- Integrated Reporting
Integrated Reporting (IR) is a contemporary social managerial process where organizations get in the process of communicating how they create value including how they create impact economically, socially and environmentally (Busco et al, 2013). In the recent past, the way organizations report their performances is being redefined in the areas of capital creation, accountability and value creation. Integrated reporting defines what companies report, the types of capital invested and its effects, and the audience of such reports. In addition, it includes the social and environmental impact of the organization.
The International Integrated Reporting Council (IIRC) asserts that, integrated reporting has the potential of shedding light on the critical areas of capital employment, value creation, and social and environmental impact. It (IR) brings together the material information that defines an organization’s strategy, its performance, governance and the future prospects that demonstrate the economic, social and environmental situation within which the organization is operating. Is sheds light by providing a clear and concise picture of how the organization is able to articulate stewardship and how it is able to create and sustain value. In this light, the IIRC advocates for Integrates reporting as a fundamental reporting tool (Busco, et al, 2013).
In Malaysia, the government has embarked on a process of adoption of integrated reporting particularly among the public listed companies. The securities commission of Malaysia is helping companies to adopt a culture of integrating reporting in order to help all the stakeholders of listed companies (management, investors) to have a better understanding that helps in making informed decisions (Ahmad, 2014). In a meeting that was organized by the prime minister, it was asserted that adopting integrated reporting involves full disclosure of a company’s commitment to the economic, social and environmental agenda. This has been informed by the rising trend of the social responsibility amongst companies.
In December 2013, the IIRC launched, in Malaysia, a framework in integrated reporting that was aimed at preparing public listed companies for the adoption of integrated reporting as the recommended form of corporate reporting. Some of the companies in Malaysia that have already adopted IR include the Felda Global Ventures Holdings (FGV) and Telekom Malaysia Bhd. Both of these companies have indicated that IR is a crucial part in corporate reporting. The executive Chief Executive officer of FGV Mr. Abdullah Mavani indicated that, IR provides the shareholders of the concerned companies with clearer information of the direction the company is taking which makes the company more transparent and accountable in its dealings (Ahmad, 2014).
Although IR is not being made mandatory for public companies in Malaysia, the government, through the regulatory bodies are advocating for listed companies to adopt it. According to PWC Malaysia, companies do have the basics of reporting but there is still much to be done in making all corporate companies to adopt IR (Azmi, et al 2014; Accounting Today, 2014). It was observed that, reporting practices in Malaysia have continued to adopt past practices that insist on communicating the historical performances in annual reports without proper emphasis on a company’s goals and future prospects of the business.
According to Azmi, the executive chairman of PWC Malaysia, financial reporting only captures limited information on values of assets. IR is essential in this case as it gives the information on the intangible values of assets management, the capabilities of the staff and the strategy to be engaged in a company’s economic, social and environmental agenda(Azmi, et al 2014). The report by PWC Malaysia continued to indicate that in Malaysia, reporting was basically more concerned with describing the business processes rather than providing the insights into the business strategy being used (Accountants Today, 2014).
A framework for integrated reporting in Malaysia requires that companies give a clear and concise overview in the aspects of their business model, and governance. Other required aspects include opportunities and risks, performance and the future prospects. According to a report by the PWC on the state of IR in Malaysia, it was found that, 90 percent of companies do give a high level strategic vision on where they aim to be. However, only 33% of those companies give information on the strategic priorities in their reports. In addition, only 43% of the companies in Malaysia provide information on the business model while only 7 percent of those companies that describe their business model do provide information on the linkage of the business model to the strategy of value creation. Still, only 90 % of the companies in Malaysia provide information on market trends while only 20% of these companies indicate how market trends are linked to the strategies they adopt in responding to the market trends (Accountants Today, 2014).
Another interesting aspect is on reporting about the organization culture. The report by PWC indicated that, while 87% of the companies give information on the organization culture, including values and tones in their discussion of governance, only 10% of those companies do provide insights on the activities engaged in corporate governance. Information on risk disclosure was found to be one area which is least reported among the companies that were surveyed (Accountants Today, 2014).
In general, while companies are increasingly embracing the concept of IR in Malaysia, there is huge room for improvement. The IR framework in Malaysia would help companies as it acts as a guiding principle of issues that should be communicated to the stakeholders.
- How Integrated Reporting will increase complexity, and improve reliability and transparency in practice
Globalization, introduction of regulations and increased expectations from stakeholders have jointly added to the complexity of businesses in approximately all major economies. In a similar way, the information that is being used in in managing businesses and to support decisions by stakeholders has become equally complex. As indicated earlier, IR helps the management and the investors to make decisions. It is however, not clear, what IR is about for many organizations in Malaysia. In addition, due limited information on best practices, it is difficult for organizations to comprehend what requires to be done in the process of integrated reporting, (Slotta and Werner, 2012).
Unlike in traditional reporting where only historical financial information was presented, IR will also include forward looking information which explains the business strategies, future prospects and risks and opportunities that are likely to be encountered. Reports will therefore be determined by the complexity of the business that an organization is involves in. To achieve this, there will be need of some kind of cooperation amongst stakeholders. This means that, the setting for the IR and the structure and length of the reports will be developed in stages, (Slotta and Werner, 2012).
According to Slotta and Werner (2012), one of the expected challenges in formulation of integrated reports is proper identification of the right balance of both monetary and non-monetary metrics including formulation of a relevant narrative. The other challenge is on how to present the integrated reports. It involves choosing the appropriate media for structuring and publishing the reports in a clear and concise way which promotes accessibility and easy understanding for all stakeholders.
Business reporting model has changed considerably. This is partly because of the changes in the way business is conducted and how business creates value. This has been caused by globalization, a mushrooming policy activity in response to governance and financial crises, increased expectation of transparency and accountability, scarcity of resources, and growing environmental concerns (IIRC, 2011). It has been indicated that, IR helps in building trust amongst stakeholders. Unlike in IR, financial reporting focuses on a narrow series of disclosures. Transparency can be enhanced through voluntary reporting on sustainability. However, transparency can also be emphasized through covering and disclosing a broader range of issues that target on the positive as well as the negative issues. IR also enhances transparency and accountability through the disclosure of the nature and quality of relationships that an organization forms with the stakeholders e.g. suppliers, customers, the staff and the local community. In addition, transparency can be enhanced through improving how issues are understood, accounted and even responded to (IIRC, 2011).
Integrated reports give concise and reliable information that is crucial in assessing the organization’s ability to create and sustain value in the short term, middle term and in the long term. A company must therefore endeavor to identify information that is sufficiently reliable and include it in the report. Although inclusion of information that is complete, unbiased and free from errors is hard to achieve, the qualities discussed in the integrated reports should be practicable. This can be achieved by ensuring that the issues that are perceived to be negative are reported faithfully just like the positive issues. The need for reliability of the information to be included in the integrated reports requires that the information should be comparable to other organizations. In addition, the information should be consistent over time. Reliability can be achieved when robust stakeholders’ engagement is ensured as well as independent external analysts.
- CSR reports, Sustainability reports and integrated report
Corporate social responsibility (CSR) is defined as the activities that a company affects in the environment and those that impact on the social welfare. Such activities do not provide direct and immediate benefit to the company. However, they promote the positive change in the social and environmental arena. On the other hand, sustainability reporting is a kind of report that is provided by organization detailing the economic, social and environmental impacts that result due to the day-to-day activities. They may also provide the governance and organization’s values models. Sustainability reports provide information for example on how the company responds to certain climatic changes, and other environmental concerns. Monitoring of the sustainability performance is carried out on an ongoing basis.
The importance of the Integrated Reports is to combine financial reports and sustainability information into a single report. The target is to provide a single report that gives the complete information to the stakeholders on how the organization in its various activities impact on the environment and the community around which it is operating. Similarly, integrated reports provide information on how the environment is impacting in the business of the organization.
While organizations may opt to prepare sustainability reports and CSR reports, they need to provide integrated reports as they are crucial in providing cohesive and efficient reporting. Through IR, companies are able to improve the quality of information that is presented to investors and other stakeholders that will enable them to make efficient and productive decisions on allocation of capital. CSR remain and key differentiator that influences both the consumers as well as the reputation of the organization. When companies engage in CSR activities, they portray positive image that in turn influences the trust that stakeholders have with the organization. CSR reports are used to give information on the CSR activities being engaged. Such activities include issues of corporate governance, employee and supplier initiatives, and climate change. Others are community investment and community partnerships, (IIRC, 2011).
It is apparent that, companies that already produce CSR reports and sustainability reports should also produce integrated reports. This is because, financial reports basically target investors. On the other hand, CSR reports are addressed to non-investor groups for instance NGOs, communities or prospective employees. In fact, CSR reports are not compiled with standardized data that can be used by analysts to evaluate the performance of a company. Therefore, there is a need to have the integrated reports that will combine the financial as well as the non-financial reports.
Integrated reports are primarily meant for investors as well as financial analysts. For most companies, integrated reports replace the traditional annual reports. When prepared following the guidelines established by the IIRC, integrated reports are different from sustainability and CSR reports in a number of ways. Firstly, integrated reports focuses primarily on giving information about the ability of an organization to create value in the short, medium and long term. Secondly, integrated reports give an emphasis on integrated thinking. This means that the internal departments and business systems have to be aligned in a way that portrays the business model, social and environmental aspects of sustainability.
Sustainability reports and CSR reports are both mediums of transparency, and they contribute in improving the reputation of the organization with stakeholders. Both can be used as effective tools of improving the stakeholder’s relationship with the organization. CSR reports in particular provide information that has the potential of assisting stakeholders to make investment decisions. Integrated reports on the other hand
Accounting Today, (2014). Integrated reporting in Malaysia. The accounts today. July 2014. Available from http://www.mia.org.my/at/at/2014/0708/08.pdf. [Accessed 3rd October , 2014]
Ahmad, M. (2014). Embracing integrated reporting. New straight times. Available from http://www.nst.com.my/node/27068 [Accessed 3rd October , 2014]
Azmi, D. (2014). The state of integrated reporting in Malaysia. PWC. Available from http://www.pwc.com/my/en/events/the-state-of-integrated-reporting.jhtml [Accessed 3rd October , 2014]
Busco, C. et al (2013). Towards integrated reporting: concepts, elements and principles. Springer publications. Available from http://link.springer.com/chapter/10.1007%2F978-3-319-02168-3 [Accessed 3rd October , 2014]
IIRC, (2011). Towards Integrated Reporting: Communicating Value in the 21st Century. International Integrated reporting Council. Available from https://www.kpmg.com/CH/en/Library/Articles-Publications/Documents/Audit/pub_2011_IIRC-towards-integrated-reporting_EN.pdf [Accessed 3rd October , 2014]
Slotta, A., and Werner, M., (2012). Integrated Reporting The Future of Corporate Reporting. PWC. Available from http://www.pwc.de/de_DE/de/rechnungslegung/assets/integrated_reporting.pdf [Accessed 3rd October , 2014]