Changes to corporate reporting are essential. The question is how quickly can we move to international standards to solve the problem

Posted
3 December, 2019

When it comes to corporate reporting, business as usual is not an option. Investors are saying it, companies are saying it, business leaders and their representatives (most notably the World Business Council for Sustainable Development) are saying it. Companies are disclosing many different things and the absence of standards has led to mixed quality and lack of comparability.

Pressing non-financial risks and changing risk profiles drive today’s headlines and the enormous scrutiny of corporate behavior in which we all engage. From cybersecurity and data privacy risks to talent and human capital and, importantly, climate risk and resiliency. Organizations need to provide relevant, reliable, and comparable narrative information and metrics.

The conversation has shifted from why to how companies communicate their progress and prospects in terms of value creation and impact on various stakeholders.

The International Integrated Reporting Council in NYC November 2019

 

At this critical moment in the conversation, IFAC hosted the International Integrated Reporting Council (IIRC) November meeting in  New York. The IIRC’s umbrella International Integrated Reporting Framework provides the foundation for understanding and communicating value creation. But the conversations that carried from the meeting into the evening also illustrated that, as this space continues to evolve, there is an essential need for consolidation and alignment that can be the platform for globally accepted standards.

Business, investors, regulators, and others demand consensus on the information for which companies will be held accountable. Without this, there will not be a benchmark or equalizer for companies and their stakeholders to evaluate various opportunities and risks and understand short-term versus long-term value trade-offs, and whether the company has a long-term strategy for value creation and positive impact through a resilient business model.

This is not an easy challenge to resolve because the corporate reporting system is viewed from different perspectives depending on one’s profession, background and experiences. Significant variances in terminology and differing expectations from investors, management, and regulators complicate matters.

With many possible ways forward, enhancing corporate reporting in a globally-uniform and coordinated way will be vital to a transition. Working closely with investors, directors, sustainability professionals, and the accountancy profession, the IIRC can be a catalyst for systems change. But we will need to move quickly to shape the system and standards toward achieving the aims of integrated reporting.

Eumedion, the Dutch investor group, has proposed a global standard setter for non-financial reporting. The IFRS Foundation is posited as the natural home given its legitimacy derived from a strong and proven governance structure.

The IFRS might be the right answer, but following the IIRC Council, we need to recognize and agree on some key matters including

  1. Global and unified action is critical:  It is important to prevent regional and jurisdictional measures for capital markets becoming entrenched. Financial reporting needed reliability, consistency and comparability and this was driven through international standards. Something must give in order to achieve a global position that different stakeholders can rally around.
  2. The overall big picture: Agreeing what the corporate reporting system is in its entirety and whom it needs to serve, and with what “products” and “tools”, will help highlight the need for global standards and approaches. Currently, we have many jigsaw pieces with no overall picture and roadmap. ESG does not represent most of the picture; intangible assets largely remain hidden or unexplained. Do the International Integrated Reporting Framework and its 6-capitals value creation model provide the basis for the big picture? Our belief is that it broadly does provide an “umbrella” Framework.
  3. Data is not knowledge: The principles and key concepts of integrated reporting need to form the basis of standards and drive forward the quality of information. Standardized metrics in themselves are not the answer. Companies will always need to think about what is relevant to them and what information is needed to achieve their purpose and objectives.
  4. Integrated thinking in the boardrooms of all companies: Reporting as a compliance exercise detached from how the organization operates will not be a desirable outcome for investors, companies and society. The main point of integrated reporting is to help companies drive change from within.
No alt text provided for this image

Enhancing corporate reporting needs the accountancy profession as a key partner. IFAC CEO, Kevin Dancey, and IIRC Interim CEO, Charlies Tilley, highlight the importance of CFOs and accounting and finance professionals accounting for the business and not just the balance sheet (see the article on shifting the Chief Financial Officer into a “Chief Value Officer.”).

This shift is critical for integrated reporting to become mainstream and standards to meet the needs of capital markets and stakeholders.