Opinion: Accountants at the forefront of change

Management accountants are helping to drive integrated reporting, an initiative with profound implications for businesses, investors, capital markets and the economy. Paul Druckman, CEO of the International Integrated Reporting Council (IIRC), offers an update and a call to action. The IIRC’s consultation draft of an integrated reporting framework is available for review and comment at theiirc.org/consultationdraft2013.

Integrated reporting represents what will soon be the new face of corporate reporting. By building on the strengths of today’s financial and non-financial reporting, integrated reporting enhances the communication between businesses and their key stakeholders to ensure investors have greater insights into the business model and outlook of a business, which encourages long-term thinking.

The management accounting profession has a large role to play in this evolution of reporting to make it become more relevant and meaningful to business itself and to the providers of financial capital.

Critics of today’s lengthy financial reports point to their size — in some cases 200 pages or more — as a barrier to effective communication. Investors and analysts continue to rally for reduced information overload amid a growing body of disclosure rules, guidelines and listing requirements. Although the internet has democratised the access to information, it has also spurred a deluge of filings, website content, press releases, analyst reports and articles, making it increasingly tough to separate the wheat from the chaff.

Capturing holistic long-term value

Although our understanding of business value has evolved in recent decades, our reporting approach and its disproportionate focus on financial capital has not adapted at the same pace. There is growing evidence that brand equity, innovation, customer loyalty and positive stakeholder relationships are key drivers of value. How the company manages intangible assets such as intellectual, human, natural and social capital is just as important as its prudent management of financial assets.

Integrated reporting seeks to reveal hidden value that cannot be explained by traditional financial reporting. Integrated reporting aims to communicate “integrated thinking” by bringing together material information about an organisation’s business model, strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. Through that integrated approach, management applies a collective understanding of the connectivity and interdependencies between the full range of factors that have a material effect on an organisation’s ability to create and preserve value.

Short, medium and long term

Today’s reports place an undue emphasis on historical performance. True, a company should be held accountable for its use of invested funds. But if we recall that reports are also used to inform future investment decisions, it seems logical to equip investors with a road map. Where is the company going? Will consumer trends, changing demographics and emerging technologies help or hinder its progress?

Recognising the need to communicate a concise and holistic picture of value, now and in the future, the International Integrated Reporting Council (IIRC) has set out to develop an international integrated reporting framework (see Figure 1 for an illustration of the framework’s guiding principles and content elements). The IIRC is a global coalition of accounting professionals, regulators, investors, companies, standard-setters and nongovernmental organisations (NGOs). This coalition shares the view that reporting should go beyond pure compliance to communicate value creation over the short, medium and long term.

The IIRC is now in a crucial phase in the evolution of integrated reporting. During the consultation period ending July 15th, the IIRC will be hearing from accountants and other stakeholders — regulators, investors, businesses, standard-setters and NGOs from around the world — with their opinions about the international Integrated Reporting Framework. The goal is to launch the framework in December.

Pilot programme

A growing number of international businesses, such as Prudential Financial, China Light & Power, Unilever and Tata Steel, are part of this innovative global movement to inspire new reporting practices that put businesses in control of explaining how they create value, boosting the potential for hidden value to be revealed and improving the conditions for a more financially stable and resilient business environment.

Integrated reporting is also supported by a growing number of providers of financial capital who see it as a way of increasing the relevance and value of corporate reporting, helping them to gain greater insights into the business model and outlook, which encourages longer-term investment decision-making. It is being developed, shaped and tested by the direct involvement of more than 50 institutional investors that are helping to ensure that the framework addresses the needs of providers of financial capital.

At a time when the eyes of policymakers and regulators are fixed on the role of different actors in the financial crisis, integrated reporting represents an opportunity to demonstrate the profession’s broad remit and appetite to improve the quality of corporate reporting. The importance of the CFO’s role in ensuring the integrity of the company’s story and the management accountant’s responsibility for the quality of information presented publicly support the view that there is a role for the profession.

Benjamin Franklin, one of the founding fathers of the United States, once said: “The great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.” Management accountants: This is your chance. Help drive clear communication of value.

Paul Druckman (Paul.Druckman@theiirc.org) is CEO of the IIRC. Following a career in the software industry, he operated as a non-executive chairman and director for companies in various sectors until taking over this post. He was formerly a director of the UK Financial Reporting Council; member of the City Takeover Panel; and president of the Institute of Chartered Accountants in England and Wales. His work on sustainability matters has included chairing The Prince’s Accounting for Sustainability Project Executive Board and the FEE Sustainability Group.

CIMA and AICPA contributions

Chartered Institute of Management Accountants (CIMA) and the American Institute of CPAs (AICPA), which partnered in the creation of the CGMA designation, have been active in integrated reporting efforts. The organisations led two of the technical collaboration groups that produced background papers on key integrated reporting topics.

CIMA participates in the IIRC’s pilot programme and incorporated integrated reporting principles in its 2012 annual review. CIMA Chief Executive Charles Tilley, FCMA, CGMA, is a member of the IIRC council and chairman of the IIRC’s technical task force. CIMA co-authored a business model paper that explores and reconciles approaches in business model reporting with the aim of reaching a widely accepted definition of the business model for use in integrated reporting.

The AICPA supports the IIRC’s mission and advocates for a voluntary, global, best-practices framework for integrated reporting. AICPA President and CEO Barry Melancon, CPA, CGMA, is a member of the IIRC council. The AICPA led the materiality project that produced a definition of materiality, distinguishing it from materiality as it relates to financial reporting and sustainability reporting. The AICPA has served as host to IIRC round tables in the US, and has helped to sponsor a number of US meetings of the IIRC.

—CGMA Magazine staff