Risk & Economy » Audit » Getting the message across

A NEW approach to company reporting is a step closer following the publication of a discussion paper by the International Integrated Reporting Committee (IIRC) in September.

The paper, Towards Integrated Reporting – Communicating Value in the 21st Century, calls for company reports to be delivered in a clear, concise and user-friendly format that demonstrates the links between an organisation’s financial performance and the social, environmental and economic context within which it operates.

As business has become more complex and gaps in traditional reporting have become prominent, new reporting requirements have been added through a patchwork of laws, regulations, standards, codes, guidance and stock exchange listing requirements. The result is that company reports have ballooned to 175 pages on average, while a recent survey by Black Sun showed that six FTSE 100 annual reports run to more than 300 pages.

“The UK is not short on individual disclosure requirements. They have grown like Topsy. Indeed, I have noted in the past the similarities between these and Ronnie Corbett monologues; namely lots of diversions,” says Deloitte technical audit partner Isobel Sharp.

Components of S&P 500 market valueSharp has a point. Corporate reports are already long, and in many cases, they are getting longer. But length and excessive detail can obscure critical information rather than aid understanding.

For many organisations, reporting is seen as a legal compliance process, rather than as a process for communicating what matters. Furthermore, different strands of reporting have tended to evolve separately, with additional requirements and information requests being bolted on to the existing model, rather than being integrated into it.

“The information needs to be provided clearly and concisely with the connections between financial, environmental and social impacts demonstrated and the clutter removed,” says Michael Peat, chairman of the IIRC.

This evolution of company reports has created a complex and overlapping set of disconnected disclosures. As a result, interdependencies that exist between areas such as strategy and risk, governance and performance, and financial and non-financial performance are not made clear.

Holistic approach

Sallie Pilot, director of research and strategy at Black Sun, says reports “need to focus on material issues” and cover “what is integral to the over-arching strategy”.

“It will allow people to see the business in a more holistic way, enable better decision-making, and in terms of internal benefit, people within the business will be able to understand how what they do fits into the overall company strategy,” she says.

Pilot also welcomed the Department for Business’ (BIS) paper on narrative reporting, which was released a week after the IIRC report. BIS proposes simplifying the reporting requirements for companies, providing clear and relevant information to investors on performance and pay.

The BIS consultation sets out government plans to divide companies’ narrative reports into two documents – a strategic report, aimed at shareholders providing information on financial results, information on the business model, strategy, risks, remuneration and key environmental and social issues, and an annual directors’ statement, published online, which will provide the detailed information that underpins the strategic report – so that it is easier for companies to prepare investors to identify the information they need.

“Changing the way companies do their annual reports will provide investors with better information on how well businesses are performing and what their directors are being paid, increase transparency and reduce the burden on business, freeing them up to concentrate on growing and focusing on the long term,” said business secretary Vince Cable.

Many people discussing integrated reporting for the first time want to “see” an example of an integrated report. However, there is no standard format and no specific disclosure requirements. Instead, the IIRC sets out five guiding principles and six content elements, which include an organisational overview and business model; operating context, including risks and opportunities; strategic objectives; governance and remuneration; performance and a future outlook.

KPMG has suggested that companies that embrace integrated reporting could be rewarded by “a potential new source of competitive advantage for business in the search for capital at a reasonable cost”.

“Progressive companies should get actively involved in the discussion around integrated reporting,” says David Matthews, audit partner at KPMG and a member of the IIRC’s working group.

“It will not all be plain sailing – innovation never is – and is not for the uncommitted. However, the prize for those that get it right is capital at a reasonable cost through a better relationship with investors and the capital markets.”