India desperately needs one more reform – integrated reporting

Posted
11 March, 2020

Dr. Nandita Mishra, Associate Professor (Accounting & Finance),  Amity College of Commerce and Finance, AUUP, India shares her thoughts on the need for integrated reporting in India

The digitization drive, the implementation of a Goods and Service Tax, demonetization, a new insolvency code and radical changes in foreign direct investment. In spite of so many economic reforms, India is in the midst of an economic slowdown.

Indian banks have reported fraud of more than 10 billion USD in financial year 2018-19. About 85% of Non-Performing Assets (NPAs) are from loans and advances of public sector banks. In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017. Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector. Furthermore, recently there has also been an increasing amount of fraud contributing to rising NPAs.

Transparency in disclosure has proven to be the best tool to attract investor’s attention and get easy financing. Through transparency, banks can take more informed decisions in giving loans to companies, which can lead to fewer NPAs. Corporate governance is also playing an important role in addressing the challenges of increasing amounts of fraud.

India Inc. underwent a massive evolution in corporate reporting to try and provide further transparency, but this ultimately led to them adding pages to the corporate report. An annual report overdosed with information is also not worth its value as important information gets lost. On average, annual reports of Indian companies are around 300-350 pages long.

So, India needs one more reform to be implemented and that is adoption of integrated reporting.

Integrated reporting involves connecting pre-financial and financial information in a single report and therefore increasing the quality of reporting without adding pages.

An integrated report gives a complete picture to users based on integrated thoughtfulness over all types of capital and their impact on the short, medium and long-term prospects of the company. An integrated report also demonstrates linkages between governance, performance and strategy.

On 6 February 2017, SEBI endorsed the voluntary adoption of integrated reporting from the financial year 2017-18. More than 40 companies have adopted integrated reporting it. In the financial year 2019, ICAI (Institute of Chartered Accountancy of India) added integrated reporting as an award category in its ICAI Award for excellence in the Financial Reporting.

In my experience from having studied the Top 500 companies in India, companies that have adopted integrated reporting believe it leads to greater transparency and in return improves the company’s image in the eyes of investors. Adopting integrated reporting has eased out and improved their financing.

Overall, the perception of integrated reporting in India is positive, with respondents to the study I conducted stating that they have felt the benefits.

There are still challenges in developing the practice of integrated reporting, especially around bringing on board everyone within the organization, such as finance officials who are still adapting and learning when it comes to valuing the capitals within the context of the business.

I believe training and promotion is the key to increasing the adoption of integrated reporting, so more and more people should connect themselves to accelerate this process. A study conducted by ACMA (2014) concluded that integrated reporting should be included in the professional and postgraduate level. CIMA and ACCA have already taken similar steps.

One thing is very clear, transparency in annual reports is needed to avoid financial fraud. Imposing more regulations just leads to adding more pages to the annual report. We must integrate all the information, avoid duplications and adopt integrated reporting.