In corporate terms, the process of representing company’s performance both in financial and other relevant factors is known as integrated reporting. An integrated report is a brief communication of company’s strategies, performances and governance employed or creating short, medium and long term values within the organization (Ey.com. 2018).
The International Integrated Reporting Council (IIRC) is responsible for establishing this framework. The council aims at bringing integrity in financial reporting and promoting value creation in the enterprise. The need for IR arises when corporate reporting fails to reflects the financial stability and economic sustainability in one go. Therefore in order to clearly communicate the value, integrated reports are been prepared which clearly reflects the short and long term consequences of the decision making process of the organisation (Integratedreporting.org. 2018).
However, just like every coin has two faces, preparation of integrated reports also has some benefits and limitations, which are been discussed below.
Benefits of integrated reporting
According to the report published by Association of Chartered Certified Accountants (ACCA), there are several benefits of IR which are been enjoyed by the individuals who have experienced and adopted IR within their organization. The findings of the report are based on the review of 41 corporate reports. The benefits include making the thinking and management more integrated, providing more clarity about the issues and performance of business, enhancing the relations with stakeholders and improves corporate reputation. Furthermore, the report stated that integrated reporting offer more insights to the management in assessing the factors that drives the business performance. IR is the most appropriate and efficient reporting method for both the users and prepares. It also promotes employee engagement. Eventually its adoption resulted in increased profit margins of the company (Iasplus.com. 2017).
The International Federation of Accountants has also published a report that states the advantages of integrated reporting for small and medium sized enterprises. It was stated in the report that, IR enhances the manner in which organizations plan, think and strategize their business operations. Also, many entities take it as an opportunity to communicate with the stakeholders in a more concise and clear manner. The communication explains about the process of value creation adopted within the organization. As per IFAC report, IR is basically an approach that allows the business to think in historical manner while framing out their strategies, plans and important decisions (Integratedreporting.org. 2017).
Integrated reports also helps in managing the key risks and opportunities that results in enhancing the investors and shareholders’ confidence as well as improving the entity’s performance. The main advantage of IR is that it can be used by each and every size of organization for establishing trust and understanding in the business. The central theme of IR is integrated thinking which deals with the value creation to shareholders. The thinking is based on the fact that there should be proper delegation of authority, roles and responsibilities between people and departments so that a collective and better understating of business’s key elements can be developed (Iasplus.com. 2018).
However, in order to improve the internal management process. IR has some significant benefits such as establishment of high level of trust and credibility with the customers, suppliers, society and other stakeholders. This can be very useful for the non-profit organizations as they are constantly searching for commercial partners. IR maximizes the ability to transfer and sell the business by providing a greater value for it. Based on a good strategy and well defined plan, business can secure its finances at reasonable cost (Integratedreporting.org. 2017).
Talking about SMEs, through IR they can easily create a better understanding of the factors that measures its capability of value generation over short and long term. It also improves the business planning and leads to the overall development of SMEs. It helps in better understanding, improved communication, generating multiple capitals and enhanced decision making process. Also it allows SMEs to summarize their reports and create a strategic focus that will lead to future growth and development (Integratedreporting.org. 2017).
It was observed that many multinational companies has faced problems related to the information disclosure in their financial reports. Such as there were inconsistent definitions of some particular terms such as full-time equivalent, sick days and many others. The data represented does not reflect the true picture of the company and thus making it difficult for the financial executives to deal with the risk and uncertainties. However, in order to deal with such situations, framework of Integrated reporting was introduced which was accepted and adopted by several organizations operating at large and small scale (Pwc.blogs.com. 2011).
The main advantage of IR is that it gives a complete view of the data which is relevant to the companies as well as it value creation strategies (Adams, 2017). According to the report by Eccles and Krzus, IR approach stimulates a wider standpoint of the data which is necessary for the company’s goals and decisions. As a result of which, financial executives can easily create value and enhances its corporate processes (Eccles and Krzus, 2014). The comprehensive approach of integrated reporting yield many advantages such as bringing greater transparency in the information, improving short term and long term analysis. It makes the review process more automated and streamlined by eliminating the manual errors.
Furthermore, IR makes the information more relevant and useful for the company as well as for its shareholders. It provides a clear disclosure on the concepts suggested by IIRC and World Intellectual.
Overall, it can be said that the reports prepared through integrated reporting approach helps in increasing the overall performance of the business. It clearly lay down the process of creating value, both internally and externally and also the measures to gain the trust of the stakeholders. Along with this, IR discloses the important or key risk associated with the business organization as well as the opportunities related to it. This enables the management and investors to determine or measure the short, medium and long term impact of such risk on the organization.
Limitations of Integrated Reporting
However, despite of having several benefits IR also has some disadvantages. One of the key challenges faced by the organizations while adopting IR in their financial reporting practices is that bring changes in the traditional annual report. The problems was related to modification of a report which was focused on key financial areas and disclosures, to a broader one that tells each and everything about the value creation process of the company.
Generally, traditional annual reports are of 1000 pages which involves both the relevant and irrelevant information. Reports prepared on the basis of integrated reporting approach are concise in nature and reflects only the relevant and useful information. It anyhow reduces the quantity of data and enhance the understandability of company’s goals and strategies. The unique features of IR related to the structure of report has confused many entities on how to structure and prepare integrated reports.
The Association of Charted Certified Accountant has carried out a research based on the challenges to assuring integrated reporting. The research interviewed a Big Four audit partner and the findings shows that although the assurance of IR can add value by improving the credibility of the report and helps the board of directors in monitoring and reviewing the functions, but there are number of technical issues which makes it difficult to assure the entire report. These issues include difficulty in developing appropriate base for assuring the IR, traditional audit team has limited skills and inadequacy in client’s records. Along with this, there are inappropriate systems and controls.
As result of which, only some part of the integrated reporting are exposed to assurance engagement, which includes only realistic disclosures without any evaluation. Moreover, in order to cope up with this problem, a process based audit was suggested. But the idea failed due to the inappropriate documentation of systems and controls for many clients. Also the suitable criteria for evaluating and controlling was not present there. The absence of such criteria was the major hindrance in the assurance of integrated reports and also in the risk of auditor liability (Accaglobal.com. 2015).
As per these findings, it can be said that there were many problems regarding the assurance of integrated reports and also many members of IIRC were also disappointed with this fact as they believed that assurance must cover the entire report (Accaglobal.com. 2015).
From another research conducted, it was identified that there are some shortcomings of integrated reporting. These generally include complexity, lack of clarity and a general lack of perception that IR will achieve all its objectives are all existed. When the framework was introduced, there were debates and arguments related to the structure and looks of IR. Another related problem was lack of accepted standards, which was decided to be overcome through the framework prepared by IIRC. But still the framework has some gaps and need to be field tested. One key problems that still exists is the relationship between integrated report and other report such as sustainability report. This issue may result in duplication of the data and it is very necessary for IR to figure out a suitable way for complying with other reporting requirements. According to The Journal of the Global Accounting Alliance one of the practical challenges faced by the preparers is implanting the process of forming a report in order to get a balanced view that represents the essence of an organization and the various forward looking perspectives of it (Gaaaccounting.com. 2014).
In addition to this, the biggest challenge faced was the high volume of information that is required to be managed within the tight deadlines, specifically for the reporters who has not prepared sustainability reports. Other problems are related to the contents of report and simply compiling the annual and sustainability reports is the another major issue as it makes the report larger. Also if some information is omitted, it may result in a material risk. Moreover, the matter of sustainability report will be sacrificed because of the financial content that is regulated and is tended to be preferred more. Merging of both the reports in a meaningful way is considered to be a complex challenge (Vancity.com. 2005). Initially, IR was not considered as a part of business process, but when it has become compulsory, prepares has faced many problems and were also not convinced by the fact that these are been taken seriously by the investors (Gürtürk, 2017).
The above report concludes that in order to provide greater insights to the management and investors, it is very necessary for the organizations to have integrity in their financial reporting processes. The integrated reports help in creating better understanding of the financial and non- financial information as well as clearly displays the process of value creation. However, along with the benefits, IR also has some limitations which are also discussed in the above report. There are some loop holes in the framework established by IIRC which created many problems for the preparers, reporters, users and for other related people (Mio, C. ed. (2016). To cope up with such limitations, several steps are been taken by IIRC for the same. Overall, it is concluded that now Integrated Reports has become a major part of the business process and is followed in the internal procedure of the organizations. Despite of having some disadvantages, it is compulsory for the companies to prepare integrated reports and reflect all the necessary information and data in it.
Accaglobal.com. (2015). The Challenges of Assuring Integrated Reports: Views from the South African Auditing Community. [Online] Available at: https://www.accaglobal.com/content/dam/ACCA_Global/Technical/integrate/ea-south-africa-IR-assurance.pdf [Accessed 6 May 2018].
Adams, C. (2017). Understanding integrated reporting: The concise guide to integrated thinking and the future of corporate reporting. USA: Routledge.
Eccles, R.G. and Krzus, M.P. (2014). The integrated reporting movement: Meaning, momentum, motives, and materiality. New Jersey: John Wiley & Sons.
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Mio, C. ed. (2016). Integrated Reporting: A New Accounting Disclosure. London: Springer.
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