states. “Following this shift, there is a new trend of corporate reporting: the integration of financial and nonfinancial concerns into one accounting tool, known as integrated reporting.”
Physical and financial assets no longer explain a company’s market value, the report states. In 1975, they would have comprised 83 percent of the value. But now? They’re only 19 percent.
“Market valuations are now based on intangibles, such as intellectual, social, and relationship and human capitals, and in this context, there is a crucial need for a broader information set,” the report states.
Accountants, needless to say, stand to play a key role. Along with management accountants and auditors, the task at hand is “devising the right accounting for capitals, the right information systems, and the right assurance for the reported information,” the report states.
“I believe the adoption of integrated reporting will not reach its full potential, including in the United States, unless we, as an accounting community, take several actions to lay the groundwork for a transformation in external corporate reporting,” Raef Lawson, PhD., CMA, CPA, IMA vice president of research and policy, said in a prepared statement.
There’ve been signposts pointing to the growing need for integrated reporting.
The Sustainability Accounting Standards Board, which began in 2011, developed industry-specific sustainability disclosure standards for listed companies in the United States – intended to be included in mandatory 10-K or 20-F filings with the US Securities and Exchange Commission (SEC). The disclosures focus on identifying material environmental and social issues within each industry for investors.
The SEC issued “interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to climate change. These disclosures should be integrated in the SEC filings,” the report states.
In late 2013, the IIRC issued the first guide for integrated reporting. It contains seven principles:
- Strategic focus and future orientation – how the strategy allows the company to create value in the short, medium, and long term, and how that impacts the capitals.
- Present a holistic, connected picture of all factors affecting value creation.
- Address stakeholders’ needs and interests.
- Provide information about material matters affecting value creation.
- Be concise.
- There should be no material error in reports on positive and negative issues.
- Present information consistently and in a way that allows comparisons with other organizations.