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March 1, 2012

Comment: Rowing upstream

Integrated reporting is often referred to as the ‘next evolution in corporate reporting’ and, through the emergence of the International Integrated Reporting Committee, the subject is being hotly debated across the globe. Institute of Management Accountants XBRL committee chair Brad Monterio shares his views.

Photograph of Brad Monterio, Institute of Management AccountantsA Chinese proverb says: “Learning is like rowing upstream; not to advance is to drop back.” Around the world, accountants are faced with a situation where either they will advance by learning new skills, or they will lose professional ground to others who are more skilled. What area am I talking about? Integrated reporting – the next stage in the evolution of corporate reporting.

The International Integrated Reporting Council (IIRC) defines integrated reporting as ‘…a new approach to corporate reporting that demonstrates the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates.

“By reinforcing these connections, integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.”

Investors, analysts, regulators, community groups, ‘watchdog’ organisations, lawmakers and the media are paying increased attention to non-financials – environmental, social and governance (ESG) information about organisations to better understand their performance, value and reputation.

Out with the old, in with the new

Previously, historical, backward-looking financial reports were widely used and relied upon for decision-making among executives, analysts, investors and regulators.

However, financial information alone is not the only indicator of a company’s true performance, as we have come to see with the increasing reliance on non-financial metrics as well as the rise of technologies such as XBRL (eXtensible Business Reporting Language) that help us access reliable information more easily over the internet.

Current reporting models that focus on a single entity, short time-frames and historical cost accounting do not effectively define, capture or enable linkages to ESG business practices and, ultimately, financial value.

Additionally, because a portion of a company’s value is not reflected in their financial disclosures we face situations in which incomplete information is being used for decision making.

Integrated reporting empowered through XBRL-tagged data, helps us solve these problems and serves as an opportunity to modernise corporate reporting, strengthen corporate culture and gives a more thorough view of an organisation’s true performance.

It also allows the unlocking of data from corporate silos and unusable presentation formats as well as linking of operational and ESG practices to financial performance and economic value of a company.

Lastly it can improve communication and engagement with all stakeholders to better understand and mitigate risk while making more information relevant, machine-readable, meaningful and reliable for management and all stakeholders.

New thinking and skills required

The new approach to corporate reporting requires that accountants, as key stakeholders – chief financial officers, controllers, finance professionals, external auditors and public accountants – adapt to new thinking and learn new skills in order to add value to integrated reporting.

At a high level, this new approach to corporate reporting flows first out of integrated thinking such as through culture and the tone at the top of an organisation, to integrated management so collaborative versus silo-oriented and then to integrated processes such as the supply chains, controls, methodologies and communication with stakeholders. This collective process will produce a series of interlinked or interconnected reports.

The idea of a single integrated report vis-à-vis an annual report is not realistic given that information flow for financial, operational, environmental, social and governance practices will, in reality, have varying periods and measurement points. As a result, companies will rely on a series of interlinked reports from which they can make decisions, manage the supply chain, engage with stakeholders and report externally to regulators, analysts and investors.

An organisation that is fully integrated in its thinking, management, processes and reporting will produce valuable, usable information for internal and external stakeholders.

Impact on accountants

Integrated reporting is here now – it’s not a question of if integrated reporting will impact accountants, but when, so it’s important they master the new skills needed to help companies evolve.

Accountants have a significant opportunity to learn more about integrated reporting and the new skills they need to become experts and trusted advisers in this area. Some accounting firms are already hiring domain experts, including scientists, geologists, academics and researchers knowledgeable in ESG practices. They’re not accountants, however, and they cannot fill the accountant’s role.

Accountants should learn about frameworks in development, XBRL and keep up to date with professional bodies’ education and training in this field, respond to IIRC drafts, study the benefits of integrated reporting as well as talk to management of companies about it.

So, if the Chinese proverb holds true, will you grab your paddle and learn about integrated reporting and XBRL, or will you drop back?

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