The Limitations of Traditional Corporate Reporting

Corporate reporting is the practice undertaken by the company to communicate with its stakeholders to meet their information needs. The stakeholders of the company hold certain interest in direct or indirect ways and hence they require various information regarding company’s business activities and its overall performance in order to undertake sound and informed decision making in the matters in which they are associated with the company. Corporate reports which are commonly known as annual reports primarily contain the information regarding the economic activities and financial performance during a particular year. However, in the rapidly changing globalised world, the business of the corporate entities are getting complex. On account of this, the information needs of the stakeholders are also continuously growing (Bhasin, 2017). For investors the current framework of corporate accounting does not meet their information requirements completely. Information about only financial performance does not help the investors and other stakeholders to assess the overall performance of the reporting entity. Thus, provision mere financial information does not serve the core purpose of corporate reporting. Information regarding managerial quality, company’s brand reputation, governance practices, risk and opportunities available to company, company’s initiatives towards social and environmental protection are yet to be incorporated in the corporate reports to make them more relevant to the stakeholders of the company. In the modern era, it is generally believed that that the companies take socially and environmentally responsive actions have more potential to create more shareholders’ value.  In response to the developing economic reality the corporate accounting must be kept at pace so that the information needs of the interested parties could be met by providing both the type of information: financial and non-financial one considering short term as well long term purpose. Integrated reporting is the new and modified approach of corporate accounting. Integrated reports are those reports that cover financial highlights of the business and along with the financial information it also covers the information regarding the company’s performance towards its social and environmental practices and various regulatory compliances (Schaltegger & Wagner, 2006).

At present there do not exist any framework of integrated reporting that is accepted at the universal level.  However, many researchers and regulatory bodies have realised the need of making the provisions of reporting of financial and non-financial information by the corporate bodies as the mandatory provisions. Corporate reporting just like any other business activity must be kept on traction with the evolving economic reality and must address the needs of the wider base of stakeholders (Young, Cohen & Bens, 2018). Technology is significantly and certainly changing the way corporate reporting is undertaken. Changes in technology have extended the scope of possibility of accessing the corporate information by the stakeholders and hence the information needs of stakeholders are growing rapidly (Lipunga, 2015). On the premise of rapidly growing information needs the content of the corporate reports must be extended so as to satisfy the shareholders and other stakeholders (Schaltegger & Wagner, 2006).

Unfortunately, the existing framework of traditional corporate reporting is losing its relevance in the eyes of the stakeholders of the companies because of growing business complexities and scope. Many experts have discovered that mere dissemination of financial information does not serve the basic purpose of corporate reporting and hence the scope of corporate reports must be expanded to include all those matters that are generally considered as material for the user’s decision making (Bhasin, 2016). Also, it has been argued by various researchers that the current financial reporting does not provide information on timely basis and also financial reports are overloaded with the information which are not even relevant for the users in their decision making. On the other side, non-financial reporting is current at its initial stage of its development and hence it is facing numerous challenges to make its mark (Erol & Demirel, 2016).

The Benefits of Integrated Reporting

It is firmly believed that high-quality of reporting of business information lies at the heart of strong and sustainable organisation, markets and the economies at times. Looking at the importance of quality reporting the landscape of corporate reporting is rapidly changing. However, the broadening the scope of business performance and reporting is still a debatable and complex issue to be completely resolved (Thomson, 2015). Currently, many organisations are voluntarily indulged the preparation of integrated reports as they are well aware of the benefits of adopting the principles of corporate reporting. Integrated reporting is currently observed to deliver a great impact on the corporate reporting community. In a short time-frame IR has considerably changed the landscape of corporate reporting (Churet & Eccles, 2014). With each passing year the number of companies that are complying with the IR framework on a voluntary basis is increasing and it can be estimated that integrated reporting shall become the universal practice at-least for the listed entities in the next coming 5-10 years. The integrated reports will replace the traditional corporate reports in the near future (Owen, 2013).

Integrated reports take together the financial as well as non-financial measures related to an entity on a common piece of report ((Juma, Tumwebaze & Orabia, 2017). Typically, an integrated report aims at achieving simplicity and clearly stating about its financial as well as sustainability practices towards the compliance of environmental, social and governance standards (Association of Chartered Certified Accountants, 2017). This report shows clearly the connection between the financial and non-financial performance metrics. The traditional metrics for the measurement and valuation of economic performance is no longer providing the complete picture of corporate performance (Busco, Frigo & Riccaboni, 2013). Recently in 2017, the International Federation of Accountants has published a paper that states that integrated reporting is a new and coherent way to achieve the function of corporate reporting at a comprehensive level which involves only one report to provide the complete picture of an entity’s ability to create value for its shareholders over a period of time. Since last few years, integrated reporting is focused on the significance of value creation by an organisation through the use of six capitals in both short and long run (Institute of Certified Public Accountants of Singapore, 2013). The said capitals are: financial, manufactured intellectual, human, social or relationship and natural capital (Ramolini, Fissi & Gori, 2017). The concept of integrated reporting is more than merely a static document. It covers provision of information related to the business performance along with the provision of detailed information in the areas of interest to the different stakeholders of the company in an integrated manner. Integrated reporting is the communication of company’s strategies, governance practices, financial and non-financial performance and the prospects that contribute to creation of value in short, medium and long run (De Villiers, Rinaldi & Unerman, 2014).

Integrated reporting mainly aims at improving the overall quality of the information provided to the providers of finance so that more efficient and production allocation of capital could be undertaken (Joshi, 2018). It further aims at promotion of more consistent approach towards corporate reporting that emphasises on communication of wide range of factors which have material impact on the entity’s ability to create value over a period of time. Moreover, integrated reporting is further aimed enhancing the stewardship obligations for a wide base of capitals and to promote the interdependencies of such capital factors. Further, integrated reporting is aimed at providing support to the integrated thinking as well as decision making and those actions that emphasises on creation of value in short term and long term.

What is Integrated Reporting?

Improved corporate reporting has been proposed since more than half of a century. The global financial crisis that occurred in 2008 was the main catalyst of establishment of international Integrated Reporting Council (IIRC). After the occurrence of the economic crisis at global level, the need of investors to remain highly alert and aware of the company’s overall business performance has increased drastically (Bhasin, 2015). In the wake of such need IIRC was set up and it was aimed at development of the framework of integrated reporting at a global level so as to bring back the economic stability as well as to regain the trust of investors in the capital market. IIRC is the universal body that supports and promotes the principles of corporate reporting (Villiers and Maroun, 2017).

During the last few decades, the companies are under the practice of separating their social disclosures from their environmental disclosures by way of distinct reports. This practice of preparation of stand-alone reports for all types of information such as financial, social and environmental performance had become quite complex as the companies had to report on a wide range of issues in order to meet the increasing information expectations of the stakeholders (Mio, 2016). The last five years have experienced a remarkable shift in the areas of development of integrated reporting across the world. By far only South Africa is the nation that has adopted the framework of integrated reporting and made it compulsory for the companies listed on the Johannesburg Securities Exchange (Atkins & Maroun, 2015). Over 1600 companies in the entire globe have adopted the principles of integrated reporting. In different countries, different numbers of organisations have started preparation of integrated reports. As per GRI apart from South Africa, the major countries the corporations of which have adopted integrated reporting are Netherland, Brazil and Australia. In some countries like Europe and Asia integrated reporting has gained its momentum quite quickly while in other areas the momentum of adoption of the said framework is slightly moderate.

Also, numerous companies are also proposing the adoption of framework of integrated reporting. It is believed that if these reports are prepared effectively the companies would be able to have a look of their business in the holistic way in more effective and efficient way and will also be able to find various opportunities for their business.  The potential benefits that the integrated reporting could be various such as: integrated reports help the company to understand in a better way as to how value can be created (Brown & Dillard, 2014). These reports enable the investors to have a sight beyond the viability of business in short run and at the same time it enables them to understand the potential of the business in longer run. Further, integrated reports demonstrate about the strategic approach as well as responsible business practices which can help them to retain and attract more investors towards the company. Also, the practice of integrated reporting can also help the company achieve a competitive advantage other companies that are not involved in such type of practices (Stewart, 2015).

The Evolution of Integrated Reporting

In-spite of the fact that integrated reporting provides various benefits to the entities, the concept is still suffering from certain set-backs. A major weakness that has been identified in some of the current researches on the integrated reporting issue is the way in which certain matters of social, environmental as well as the ethical information are still excluded from the corporate reports while certain other items are repeated included in such reports. Hence, it causes confusion, clutter and the division in the landscape of integrated reporting, to a great extent (Adams & Simnett, 2011). Due to these flaws integrated reporting cannot be considered as the immediate success of the corporate reporting community and it will require some more time for the entire process to be entirely accepted. There are no reports presented to depict the long term impact of compulsory integrated reporting on the overall quality of the information. The highest benefits of integrated reporting can only be reaped when its approach is revised so as to ensure that all the useful information could be provided to the providers. The key success factors to enhance the credibility of integrated report are improving its accuracy and the reliability of the non-financial information. There could be various challenges that are to be faced while taking integrated reporting further. These are: establishment of those standards of integrated reporting that are globally accepted so as to form uniformity in the reporting practices across the world. Another major concern that the integrated reporting framework has to face is the provision of assurance opinion on the data and information provided in the reports. An independent party will be required to provide an adequate level of assurance opinion on the integrated reports. Further, measurement and quantification of information which cannot be expressed in financial terms and then its integration with the financial information is quite a challenging task. The nature of financial reporting and sustainability reporting differs from each other to a great extent. The preparation of integrated reports also requires properly trained personnel (Adams, 2017). Though, both sustainable reports and financial reports are used by various stakeholders but not all the stakeholders require the sustainability reports of the business. The content of integrated may not be material to all types of stakeholders and also the reporting content varies industry wise. Integrated reporting might sometimes overburden the chief financial officers of the company (Serafeim, 2015).

Till date, the adoption of framework of integrated reporting is hindered due to the above discussed limitations. The principles of integrated reporting are have faced delay in their progress due to lack of adequate consensus among the corporate bodies, industries and the different countries regarding to the contents of the integrated reports (Abeysekera, 2013). There is still a debate on-going on the matter as to whether the integrated reports shall replace the current traditional corporate reports. Since the adoption of integrated reporting across the world is going through its development and due to the relative lack of data it would be difficult to figure out as to whether the integrated reports will replace the traditional corporate reports and when is this finally going to happen (Havlová, 2015). However, the interest in integrated reporting is growing at both the ends of users of the reports i.e. the stakeholders as well as at the company’s end.  The key stakeholders of the reporting entity such as shareholders, investors, governmental agencies are keen to know about the future viability of the business by assessing its current performance and its impact on the overall environment as well as on the society in which it operates its business. A single integrated report can be used by the companies to meet all the information needs of the stakeholders. The integrated reporting will certainly improve the communication gap between the corporate entities and the audience group and also it will help in reducing the complexities of reporting function. A good integrated report forms a proper combination of financial figures and the information regarding compliance with ESG standards (Eccles & Krzus, 2014).

Integrated Reporting and Value Creation

Integrated reporting has gained so much of importance since last few years with various multinational corporations such as Novo, Nordisk, SAP, Tata Steel and other corporations have adopted the integrated reporting even before the introduction of legislation in this regards. This new approach of corporate reporting does not only bring into account the financial capital of the business but also the other types of capitals such as social or natural capital. The concept of integrated reporting can be said to be slowly but certainly making its place not only as a communication tool but also as a genuine agent that brings internal changes within the organisations.

It can now be concluded that given the rapidly changing business environment and technological advancement the traditional corporate reporting is losing its relevance these days. The investors and other stakeholders are looking for more strategic and forward looking information from the companies. In response to this integrated reports acts as the powerful management tool that improves the communication or information gap between the companies and their stakeholders by way of provision of detailed information about the entity’s value creation capability (Thomson, 2015). An integrated report must be able to explain about the company’s related financial environmental social and the corporate governance information. In order to achieve the purpose of integrated reporting the reports must be presented in the clear concise and consistent manner. The adoption of principles of integrated reporting could ultimately increase the capacity of the reporting entity to assess more capital as it creates a positive market image in the eyes of investors in the capital market. Though, it is correct that financial reports plays vital role in satisfying the stakeholders of the company about their information needs but it is also true that merely financial reports cannot achieve the basic purpose of corporate reporting. A company must also report about its sustainable business practices so as to deal with the growing information needs of the user group of corporate reports. The main agenda behind the corporate reporting is not only to provide the detailed information but also the quality information. Integrated reports must include all the possible information that the stakeholders of the company are seeking. As of now only few multinational corporations are indulged in the practices of integrated reporting. The provisions related to such framework are not yet made compulsory in majority of countries. But, since integrated reporting brings various benefits for the companies and those benefits of preparing integrated reports certainly exceeds the cost of adoption of integrated reporting principles, the integrated reporting must be made a mandatory management practice in the coming years. This initiative will bring a great impact to the efficiency of capital markets as the potential investors will be able to make sound decisions regarding the allocation of their capital resources after evaluating the overall business performance from both financial and non-financial parameters.

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