First published in Singapore Accountancy Convention newsletter on 1 July 2013
What is integrated reporting?
Integrated reporting (IR) attempts to capture the practices of companies in a comprehensive manner in order to differentiate companies with sustainable practices from opportunistic players.
It addresses a wide range of areas including: business model evaluation of companies, how companies monitor and enforce sustainable practices, as well as how they impose responsible behaviours onto their suppliers to ensure that the entire supply chain are free from poor practices.
Why the need?
Financial statements are just one element of the corporate reporting process and traditional financial statements reporting is not comprehensive and it does not capture information about social responsibility, health and well being of workers, and other less tangible areas.
In certain jurisdictions, companies which directly contribute to environmental pollution such as haze are not obliged to take responsibility for their actions. Their financial statements do not call for such costs to be accounted for. Therefore, it incentivises them to choose the lowest cost method of production at the detriment of society at large. As a result, the profit margin contributions from such companies are better than normal.
As global stakeholders increasingly wish to know how their business strategies connect with financial and non-financial performance, they should also demand such information to reward those who behave responsibly or punish those with poor practices.
In the past five years since the global financial crisis, we have seen growing numbers of companies pursuing the objective of rebuilding trust among these stakeholders.
Good corporate reporting therefore plays an important role in helping private enterprise restore the trust that societies have lost since the Global Financial Crisis of 2008-09.
The rising adoption of International Financial Reporting Standards (IFRS), now used in more than a hundred countries, is also bringing increasing comparability of financial information to the global capital markets.
Companies today therefore need to operate in a manner that is as much dependent on their legitimacy in the eyes of a wider group of stakeholders, as it is on their economic viability.
At the same time, they also need to communicate more clearly, openly and effectively with investors and other stakeholders about how they plan to grow in a sustainable way.
The importance of IR for Singapore
Singapore companies today should do more to improve on how they report not just their financial data, but also issues such as sustainability, enterprise risk, intangible assets and human capital.
While the IIRC has focused on the production of an IR, companies would be most interested in IR as a means to improve their existing narrative reporting.
Integrated reports do not necessarily replace existing financial and sustainability reporting. Rather, their aim is to serve as the primary source of corporate information for financial stakeholders or capital providers.
KPMG believes that the concept of building narrative reporting around an organisation’s business model would be particularly attractive to management teams. It would result in investor dialogue moving beyond short-term earnings towards a focus on how the business has been developed.
Moreover, it can provide better linkages between material organisational issues and providing relevant and focused disclosure. It helps re-focus reporting around an organisation's business model and operational priorities.
IR therefore represents an opportunity to introduce a clearer focus on materiality and eliminate clutter that is a feature of so many reports today. This requires integrated thinking and a multi-disciplinary approach across multiple functions.
The aim then is to reflect the critical opportunities and challenges that affect the business - the same issues that management are dealing with on a daily basis within the organisation.
Guidance is available
While many companies in Singapore today have some way to reaching the forefront of these global developments, this approach is quickly becoming less of an option and more of a necessity.
Aimed primarily at long-term investors, the Integrated Reporting Framework is the foundation of a new reporting model which will enable a business to provide a concise communication of how it creates value over time.
However, rather than introducing new indicators, it offers guidance and principles for companies on how to integrate financial and non-financial information using existing reporting standards and guidelines such as those of GRI and the IFRS.
In time, more companies in Singapore will be called upon by their ever more educated, informed and socially conscious stakeholders to provide them with the information needed to explain their legitimacy to exist, and in the process create sustainable value while remaining profitable.
This article is contributed by Lee Sze Yeng, Partner, KPMG in Singapore