ACCOUNTANCY FUTURES CRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 03 I 2011 THE AGE OF INTEGRATION A NEW DAWN FOR CORPORATE REPORTING? PLUS: CFOs: AFTER THE STORM I GENERATION Y I PEOPLE POWER FOR SMALL PRACTICE I CARBON MARKETS I CAPACITY BUILDING I AUDITORS IN DANGER I AUSSIE TAX RULES I ACCOUNTING FOR CONFIDENCE I KENYA’S CASH REVOLUTION I CONVERGENCE CRUNCH
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ACCOUNTANCY FUTURESCRITICAL ISSUES FOR TOMORROW’S PROFESSION I EDITION 03 I 2011
THE AGE OF INTEGRATIONA NEW DAWN FOR CORPORATE REPORTING?
PLUS: CFOs: AFTER THE STORM I GENERATION Y I PEOPLE POWER FOR SMALL PRACTICE I CARBON MARKETS I CAPACITY BUILDING I AUDITORS IN DANGER I AUSSIE TAX RULES I ACCOUNTING FOR CONFIDENCE I KENYA’S CASH REVOLUTION I CONVERGENCE CRUNCH
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29 Lincoln’s Inn Fields London WC2A 3EE United Kingdom +44 (0)20 7059 5000 www.accaglobal.com
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ACCOUNTANCY FUTURES:
Editor Chris Quick
+44 (0)20 7059 5966
Managing editor Jamie Ambler
Sub editors Dean Gurden, Peter Kernan
Design manager Jackie Dollar
Junior designer Robert Mills
Production manager Anthony Kay
Head of publishing Adam Williams
Pictures Corbis
Printing Polestar Wheatons
Paper Antalis McNaughton Group. This magazine is produced on paper that
contains certified fibres sourced from forestry within 120km of the paper mill.
The mill operates under ISO 14001 certified environmental management system
and has its own biomass energy production.
ACCA
President Mark Gold FCCA
Deputy president Dean Westcott FCCA
Vice-president Barry Cooper FCCA
Chief executive Helen Brand
ACCA Connect
Tel +44 (0)141 582 2000
A list of ACCA offices can be found inside the back cover of this journal.
ACCA (the Association of Chartered Certified Accountants) is the global body for professional accountants. We aim to offer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management. ACCA has 140,000 members and 404,000 students, who it supports throughout their careers, providing services through a network of 83 offices and centres around the world.
Accountancy Futures® is a registered trademark of ACCA.
All views expressed in Accountancy Futures are those of the contributors. The Council of ACCA and the publishers do not guarantee the accuracy of statements by contributors or advertisers, or accept responsibility for any statement that they may express in this publication. Copyright ACCA 2011 Accountancy Futures. No part of this publication may be reproduced, stored or distributed without the express written permission of ACCA. Accountancy Futures is published by Certified Accountants Educational Trust in cooperation with ACCA. ISSN 2042-4566. Accountancy Futures Edition 3 was published in February 2011.
29 Lincoln’s Inn FieldsLondon WC2A 3EEUnited Kingdom+44 (0)20 7059 5000www.accaglobal.com
ACCOUNTANCY FUTURES
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ACCOUNTANCY FUTURES
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John Davies head of [email protected]
Aziz Tayyebi financial reporting [email protected]
Dr Afra Sajjad head of education and policy development, ACCA Pakistan
Editorial board
The start of a new era in corporate reporting? The concept of integrated reporting – the integration of financial and non-financial information in a company’s reporting – now has real impetus with the launch of a committee of big-name companies, global accountancy firms, professional bodies and standard-setters to back it and draw up a plan of how it will work. It could range from the maintenance of International Financial Reporting Standards with some environmental and other bolt-ons, right up to a fundamental overhaul of corporate reporting. We will follow what promises to be a lively debate closely in Accountancy Futures, starting in this edition with a series of articles exploring the concept, including an article by Sir Michael Peat, chairman of the new committee. We also tackle many other topics of interest to finance professionals and business leaders keen to explore what the future holds and how they can shape it.
Chris Quick, editor You can find out more about ACCA’s Accountancy Futures programme at www.accaglobal.com/af
ACCOUNTANTS FOR BUSINESSWe explore the vision for integrated reporting and look at the new environment facing CFOs. We also examine the challenges Generation Y gives employers and report from the World Congress of Accountants.
CARBON ACCOUNTINGWe take a look at the development of carbon markets and the accounting and measurement issues they raise. Also under the spotlight are Scope 3 emissions – those that are produced indirectly by businesses. The fact that these are not being counted could hinder the development of a low-carbon economy.
Public sector goes global: Andreas Bergmann, chair of the International Public Sector Accounting Standards Board, reports on progress in creating a global accounting framework. PG66
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AUDITWith audit in the spotlight after the financial crisis, we ask how it could evolve in the future, reporting on the views of CFOs, auditors, investors and others. We also explore the thorny issue of auditor liability.
NARRATIVE REPORTING We report on an ACCA/Deloitte survey of CFOs’ views and perspectives on narrative reporting.
ACCESS TO FINANCEConstrained access to finance leaves small businesses at risk from recovery just as much as from recession, finds a global survey of 1,750 small business by ACCA, CGA-Canada and Italian accountancy body CNDCEC.
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Carve-outs and convergence: Paul Cherry, chair of the IASB’s IFRS Advisory Council, shares his views on the future of International Financial Reporting Standards. PG82
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Looking aheadA round-up of recent and upcoming research and events
01 INVESTING IN WOMENGovernments would benefit from paying more attention to the vital role women play in driving economic growth, new research shows. The Deloitte report, The Gender Dividend: Making the Business Case for Investing in Women, found that the role women play – or don’t play – can affect economic competitiveness. Go to www.accaglobal.com/genderdividend to read the report in full.
02 MAXIMISE YOUR PEOPLE POWERA new report from ACCA and KPMG, Effective Talent Management in Finance, sends some clear messages about the importance of integrated talent management and the key elements required. The research highlights that less than 20% of organisations fully integrate talent identification, development, deployment and retention activity across the finance team. Talent management practices are often informal and sometimes run in isolation. The report looks at how talent management can shape and influence the structure of finance functions, and highlights the practices organisations should adopt to deliver the best possible talent development for finance professionals. Go to www.accaglobal/accountants_business for more.
03 IAAER AND ACCA PROLONG PARTNERSHIPThe International Association of Accounting Education and Research (IAAER) and ACCA announced at the 11th World Congress of Accounting Educators and Researchers in Singapore in November 2010 that they would continue working closely together until 2014 – an extension of three years on the original memorandum of understanding. Donna Street, IAAER president and professor at the University of Dayton, said: ‘IAAER is delighted that the extension of our partnership with ACCA through 2014 will enable our organisations to continue to help focus academic research on issues facing international standard setters by informing the debate on a variety of agenda topics. The three-year extension also ensures continuation of our joint efforts to build accounting research and teaching skills capacity in transitional economies.’
04 ASSESSING PPP PRACTICESACCA has commissioned research into public-private partnerships (PPPs). Using France and the UK – both mature in their use of PPPs – as benchmarks, the project will assess the PPP maturity of a number of countries in Asia Pacific. It will look at the degree of
Female solidarity: demonstrations in Makati, Philippines last year on International Women’s Day. It is on 8 March this year and is celebrated as a national holiday in China, Russia, Vietnam and Bulgaria.
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establishment of policy frameworks provided by the central government, the sectors of application, and capabilities in relevant sectors. The project will identify the variety of PPP concepts globally with the aim of drawing up guidelines for appropriate local practice in a global context rather than advocating global best practice, and will pay specific attention to accountability issues. 05 RISK APPETITE RESEARCHACCA is examining the role of corporate governance in controlling the risk-taking behaviour of boards. The study is designed to address the gap in research literature and wider understanding about the governance processes that determine the level of risk to which companies choose to be exposed when setting cash-holding and leverage policies. 06 WHAT BUSINESS LEADERS THINKAn ACCA survey of surveys of CFOs and CEOs in 2010 reflects uncertain environments, both macro and micro, and a strengthening push for innovation. Surveys by PwC, Deloitte, IBM and Ernst & Young are among the studies looked at. The uncertain environments range from the world economy to consumer demand, along with increasing regulation, shifts in economic power with increasing competition and price pressures. Accompanying the need to innovate and respond to changing environments, there is evidence of conservatism and control. Accountants’ skills in measuring and monitoring performance as well as controlling costs are being relied upon to provide stability. 07 GLOBAL BUSINESS RISKRegulation and compliance remain the biggest risks to global business in 2011, but cost cutting and lower margins are the fastest-growing risks, according to new research. Ernst & Young’s Global Business Risk Report reveals that cost cutting had risen four places to number two and pricing pressures had moved up 10 places to fifth position compared with 2010. The report is available at www.accaglobal.com/gbrr 08 CONFIDENCE GROWINGCEOs’ confidence in future growth has returned to nearly pre-crisis levels, according to a new survey. PwC’s 14th annual global CEO
Survey found that the positive momentum in CEO confidence was reflected in hiring plans. More than half of CEOs polled worldwide said they expected to recruit in the next 12 months. CEOs in Central Europe, Asia Pacific and Africa were particularly bullish about hiring.More at www.accaglobal.com/ceosurvey
09 CANCUN CONVERSATIONSCompanies are increasingly seeking out and adopting sustainable business practices, according to emerging evidence from a global research project. A Review of Corporate Sustainability in 2010 reveals a clear increase in the numbers of companies with active programmes, the research, commissioned by KPMG International and carried out by the Economist Intelligence Unit, showed. For more visit www.accaglobal.com/kpmg_cop16
10 ISLAMIC FINANCE ROUNDTABLEAs Islamic finance rapidly expands, so divergence in accounting practices is an ever more difficult factor. ACCA and KPMG have therefore embarked on a joint project to direct the International Accounting Standards Board’s (IASB) response to standardise accounting in this area. The first of three high-level roundtables was held in Kuala Lumpur, Malaysia, last October. Subsequent meetings of the IASB, regulators, banks and ratings agencies are due to take place in April 2011 in London and Bahrain. A final report will be issued later this year.
11 THE IMPACT OF ECONOMIC CONDITIONSGlobal economic conditions continue to dominate business life. ACCA is launching a range of projects to research the effect of economic conditions around the world, and ways in which the impact can be managed. The aims of the research include: understanding trends and developments, championing the role of the accountant in business – especially the CFO – and illuminating areas of best practice to help companies add value to business strategy and operations. It will also identify ways in which accountants can add value as advisers, and work at understanding learning points and indicators for moving towards a refreshed global economy. Go to www.accaglobal.com/gec to read the latest insights and results of the most recent global economic conditions survey report.
When I took my first tentative steps as an accountant (they are still fairly tentative!), my grandfather told me that the essence of the
job was to provide trust and confidence, vital prerequisites for commerce and prosperity. He added that accounting information should be clear and comprehensible – meaningful and powerful communication. The test was whether the information could be understood by an intelligent but non-financially literate person. HRH The Prince of Wales has always had a remarkable knack for putting his finger on
issues of long-term importance. Fairly soon after I started to work for him, some eight years ago, he made it clear that he didn’t believe that the accounting profession was providing the information needed to tackle the issues confronting the world economy at the beginning of the 21st century: increasing population, over-consumption of finite natural resources, pollution of land, sea and air and climate change. His Royal Highness felt that the limited information provided to investors, managers, employees, and indeed consumers and members of the public, was a major
The integrated imperativeInternational Integrated Reporting Committee chairman Sir Michael Peat sets out a vision for corporate reporting that brings together the financial and non-financial
HRH The Prince of Wales: accountants must draw out the information needed to tackle pollution, climate change and over-consumption.
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Integrated reporting is a vital building block to enable the world’s economy to evolve and maintain standards of living for people who already enjoy a good quality of life, and create them for the hundreds of millions who do not
Sir Michael Peat is principal private secretary to HRH The Prince of Wales and The Duchess of Cornwall. He has also served as keeper of the privy purse and been a partner at KPMG. A qualified accountant, he has an MBA from INSEAD and an MA in law from Oxford.
Deep-seated changes to our current economic model are need to tackle the over-consumption of resources and the risk of catastrophic climate change. Every publicly listed company has to file an annual report on its financial performance in compliance with, in most cases, either International Financial Reporting Standards (IFRS) or US GAAP. Increasingly, companies are also producing corporate social responsibility or sustainability reports although these can vary widely in terms of relevance and quality, largely because there is no global standard for measuring and reporting on environmental, social and governance performance.What is required is a concise, comprehensive and comparable reporting framework that integrates material financial and non-financial information. It should be structured around the organisation’s strategic objectives, its governance and business model. The objectives for an integrated reporting framework are to:A support the information needs of long-term
investors, by showing the longer-term
consequences of decision-making
B reflect the interconnections between
environmental, social, governance and
financial factors in decisions that affect
long-term performance, making clear the link
between sustainability and economic value
C provide the framework for environmental and
social factors to be taken systematically into
account in reporting and decision-making
D rebalance performance metrics away from an
undue emphasis on short-term financials
E bring reporting closer to the information
used by management to run the business on
a day-to-day basis.
Source: www.integratedreporting.org
barrier to the development of a more resource-efficient, sustainable economy. He established The Prince’s Accounting for Sustainability Project (A4S) to address this issue. During its first four years A4S created a prototype integrated reporting framework and provided practical guidance for how organisations can embed sustainability into their day-to-day operations. In July last year, integrated reporting developed globally with the formation of the International Integrated Reporting Committee (IIRC). The committee is a joint initiative between A4S, the Global Reporting Initiative and the International Federation of Accountants, together with a powerful cross-section of representatives from the corporate, accounting, securities, regulatory and standard-setting sectors. The role of the IIRC is to help develop a new internationally accepted approach to reporting – an approach which provides more comprehensive information about the full range of an organisation’s impacts and performance, past and future, in a clear, concise, consistent and comparable manner. In other words, to help develop reports that not only provide financial information, but information about an organisation’s governance, social and environmental performance; and not in disconnected sections or silos but in an integrated manner, which reflects the reality that all these elements (financial, governance, social and environmental) are closely related and inter-dependent and flow from the organisation’s overall strategy. This is a significant step forward and a daunting task, but it is a task that cannot be shirked if the information needed so urgently to meet the challenges of the 21st century is to be provided. Put briefly, integrated reporting is a vital building block to enable the world’s economy to evolve and maintain standards of living for people who already enjoy a good quality of life, and create them for the hundreds of millions who do not, without the present unsustainable over-consumption of the world’s finite natural resources. Information of this kind would meet the test articulated by my grandfather all those years ago.
IIRC on integrated reporting
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New dawn for reportingACCA’s Neil Stevenson looks at who and what is driving the ambitious moves to develop an integrated reporting framework and make it compulsory
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The global financial crisis has persuaded many of the need for a new economic model that can protect businesses, investors, employees
and society from a cycle of successive and increasingly debilitating crises. At present, short-term financial gains can take priority over long-term value generation, encouraging a gung-ho approach to risk-taking that can lead to a level of market instability, which has the potential to devastate individual businesses and whole economies. The current model of corporate reporting, it is felt, does not do enough to discourage such behaviour because it doesn’t pay enough attention to factors such as risk, strategy, governance and the sustainability of business models.These concerns, which have grown as business leaders and governments have agonised over the causes of the financial crisis, have given impetus to existing demands for a change in emphasis in corporate reporting on the grounds that it does not currently adequately reflect material environmental, social and governance (ESG) factors. These include resource usage, social impacts, human rights and how a business might contribute to or be affected by climate change. Many believe that over-consumption of finite natural resources and the risk of catastrophic climate change present one of the world’s greatest challenges – and is its biggest business risk. Supporters of integrated reporting argue that the inclusion of all these non-financial but nevertheless crucial risk factors into corporate reporting would help steer business decision-making in a more sustainable direction – in both financial and environmental terms. They argue that the quality of reporting would improve because businesses would provide a more strategic picture of the issues that are critical to their long-term sustainability and success. In addition, those managing companies would be able to make better resource decisions by including issues relating to natural and social capital as well as financial capital. The result would be a more holistic picture of the reporting entity that covers both risks and opportunities, and reflects the interconnections between ESG and financial factors.
INTEGRATED REPORTINGWhile there have been significant advances in sustainability reporting over recent years, no single body has so far had the authority or oversight to bring all the different reporting pillars together in a single, mandatory, fully integrated and globally endorsed framework. This is the ambition of the International Integrated Reporting Committee (IIRC),
Neil Stevenson is ACCA’s executive director – brand, and a member of the International Integrated Reporting Committee (IIRC) Engagement and Communications taskforce. His remit at ACCA covers marketing, communications, policy, technical issues and publishing. This includes promoting a global agenda of research and insights, complementing his interest in issues involving change and innovation in the global professions.
formed last year by a progressive section of the business, financial and accounting community, bringing together many leading accountancy firms, big-name companies, business groups and professional accountancy bodies, including ACCA. The two key bodies involved are the Prince of Wales Accounting for Sustainability Project (A4S) and the Global Reporting Initiative. A series of profile-raising events are planned for 2011, kicking off with a roundtable discussion in Mumbai, India, chaired by International Organization of Securities Commissions chairman Jane Diplock, as Accountancy Futures went to press.The release of a discussion paper looking at an integrated reporting framework is planned for June 2011. Interested stakeholders are invited to comment before it is formalised and presented to the G20 in Cannes in November 2011. G20 approval will add credibility and inject vigour into the move towards global standardisation. The IIRC’s aim is that the framework will be constructed in a way that allows companies to report in a clear, concise, consistent and comparable way.
SUSTAINABILITY CHALLENGEThe accounting element of the massive change required was highlighted by the creation of A4S in 2004, which reiterated the need for new approaches to accounting and reporting to reflect the broader and longer-term consequences of corporate decisions. Without more complete and comprehensive information, management, investors and others cannot make the fully informed decisions needed to prosper in the face of sustainability challenges.A4S felt that the profession’s best contribution to sustainability would be to establish a
Man
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Financial
Gov
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and
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Integrated reporting
framework
INTEGRATED REPORTING: FOCUSING ON THE TOP SLICEIntegrated reporting provides the top level structure for the whole reporting pyramid
Source: IIRC
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global framework of mandatory ‘connected reporting’ requirements for listed companies and for a global committee of key stakeholder groups to push for global adoption. The GRI, along with other bodies such as the Carbon Disclosure Project, have made significant steps forward in formalising reporting guidelines for companies’ material environmental, social and economic impacts. Yet despite the corporate uptake and integration of more-than-financial impact assessments, there is still little evidence that collective corporate efforts have significantly halted activities that pollute, deplete resources and destroy non-financial value. The voluntary nature of such reporting initiatives means that take-up can be fragmented, allowing companies with large impacts on the environment and society to avoid full and transparent disclosure.
WHAT WILL IT LOOK LIKE?Considering that integrated reporting is still in an embryonic phase, it should come as no surprise that a clear formulation of what exactly it constitutes is still being debated. Definitions range from the maintenance of current financial reporting and accounting practices based on International Financial Reporting Standards (IFRS) with an ESG section bolted on, right up to a complete change in the fundamentals of accounting and reporting formats. There is, however, agreement on the need for a concise and comprehensive integrated reporting framework which is structured around an organisation’s strategic objectives, its governance and business model, and integrating material financial and non-financial information.The key consideration is the strategic ingraining and disclosure of all ESG factors affecting the future financial performance
The result would be a more holistic picture of the reporting entity that covers both risks and opportunities, and reflects the interconnections between ESG and financial factors
and associated risk rating of a company’s activities. The central tenet of integrated reporting has been part of the sustainability and CSR reporting space for a number of years, but it is IIRC’s ambition to bring together financial and non-financial risk disclosure in a global, mandatory framework which sets it apart from past initiatives, and which engages and relates to investors.Sceptics of the integrated reporting initiative point towards a raft of issues. The first is the sheer ambition of the change that is being put forward, involving the huge challenge of gaining global consensus to a mandatory change, especially given that it has so far taken more than 30 years to agree the global application of IFRS. Other criticisms include fears that it will lead to increased complexity in reporting and greater resourcing requirements, and a tick-box approach. But given the powerful backers and the fundamental financial and environmental issues involved, the launch of the IIRC may well turn out to be a turning point in the development of corporate reporting.However, alongside this development, it is clear that we will also need to encourage a greater proportion of shareholders to become more interested in the governance and sustainability of the organisations they invest in. This will be the best way of ensuring integrated reporting is embedded in business in practice. Much attention has been paid, rightly, to the models around auditing and assurance and corporate reporting. Perhaps we need to develop more urgency around this third dimension: governance and stewardship. This could lead to the fulfilment of the ambitions of those who advocate the ‘triple bottom line’: a sustainable approach to sustainability.
For new ACCA/Deloitte research into narrative reporting, see page 58.
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Blurry greys: Clarification on what it means is needed, but ACCA’s Rachel Jackson says integrated reporting can sharpen the focus of corporate activities
The idea of integrated reporting has been increasingly under discussion by stakeholders in the world of business accounting and sustainability reporting. The definition of what integrated reporting actually covers is currently a range of blurry greys rather than a crisp and clear black and white. However, looked at in broad terms, integrated reporting is simply the end result (the reporting) of a complex but inclusive process that integrates the business strategy with material sustainability issues.Some optimistic observers see an integrated strategy as boosting transparency and offering a clearer explanation of the relationship between companies’ financial and non‑financial performance. Other, more cautious professionals highlight possible challenges such as greater reporting complexity, comparability and assurance across sectors and countries, and discord in timescales between compilation of the integrated reporting framework and continuing physical impacts of climate change.There is no doubt that a well‑developed integrated reporting methodology could focus corporate efforts to integrate material sustainability issues and impacts arising from business activities more deeply in strategic decision‑making processes. Deploying an integrated strategy as a risk screen to assess operations for their medium to long‑term sustainability and financial implications could strengthen governance protocols, create less disparate businesses and change financial market investment behaviour.Few companies currently take an integrated reporting approach. This blank canvas offers the relevant professions an opportunity to shape the framework. ACCA is pleased to be part of the IIRC, which has ambitious plans to do just this. We shall continue to participate actively, taking part in the debates that arise, addressing questions around the relevance of integrated reporting, finding ways to stimulate investor and regulator demand for integrated reporting, and developing useful reporting metrics.
Join the dots: Filling in the gaps left by the key guidance for integrated reporting is essential to drive widespread take-up, says ACCA’s Roger Adams
One of the main proposals made by the International Integrated Reporting Committee (IIRC) is the need for new approaches to accounting and reporting to reflect the broader long‑term consequences of corporate activities. By providing robust and comparable reporting guidance on how to link corporate strategy to financial and non‑financial performance, the IIRC can convince businesses and investors that financial value can be derived from integrated reporting.Integrated reports should clearly identify and explain the link between an organisation’s strategic goals and the resulting impact on parameters such as the wider business context, key relationships, resource dependencies and governance structures, and help establish a more holistic corporate risk profile.To ensure widespread business acceptance, the IIRC must connect the dots between itself and other key reporting guidance. ACCA continues to support the GRI and its sustainability reporting framework, and the Climate Disclosure Standards Board (CDSB) and its climate change reporting framework. As well as identifying the information needs of investors, the IIRC needs to provide solutions to any perceived barriers to the take‑up of integrated reporting. The to‑do list includes addressing the requirements of multiple stakeholders, determining the materiality of issues, giving an option of different reporting levels, assessing knock‑on impacts to auditing standards and internal control checks, and overcoming corporate confidentiality issues.Opportunities and benefits arising from a move towards integrated reporting will have to be clearly demonstrated within an urgent context requiring the momentum towards a sustainable, low‑carbon global economy to gather pace. Ultimately the establishment of an international framework that not only merges financial and sustainability outcomes but also supports the achievement of a sustainable economy will require support from governments, the finance and accounting community and wider stakeholder groups.
Rachel Jackson is ACCA’s head of sustainability. She champions ACCA’s global sustainability agenda on reporting and disclosure with specific reference to environmental, economic and social issues. Rachel represents ACCA on various technical committees and working groups including FEE and the EPC Climate Change Adaptation Task Force.
Roger Adams FCCA is ACCA’s director – special assignments. He previously managed ACCA’s global policy positions on professional issues, such as sustainability and corporate responsibility.
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Q: How would you define integrated reporting?A: It is reporting in a single document the material measures of financial and non-financial (ie environmental, social and governance) performance and their relationships to each other. It is also about an integrated website that makes it easy for users to find and analyse in one place financial and non-financial information, including more detailed information of particular interest to specific stakeholders. Finally, integrated reporting is as much about listening as talking. A company should use its website for dialogue and engagement with shareholders and all other stakeholders to create a collective conversation. Q: What makes it different from existing concepts and models in this area?A: Two things come to mind. The first is corporate social responsibility or sustainability reporting, typically in a report separate from the company’s financial report; it was originally referred to as the triple bottom line of economic, environmental and social metrics. The second is the balanced scorecard, which includes financial and non-financial metrics.
Q: Why do we need it?A: A sustainable society requires all its companies to have sustainable strategies. A sustainable strategy is one that creates value over the long term. This is in contrast to a focus on short-term financial performance
that imposes negative externalities on society. Integrated reporting establishes the discipline for integrated internal management of financial and non-financial performance. It is also the best way to report on a sustainable strategy.
Q: What are the main challenges to adoption?A: First, a company must truly have a sustainable business rather than just say it has. Second, a collaborative and multifunctional process is required for producing the integrated report; no one group has all the information necessary for doing so. Third, internal control and measurement systems for non-financial information are typically not as sophisticated and robust as those for financial information. Fourth, internal sceptics have to be brought on board. Fifth, a great deal of education will be required of the users of the integrated report, both shareholders and other stakeholders.
Q: Will it make annual reports even longer?A: Not necessarily. An integrated report doesn’t have to be the annual report. Southwest Airlines morphed its Southwest Cares report into its integrated report. The key thing to note is that the integrated report is the material financial and non-financial information, so it doesn’t have to be long. Length often comes from detailed disclosures required by regulation.
Q: What role do you see accountants playing in integrated reporting?A: Accountants have a major role to play, if they are willing to do so. They are experts in the measurement and reporting of financial information. They need to broaden their content knowledge to include non-financial information, often working with others who are expert in a particular aspect of it so they can help the organisations they work for to implement integrated reporting both internally and externally.
Q: How can integrated reports be audited?A: Integrated reporting requires integrated auditing. There are a number of barriers to overcome here. Better standards are needed for non-financial measurement and reporting, auditors need to develop the capability to audit non-financial information, and there are also liability concerns.
Professor Robert Eccles is a senior lecturer at Harvard Business School. He undertakes research on corporate reporting, and has written three books on the subject, including One Report: Integrated Reporting for a Sustainable Strategy (with Michael Krzus). He is also a steering committee member of the International Integrated Reporting Committee.
Perspective: the academicWe put the same set of key questions about integrated reporting to two experts in the field. First up, Professor Robert Eccles of Harvard Business School
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Q: Will it make annual reports even longer?A: This question misses the point. We are certainly not talking about combined reporting but integrated reporting. Combined reporting adds to the annual report but integrated reporting changes some of the fundamentals.
Q: What role do you see accountants playing in integrated reporting?A: At present the ‘natural’ role for the accountancy profession has been seen to be in financial reporting. However, the training of an accountant is not in numbers but in information, the data that underpins an organisation. Thus integrated reporting is the domain of the accountant more than other professions. It may need broader thinking and the use of multidisciplinary teams with specific skills and experience, but the judgment and analytical skills inherent in the accountancy profession are the key.
Q: How can integrated reports be audited?A: The information reported (and withheld) should be capable of being verified at some point in the future. Possible assurance may be in the form of an audit confirmation that the management has embraced integrated reporting framework principles. It is also worth considering whether management and auditors should confirm that the information reported is a fair reflection of the information used by management to run the business.
Q: How would you define integrated reporting?A: Integrated reporting brings together financial and non-financial information in a clear, concise, consistent and relevant format. The goal of an integrated reporting framework is to improve the quality of corporate reporting so companies can provide a more strategic picture of the issues critical to long-term sustainability and success. Integrated reporting includes information about natural and social capital as well as financial capital. This information provides important insights for those interested in the way a company thinks and acts. The framework should help to create a more cohesive reporting model by highlighting areas where convergence is needed in standards and national regulations.
Q: What makes it different from existing concepts and models in this area?A: The strategic long-term perspective across the entire company differentiates it. Other models also address this concept and are generating good ideas, but the International Integrated Reporting Committee (IIRC) uniquely brings together for the first time financial standard setters, securities regulators and sustainability standard setters with representatives from companies, investors and civil society.
Q: Why do we need it?A: The financial crisis has demonstrated the need for reporting that gives better information about how a business is performing against its long-term strategy. At present various standard setters and regulators are responsible for individual elements of reporting. There is thus a risk that multiple standards will emerge.
Q: What are the main challenges to adoption?A: These troubled economic times may lead businesses to see priorities differently, plus there is an expectation from many quarters of deeper and more rigorous standards for financial and non-financial reporting. The convergence to integrated reporting appears to have a momentum that will mean success but there will also be the devil in the detail when it comes to implementing the design of the integrated reporting framework however flexible a framework is conceived.
Paul Druckman is chair of the executive board of The Prince of Wales’s Accounting for Sustainability Project, and co-chair of the working group of the International Integrated Reporting Committee. After a highly successful business career as a technology entrepreneur, he is a non-executive chairman and director for a number of businesses.
Perspective: the entrepreneurOur second expert, Paul Druckman, allies business acumen to his work in driving sustainability issues in the accountancy profession
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