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October 21, 2014

Integrated Reporting – tackling the director liability challenge

The potential legal liability arising from forward-looking disclosures gives ammunition to those who are hostile towards <IR> to delay adoption until the regulatory environment becomes more conducive to change, writes CPA Australia chief executive Alex Malley

The Integrated Reporting <IR> Framework released by the International Integrated Reporting Council (IIRC) in December 2013, is appropriately principle-based. It is designed to be applied across a wide range of businesses in different legal jurisdictions all around the world. I support this approach as the most effective way to drive development and adoption of <IR>.

Corporate reporting is an evolutionary process and requires a deep understanding of a company’s business model, its interdependencies and stakeholder interests. In current financial reporting this emphasis is less pronounced, the information collected and reported is predominantly sector-neutral and is based on historical transactions.

For financial reporting there are strict rules that have been developed for dealing with the diversity, scale and volume of transactions to provide a picture of how that business is performing. The challenge which <IR> is attempting to address goes beyond these traditional financial reports and attempts to capture and communicate the true value creation of the business.

An area of complexity in the IIRC’s Integrated Reporting Framework that attracts frequent comment relates to the potential legal liability arising from forward-looking disclosures that are prepared against the Framework’s Guiding Principle of Strategic focus and future orientation. Despite the Framework being principle-based and jurisdiction-neutral, the <IR> Framework states that: "legal or regulatory requirements may apply to certain future-oriented information in some jurisdictions."

These concerns were raised with the IIRC during the public consultation process with the IIRC acknowledging that "some information might, in some circumstances in some jurisdictions, result in a potential legal liability to the preparer" and concluding that there was no need for substantial changes to the draft Framework. With respect, this last statement is none too comforting for practitioners.

Sadly, these issues also leave open the potential for those who are either ambivalent or hostile towards <IR> to say that the risks are too great and to strongly advocate for delaying its adoption until the regulatory environment becomes more conducive to change. Inertia on the part of companies and their controllers will not get us where we need to be on corporate reporting.

I also do not believe that there will be a wholesale unbundling of complex liability regimes just to allow <IR> to blossom, and nor should it. Nevertheless, many of the components which underpin <IR> already have a legal basis such as measurement and recognition in statutory financial reporting and the raft of governance disclosures. To say that <IR> can function abstractly and be disconnected from local legal considerations is a misnomer. Indeed, the Framework itself recognises that an integrated report may be prepared in response to an existing legal or regulatory requirement and management discussion and analysis provide the greatest potential as an enabling platform.

The complexities of corporate regulation should not be seen as a barrier to <IR>, rather, they form part of the external environment in which the company’s business model functions to create value. This recognition provides a sharp focus on the need to identify aspects of national legal frameworks that enable the adoption of <IR> and offer appropriate protections based on established principles such as due diligence and reasonable grounds – ideas which are familiar to sound accounting practice.

As we approach the first anniversary of the release of the <IR> Framework, we need close and collaborative arrangements between corporate regulators, the business sector and standard and framework setters at a national and international level. If <IR> is looking to be taken up by more than just the select group of ‘pioneers’, conditions conducive to its uptake and acceptance by corporate regulators and those with oversight of securities exchanges are fundamental. What we cannot expect, certainly in the short term, is to see any unravelling of the complex web of corporate regulation and regimes which govern the rights and remedies related to information produced by companies.

Within all of this, I can see that there is a clear role for the IIRC to facilitate this important dialogue, particularly in those markets viewed as challenging because of local regulatory complexity. This dialogue needs to focus on what is possible, where the barriers are for implementation and identify ‘softer’ principle-based market or regulatory reforms which will provide the platform for <IR> at a national level.

Several obvious topics to be addressed include examining the implications of the Framework for operating and financial reviews as well as developing safe-harbour protections for practitioners that are based on due diligence. These necessary next steps are measured and targeted and do not go down the path of attempting to reform liability regimes in particular jurisdictions, which is complex, fraught with danger and unlikely to succeed.

Winning these battles will then assure the business case for <IR> can be made, and adoption can progress.

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