5 Things CPAs Need to Know about Integrated Reporting
Last week, my blog post discussed that Integrated Reporting <IR> represents an important shift in corporate reporting in which CPAs can play a key role providing consulting services, implementation or report preparation. In today’s blog, I’m drilling down into some of the key concepts of the recently released Consultation Draft of the International <IR> Framework that are important for CPAs to understand.
Five features of the Draft Framework are:
- Integrated thinking: While much of the Draft Framework focuses on the preparation of an integrated report, at the heart of Integrated Reporting is the application of integrated thinking. Initially, the process of preparing the integrated report is like the tail wagging the dog. It is used to break down the traditional silos within an organization and get people focused on the relationships between their units and the various capitals that the organization uses or affects.
- Capitals: Rather than the traditional focus on financial capital and capitalized assets, the Draft Framework identifies six types of capital — financial, manufactured, intellectual, human, social and relationship, and natural — and views these forms of capital as stores of value that may be increased, decreased or transformed by the organization’s activities. An organization describes its use of and effects on the capitals in an integrated report rather than measurements of value; it is up to the report users to assess the ability of the organization to create value over time from such information.
- Connectivity: Often information is communicated without sufficient context to understand its relationship to an organization’s performance or prospects. The Guiding Principle of “Connectivity of information” is intended to drive organizations to make those connections in external reporting as well as in their day-to-day operations. In an integrated report, an organization should explain the inter-relationships and dependencies between those components that are material to their ability to create value over time, the connection between the time dimensions of past-to-present and present-to-future and the connections between quantitative and qualitative information.
- Resiliency: Organizations with longevity are often built around a resilient business model with a strong governance structure that embraces the full range of processes, procedures, strategies and priorities that are responsible for their success. Do providers of financial capital currently understand the organization’s governance, strategy and business model and the extent to which they are linked? An integrated report is intended to more effectively communicate these aspects and the connectivity between them, which in turn is intended to support better decision-making by providers of financial capital, who are the primary intended audience of an integrated report.
- Comparability: An integrated report contains six areas of focus—or Content Elements—to help business communicate key information. The Content Elements include: Organizational overview and external environment; Governance; Opportunities and risks; Strategy and resource allocation; Business model; Performance; and Future outlook and are framed in the form of questions in the Draft Framework. However, the Draft Framework does not specify any particular set of indicators that are to be included in responding to the questions. The result is that content will be included for matters determined to be material by each particular organization rather than inclusion of a standard list of information. This reporting format will require a new mindset for evaluating comparability between organizations and over time; however, it should allow for improved comparisons, particularly with other organizations, by focusing on such dimensions as the organizations’ business models, their strategic focus, governance, which capitals they use and affect, and how such relevant context connects not only to financial performance but performance with respect to the other capitals and prospects for the future.
Are you interested in learning more? The AICPA is hosting a video webcast, Integrated Reporting: The Next Step in Corporate Reporting, to be held 2 to 4 p.m. ET on May 20, which will explain the key concepts of the Integrated Reporting Consultation Draft and what it means for organizations. Learn more about Integrated Reporting . The AICPA encourages you to comment on the Draft Framework, which you can do through the IIRC website.
Beth A. Schneider, CPA, Audit Director - Audit & Assurance Services, Deloitte & Touche LLP. Beth is on secondment to the IIRC as a Technical Director participating in the development of the International <IR> Framework. She also is chair of the AICPA Sustainability Task Force under the Auditing Standards Board and a member of the AICPA Assurance Services Executive Committee.