Integrated financial reporting has become increasingly high profile in recent years, with the number of publications in both academic and practitioner circles increasing at a rapid rate. Experts, scholars, and practitioners in the field of integrated reporting hail from academia and the accounting workforce, but despite such coverage, there remains some confusion as to what exactly an integrated report contains.
Financial reporting in the traditional sense of publicly disclosed financial statements, filed with the US Securities and Exchange Commission for organizations traded in the United States, is not typically an area of excitement or of interest to many users. Prepared for, and distributed to, a relatively narrow set of equity and debt holders, the information contained in traditional financial statements is based on historical performance. Additionally, the information contained is almost exclusively linked to the financial performance and results of the organization.
Integrated reporting, by contrast, includes a variety of information that covers the financial performance of the organization, as well as other important nonfinancial data.
What Data is Included in an Integrated Report?
Including such information inevitably raises questions regarding the role of accountants and CPAs, but it also presents opportunities for proactive accounting professionals. In order to understand the challenges and potential included in the proliferation of the integrated reporting framework, it is important to fully understand the different information contained within such a report.
Drilling specifically into the information, outside of financial information, contained within an integrated report, there are several different categories of data. Sustainability information, corporate governance data, and information linked to the broader risk management are embedded within an integrated report. This information is equally as important as financial results in a stakeholder environment.
As the influence and reach of nontraditional stakeholders – including environmental groups, corporate governance rating agencies, and consumer advocacy groups – increases, the importance of nonfinancial data also increases. The financial results of an organization, regardless of industry, are driven by operations and the broader business forces affecting the organization. An integrated report has the potential to effectively quantify these different sources of information, specifically via the multiple capital model construct.
The multiple capital model is an attempt to quantify and report in a familiar format information that drives organizational performance, but is not strictly financial in nature. An integrated report contains multiple capitals to help quantify and report nontraditional information, such as sustainability, governance, the effect of intellectual property of business decisions, and the concept of social capital. Such ideas and concepts may seem ethereal or amorphous in nature, but the bottom line impact of these ideas is significant. Failures of environmental compliance, corporate governance missteps, operational oversights, and a lack of employee retention plague organizations across industries and on a global basis.
How Can CPAs Add Value?
In addition to financial capital, the five other types of capital included in the multiple capital model are natural, intellectual, social and relational, manufactured, and human. Developing metrics, reporting guidelines, and assurance standards to better assist organizations to assess and use these various types of information provide numerous opportunities for proactive CPAs. It is insufficient, of course, to merely understand the concept of integrated reporting and a multiple capital model – accounting professionals must construct an action plan to implement such ideas.
Quantifying the ideas of multiple capitals, while an emerging area, is an area in which accounting professionals can leverage existing competencies to definitively add value through the integrated reporting process. Every organization and industry will be different, and the development of certain metrics will certainly take time, but there are several commonalities that can be applied across industry boundaries.
The following short list of questions and comments highlights possible methods that accounting professionals can use to establish the necessary metrics to report this information for managerial decisions-makers to make better decisions.
1. Natural capital. Is the organization taking advantage of available tax credits, subsidies, and technology to reduce costs and maximize sustainability initiatives? Even for service organizations, the cost of utilities can be substantial, and it should be a focus of cost reduction.
2. Intellectual capital. With intangible assets and intellectual property increasingly more important, and customer data under attack from a variety of sources, does the organization leverage intellectual property, maximize data analytics techniques, and protect customer information?
3. Social and relational capital. It is imperative, in an environment dominated by social media, that organizations have a proactive presence to engage with customers. More broadly, in order to raise capital and embark on new ventures, the organization must have quality relationships with partners, suppliers, and stakeholder groups.
4. Manufactured capital. At a high level, the idea of manufactured capital represents how the organization delivers products and services to end users, customers, and clients. From distribution metrics for physical goods to the distribution of information, the process is equally important to analyze to ensure effective and efficient methods of delivery.
5. Human capital. The cost of employee turnover and continuous training is an ongoing issue cited by management professionals in virtually every survey or poll. What practices is the organization undertaking to retain, train, and develop the employee base, and are these practices quantifiable in nature?
An integrated report contains large amounts of information in addition to the traditional sources of financial data currently distributed to shareholders. While there are challenges inherent in such a format, there are also opportunities for proactive CPAs and accountants.
Quantifying the results of operational data, which drive financial results, is imperative in a business environment that is increasingly stakeholder-driven. Assembling metrics and standards, through iterative processes, is a clear and quantifiable way by which accounting professionals can add value and leverage the use of integrated reporting to the benefit of the profession – and of respective organizations.
About Dr. Sean Stein Smith
Dr. Sean Stein Smith, DBA, CPA, CMA, CGMA, CFE, is an assistant professor at Lehman College, part of the City University of New York. He is a member of the NJCPA Content Advisory Board, Student Programs & Scholarship Committee, Young CPA Council, Nonprofit Interest Group, and Accounting & Auditing Standards Interest Group. He can be reached at [email protected].