INTEGRATED REPORTING

Posted: August 26th, 2021

INTEGRATED REPORTING

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Question 1: International Integrated Reporting Council (IIRC)

            The IIRC vision, in the long term, is ensuring that integrated thinking is entrenched as part of the core business process practiced worldwide in private as well as public sectors. Incorporating IR results in a productivecapital allocation, where it acts as a strengthin financial sustainability and stability. Equally, integrated reporting (IR) contributes to change in the way reporting for stakeholders and management of businesses is done. As a result, there is an improvement in corporate governance structures (Dumay and Dai, 2017). This is because IR supports the decision-making process and integrated thinking. Integrated thinking in the integrated reportingstructurerefers to the way organizations consider the relationships among its numerous functional and operating units that the company affects or uses. Integrated reporting reports the company material information about governance, strategy, prospects, and performance(McNally, Cerbone and Maroun 2017). A combination of these facetsenables the replication of the social, commercial, and environmental business operating contexts. Therefore, the reports provide a clear and brief illustration of how businesses demonstrate stewardship besidesshowing whether companies are creating and sustaining value.

            Additionally, IIRC’s main objective is promoting sustainable accounting, which is based on the framework issued in 2013 (Abhayawansa et al., 2019). Thus, integrated reporting leads to creating value for organizations in its activities, outputs, outcomes, relationships, and interactions with other stakeholders in the industry. Subsequently, it improves the information quality that is available to financial providers, thereby enhancing efficient capital allocation. It also provides a better cohesive approach to corporate reporting, resulting in communicating all the factors that affect the ability of a company in value-addedover time. At the same time, integrated accounting results in enhancing stewardship and accountability for the extensive capital base in areas such as manufacturing, human, financial, intellectual, natural, and relationship factors. Equally, it leads to the promotion of the understanding of the supported integrated thinking and the business interdependencies resulting in value addition in the medium-term and long term company activities (Abhayawansa et al., 2019). Hence, the framework supports sustainable accounting practices as it includes statements from those charged with governance. These groups have to ensure that they fulfill particular requirements such as acknowledgment of responsibility while executing their duty.

            Moreover, organizations are guided by the materiality principle, which ensures disclosure of all the information that is substantively affecting the business’s ability to create value. The materiality principle ensures that organizations have consistency in reporting over a long duration of time, which enables comparative analysis with other businesses as they strive to create value(McNally, Cerbone and Maroun 2017). Furthermore, reliability and completeness are incorporated in IR, which results in the business as well as including all material information being disclosed precisely without errors (Dumay and Dai, 2017). Thus, the report should include sufficient context that is crucial in understanding the organization’s governance, prospects, and strategy to reduce the overburdening of stakeholders with irrelevant information.

            According to a study by Flower 2015, the IIRC is criticized for deviating from its original concept of sustainable accounting. In his explanation, the concept of value regards investors more than society. Therefore, the body does not place value when reporting on values of business activities beyond wealth or profit maximization. Also, firms sometimes inflict harm through their actions to the environment and the society, which is never reported in the assumption that there is no consequent effect on the company. As such, IIRC abandoned its sustainability accounting due to the composition in the governing council. Notably, the body is dominated by multinational enterprises and the accountancy profession.Yet, IR does not always take into account the features that are part of a sustainable corporation that is operating in an unstainable world (Flower, 2015). It is highly necessary to ensure accountabilityof every unsustainable impact of their intentions and actions. Similarly, IR does not integrate the values and voices of all the natural world and the different communities since it only focusses on a few corporate dialects. Thus, it fails to inform if the business programs are positively contributing to sustainable transformation as it does not show the consequences of a company’s activities and the inter-relationship on the economic, ecological, and social systems.

Question 3: Intellectual Capital Is Reported Under IR

            Integrated reporting is a corporate reporting innovation that gives a comprehensive account of ways companies create and manage finances as well as non-financial capital in generating sustainable returns. Unlike in other organizational reporting frameworks that indicate sustainability and annual reports, the integrated reporting explains the relationship between material financial performance measures with non-financial measures (McNally et al. 2017). An integrated reporting strategy is linked with the overall company’s policy, risk valuation, and business procedures to deliver comprehensive explanations aboutthe way businesses manage relations with shareholders. More so, it should provide a detailed analysis of how a company will generate sustainable returns, in short, medium, and long-term operations (McNally et al. 2017). Therefore, the integrated reporting framework deviates from the traditional financial reporting that focuses on the historical financial information beings giving a forward-looking assessment on risk, significant prospects of reporting financial and non-financial funds to achieve sustainability.

            According to De and Sharma (2017), intellectual capital (IC) is defined as the aggregate of things that give a company a competitive advantage against the competitors. Therefore, the intellectual capital includesintellectual materials andintellectual properties that when put into use,it helps the company to create value. The three substantial constituents of IC are structural, human, and relational capital (De and Sharma, 2017). Human capital is recognized as the organizations greatest asset as it offersan organization the capacity in decision making and resource allocation. Equally, structural capital is involved in structures and mechanisms of a company, which support the company employees’ in their pursuit of optimizing intellectual performance. While, relational capital is described by the social networks and relationships among people, communities, or the general public. Therefore, it is paramount for companies to report their intellectual capital.

According to De and Sharma (2017), intellectual capital givesthe market sufficient information on intellectual assets, thus improving the decision-making process of investors. At the same time, the IC assist in discipliningthe management of an organization and the board of directors with definite economic consequences. Furthermore, reporting IC in the company’s integrated reporting ensures that the non-financial information provided by a firm is consistent, reliable, material, and comparable. In this case, investors are allowed to reduce investment risk,thus maximizing their future earnings(Abhayawansa, Guthrie, and Bernardi 2019). Besides, the IC is utilized by the company’s management in taking long-term organizational strategy perspectives besides equipping the financial stakeholders with the relevant information. Therefore, companies initially adopt integrated IC reporting with internal objectives whose ultimate aim is to publish external documents for the company’s stakeholders.

            Notably, Feng at al. (2017) contends that reporting IC in integrated reporting discloses secret or unknown details of the companies to the stakeholders. As such, they are furnishedwith information on the dynamism in social, ethical, and environmental factors and how they affect their investment portfolio. However, De and Sharma (2017) hold that equipping the market with adequate, timely, and appropriate company’s accounting information on intellectual assets enhance makingis critical to investors and company management. Therefore, it is evident that better-quality information onthe company’s intellectual assets enhances the business’s ability to secure low-cost capital funds besides providing room for developing actions that add value to organizations.

            Finally, integrated reporting supports the company management and investors in making a long-term decision in regards to financial, human capital, social, and relationships (De and Sharma, 2017). Disclosing the IC improves information quality provided to the users of financial information that enable an enhanced, efficient, and productive capital allocation. Accounting frameworks such as Generally Acceptable Accounting Principles (GAAP) andGlobal Reporting Initiative (GRI) offers guidelines on the preparation and financial reporting to show the financial performance of companies(Abhayawansa, Guthrie, and Bernardi 2019). Unlike these accounting frameworks, integrated reporting goes a step further to cater for intellectual capital. Thus, it provides more information to the users in making financial decisions as it aligns the company’s human capital, relational capital, and structural capital.

Question 5: Influence of a Country’s Legal System on IR

            According to Oshika and Saka (2017), new reporting requirements on the company’s financial reporting have been adjusted by a patchwork of laws, rules, and regulations, standards, guidelines, stock-exchange listing, and codes. In effect, there are changing business dynamics in the accounting system and the need to provide adequate information to the users of accounting information. Subsequently, it has increased complexity in financial information reporting, which islonger and more detailed(Abhayawansa, Guthrie, and Bernardi 2019). The current information is provided in integrated reporting includes management remuneration, commentaries, andsustainability, as well as governance reporting. Initially, companies reported their financial information according to specific characteristics such as size, profitability, and industry. Currently, non- financial metrics also affect the publication of the company’s accounting information and sustainability reports (Oshika and Saka 2017). Additionally, the disclosure of the company’s integrated reports contains essential financial information for the users in making investment decisions. Therefore, companies mustdeliberate the implications of the various featuresof the legal system. It is based on the fact that companies function in established settings with regulatory pressure and robust legal systems, whose objectives are to protect the stakeholders. 

            More so, integrated reporting is adopted by several companies nowadays as it offers more information to the stakeholders, management, and board members of the company, thus aiding their decision-making processes. A study conducted by Frias-Aceituno et al. (2013) notes that most organizations are reluctant to publish integrated reports despite the numerous advantages of IR to business operations. The rate of adoption of IR is low due to the extra costs incurred by a when processing such reports(Abhayawansa, Guthrie, and Bernardi 2019). At the same time, poor publication may lead to additional penalties from the regulatory body. Therefore, this increases the risks of legal actions that are harmful to the company’s competitive advantage and the organization’s disclosure strategy. 

            Further, Frias-Aceituno et al. (2013) note that institutional theory depicts companies as economic units that operate in institutions that dictate theirbehaviors andimpose their expectations. Therefore, the acceptance of the institutional theory enables organizations to adopt asimilarbehavioral pattern of a particular country, a process known as isomorphism. In this case, the process promotes stability and the company’s sustainability with strengthened institutional legitimacy (Frias-Aceituno et al., 2013). Consequently, therefore, companies canconformto the rules and regulations imposed by the external forces of a country’scoercive isomorphism. Hence, the companies act positively in well-developed legal systems that protect the overall stakeholders’ interest, yet, not exclusively oriented to shareholders. 

            Besides, Frias-Aceituno et al. (2013) analyze the legal systems by comparing which compare the public and conventionallegalpolicies of various countries. The study pointed out the efficiency of mechanisms implemented to ensure the company’s compliance with the underlying regulations. The review noted that the civil law system focuses more on the company’s stakeholders than with theconventionallegal system that is shareholder-oriented. Equally, the common law focus on numerous participants like shareholders, management, debtors, suppliers, employees, and customers. All these groups desire the continuity of an organization as a whole. Similarly, Rivera-Arrubla ae al. (2017) notes that organizations are given the legal status by a society they operate in and expected to honorabsolute social responsibility towards society. In such jurisdictions, they have laws that protect the worker’s rights and other stakeholders. Thus, companies in such a context should provide more information in addition to their financial statements.

            Ultimately, the universal law system protects shareholders’ interests who are capable of decision making in a company. Therefore, countries with a common law system are instrumental in creating the shareholders’ value. In such states, a robust tradition in the development of owners’ rights and shareholders’ protection is given a prevalence when publishing financial information(Abhayawansa, Guthrie, and Bernardi 2019). Here, therefore, companies provide a summary of their financial information compared to integration and sustainability reports (Rivera-Arrubla et. al. 2017). Hence, the legal system of a country affects a company’s disclosure of financial statements and reporting.

Reference List

Abhayawansa, S., Guthrie, J., and Bernardi, C., 2019. Intellectual capital accounting in the age of integrated reporting: a commentary. Journal of Intellectual Capital.

Dumay, J., and Dai, T., 2017. Integrated thinking as a cultural control?Meditari Accountancy Research.

De Villiers, C., and Sharma, U., 2017. A critical reflection on the future of financial, intellectual capital, sustainability, and integrated reporting. Critical Perspectives on Accounting, p.101999.

Frias-Aceituno, J.V., Rodríguez-Ariza, L. and García-Sánchez, I.M., 2013. Is integrated reporting determined by a country’s legal system? An exploratory study. Journal of      cleaner production, 44, pp.45-55.

Flower, J., 2015. The international integrated reporting council: a story of failure. Critical Perspectives on Accounting, 27, pp.1-17.

Feng, T., Cummings, L., and Tweedie, D., 2017. Exploring integrated thinking in integrated reporting–an exploratory study in Australia. Journal of Intellectual Capital.

McNally, M.A., Cerbone, D., and Maroun, W., 2017. Exploring the challenges of preparing an integrated report. Meditari Accountancy Research.

Oshika, T., and Saka, C., 2017. Sustainability KPIs for integrated reporting. Social Responsibility Journal.

Rivera-Arrubla, Y.A., Zorio-Grima, A., and García-Benau, M.A., 2017. Integrated reports: disclosure level and explanatory factors. Social Responsibility Journal.