INTEGRATED REPORT

ACC80005-Financial Accounting Theory

Gia Nguyen Phu- 101791075

Word counts exclude introduction and References: 2430.
Introduction

The issues of sustainability and transparency have been increasingly created rigidity for both
stakeholders and management (Couldridge, 2014; 2015; Gore and Blood, 2010). Knowing how
business’s performance, the risk shareholder takes, how the business impact on different
aspects, etc is crucial to shareholders. Some of investor want to know the influences of
business’s operation on socials as aspects while others may concern on law and legislation or
environment. Therefore, in order to satisfied these needs, many organisations choose to publish
different reports to provide all this information. However, ‘will shareholder able to identify the
link between monetary related and non-monetary-related information’ is question arise. In case
shareholder are not able to understand this information, it can lead to a serious situation that
damage an organisation’s reputation and the connection between organisation and
shareholders.

Integrated report shows the whole picture of a company’s operation about goals in long and
short term as well as links between financial performances and non-financial performances
(Jensen and transparency on organisation’s commitment in a report (Adams, 2013; Eccles and
Krzus, 2010). Morros Berg, 2012). Thus, it becomes the most efficient means of
communication to interact with shareholders. By using both indications financial and non-
financial, integrated reporting show the (2016) states that “bring(s) governance, financial
capital, intellectual capital, social capital, and environmental capital onto a common platform”.
Therefore, it is argued that integrated reporting system is not just about reporting but a mean
of achieving higher benefit (Steyn, 2014).
Integrated Report Potential.
Traditional Reporting and Integrated Reporting
In business world, traditional report is considered using separated reports with a conventional
approach. These reporting models are yearly financial reports, social report and environmental
reports (Jensen and Berg, 2012). In common practices, these reports normally are prepared for
shareholders and investors. (Simnett and Huggins, 2015). However, due to the report’s
characteristic is to deal with monetary related information, it failed to provide a complete view
about the company’s performance (Weybrecht, 2010). There are many researches showed that
shareholders want both monetary-related and non-monetary-related information in just one
report (Eccles and Krzus, 2010; Serafeim, 2015). Furthermore, there are many criticisms about
how short-term orientated as well as heavily focused on historical data these reports were
(Cabedo and Tirado, 2004). It also has been showed the weakness in disclosure on risk and
uncertainty (Serafeim, 2015). Hence, a number of firms experienced this system is not efficient
in order to meet investor’s demand in term of a set of different views on business’s performance
(Hughen et al., 2014). This leads to many types or reports on numerous aspects for instance
corporate social responsibility (CSR) sustainability reporting, triple bottom line report or
environmental report have to be prepared every financial year (Eccles and Krzus, 2010).
However, by prioritized the need of each shareholder, it brings challenges and confusions and
higher cost to each corporations or decision makers, therefore, there is a cost-efficiency-related
problem by using this system. Thus, adapting to a better reporting framework that can provide
all information is crucial for both parties (shareholder and corporations).

In 2006, “Global Reporting Initiatives (GRI)” has introduced a framework include both
financial report and financial reporting. The improvement on this framework bring to the
development of integrating reporting framework., that proposed in 2010 by International
Integrating Reporting Council. The new report framework can include all information that
shareholder concern and is known as integrated report. Therefore, there was some claims in
public that integrated report framework is superior to conventional reports (Jhunjhunwala,
2014). The links between financial and nonfinancial performance has been revealed by
bringing different measurements into single report (Eccles and Saltzman, 2011).

There are numerous of information include in integrated report such as: “How much water does
a company use per unit of production compared to its competitors? To what extent do energy-
efficiency programs reduce carbon emissions and lower the costs of production? What is the
impact of training programs on improved workforce productivity, lower turnover, and greater
customer satisfaction? How do improvements in customer satisfaction lead to greater customer
loyalty, a larger percentage of the customer’s spending, and higher revenue growth? How is
better management of reputational risk through good corporate governance contributing to the
value and robustness of the company’s brand?” (Eccles and Saltzman, 2011. p. 59)

Traditional Reporting Limitation

There are several aspects about limitation of a conventional report:

• Financial report relies historical recorded transactions. However, the value of the assets
and liabilities that owned and owed by company changes by time and base on market’s
fluctuations. Because the report doesn’t reflect the current situation, hence, the
statements can be misstated in case a huge volume of goods available and organisation
did not revaluate these goods.
• If the inflation is significant, there is chance that recorded statements can be understate
and the information is inappropriate.
• Personal judgments have a big influence on the result of report. The accounting
standards used by the person adjusting these records would affect significantly on the
value of assets and liabilities. This result in, there is a limitation for the report due to
this aspect cannot be stated.
• In case these statements are recorded based on a time period, the seasonality’s effect
can impact on it. Thus, mistakes can be made by investors while analysing a company’s
performance based on this limited seasonal information.
• Balance sheet doesn’t contain the value of Intangible assets (brand value, firm’s
reputation and such) and these intangible assets doesn’t reflect in sales. There are
expenditures on intangible assets has been recorded on financial statements, these are
usually a problem to new business due to the big investment on intellectual property
but generate low sale.
• It is common for investors to analysis a company’s performance by comparing it to
other companies in same industry. However, it usually be incomparable because there
are a number of differences. For instance, the difference in accounting standards,
difference in position leads to different evaluation or different personal judgements,
 these differences make the comparing between two business can be inappropriate and
insufficient.
• If the management is to chased after good result as well as there are good motives
behind for example promotions or bonus, the report can be unreliable due to fraudulent
accounting practices, creating fraud sales, etc (Enron case).
• Several non-monetary factors are ignored in these reports such as credit worthiness of
the concern, sources and commitments for purchases and sales, co-operation of the
employees. Hence, the report just shows position of financial accounting, not financial
position.
• The conventional report also is not reliable due to the lack of revision from third party.
Therefore, it must go through an audit process that permitted by law.
• The report gives a company’s past performance based on recorded statements.
However, it will be personal assumptions if investor using this information to forecast
company’s future performance.

Sustainability Reporting and Integrated Reporting

One of core aspects in the integrated reporting’s process is sustainability reporting. It can also
understand as a sub-section of a integrated reporting (PWC, 2013). It has been defined by GRI
Reporting Framework that sustainability reporting as the practice of measuring and disclosing
performance and being accountable to internal and external stakeholders for organisational
performance intended to further sustainable development” (GRI, 2011). In common
Sustainability report contains sustainability information such as social and governance,
environment. Therefore, there are criticism about sustainability is not helpful for decision
makers (King, 2011). Additionally, King (2011) stated some of sustainability report’s
weakness such as: Disconnection from the financial report, providing backward perspective,
failure of providing the connection between corporation’s key strategies and sustainability
issues.

Meanwhile, integrated report is expected to provide information a comprehensive way and to

create sustainable society (Armbester et al., 2011). Even so, integrated reports contain valuable
information to shareholder because their different view on corporation’s performance by
combining different report’s components (financial, management, gorvernance, sustainability
report) in a way that explain corporation’s position and capability of creating value (IIRC,
2011).
Therefore, there is a similar information that both integrated report and sustainability report
provide (Wadee, 2011), as well as, fulfill the similar needs for stakeholders (Eccles and
Saltzman, 2011; Stacchezzini et al., 2016). Furthermore, there also a claim that while
sustainability report only has three bottom lines disclosures, integrated report connects both
monetary-related and non-monetary-related information which is superior for analysis and
understanding how firm value is created (Hughen et al., 2014; Frias-Aceituno et al., 2014).

Integrated Reporting Cost, Benefits and Stakeholders Engagement

There are many financial scandals in the past that which resulted from the failure of a
corporation’s commitments. Many of verbal commitments to shareholders are unreliable and
are not able to use as evidence for such circumstances. Therefore, investors prefer a better
means of commitment and able to present as evidence for a corporation’s commitment. This
makes the reporting system become the most useful means of communication between
corporations and shareholders. Due to the impact on trust from these financial scandals, it is
vital for any corporations to focus on the communication with shareholders via reports. The
information from these reporting makes stakeholders to believe in the potential of corporation’s
future strategies, henceforth, it provides guidance for any decision maker.

There are several type reports has been used to encourage investors about the positivity of
corporation’s performance such sustainability reporting, ESG reporting, CSR reporting, triple
bottom reporting, therefore, it also enhances the corporate’s reputation (Bebbington et al.,
2008). In addition, by the better reputations, it brings a great potential to gain better business
advantages and better negotiations toward shareholders (Brown, et al., 2010; Simnett et al.,
2009).

On the other hand, by using report framework with nonfinancial indicators, it allows
corporations and shareholder to deal with sensitive problems. The non-financial reporting such
as CSR reporting attracts stakeholders and makes them comfortable with business activities.
Hence, it is an assistance for the corporations in negotiating with the government related
problems as well as maintaining a corporation’s prestige.

Coming to the point, reporting is considered as a prominent medium of engaging stakeholders,

however, there are corporations that are not able to fulfill every shareholder’s needs especially
for medium and small business. These corporations usually confused between whether they
should prioritise their information seeking or their shareholder. Furthermore, the cost of
publishing reports is another limitation for these companies due to the more report published,
the more cost increased. Furthermore, even at their max capability, the confusion between
general shareholder and individual shareholder will still affect to their decision-making
process. Due to the separation among reports, the link between financials and non-financials
cannot be demonstrate clearly (Serafeim, 2015). Furthermore, integrated reporting also
requires a large amount of fund, time and effort for data acquisition, data analysis… For
example, the cost of software license or consulting fee. By the further research during preparing
the integrated reporting, it generates higher cost and applied to both personnel and equipment
used. For example, the cost of salaries and employee’s benefits, the cost of machinery
depreciation used, services cost, supervision and administration cost, etc, Therefore, it can be
concluded that there are barriers that affect to implementation of integrated reporting process
are: same measurements to monetary and non-monetary information, involve different groups
of shareholders, lack of uniform non-monetary measurement, information overload and may
incomparable.

On the other hand, the integrated report has used both information of both indicators.
Integrated reports explain how shareholder can influence to a business and their ability to create
and maintain the value in short and long term. Thus, integrated reporting system is one of the
most efficient approach to rise shareholder confidence about company’s position especially
when there is financial crisis or a significant change in market. The fact that different
information from integrated report such as business activities, business risk, business core
strategies in upcoming period, business goals in long and short term, will contribute for a better
relationship with different groups of shareholders due to their different insights about different
corporation’s aspect. Subsequently, shareholder has greater understanding on what should be
expects about business bases on provided information, data, and analysis (IIRC, 2011; Eccles
and Armbrester, 2011; ACCA, 2014). Additionally, IIRC (2011) stated that the engagement
process by using integrated report also bring a side effect such as lower in cost of capital,
corporation’s competitiveness, different group of shareholder’s communications, lower in
supply-chain risks bases on connections with suppliers and a rise in corporation’s reputation.

Accoring to IIRC (2011), Integrated Report able to engage all shareholder’s parties through
annual conference and bilateral meetings. Due to there are different needs in different groups
of shareholders, thus, there a set of specific responses by the specific shareholder group
meetings as the table below:.
Shareholder group Response from IIRC
BUSINESS AND
OTHER
REPORTER
ENTITIES

PROVIDERS OF
FINANCIAL
CAPITAL

FRAMEWORK
DEVELOPERS
AND STANDARD
SETTERS
ACCOUNTANCY
PROFESSION

POLICYMAKERS,
REGULATORS
AND
EXCHANGES

CIVIL SOCIETY

ACADEMIA
OUR TEAM

The integrated reporting is not only just an efficient approach in the process of communication
which can help shareholder have a deeper insight about company’s performance in the past,
current position and future predictions (Wadee, 2011) but also for corporation to analysis and
take advantage of better position by having better reputation (Serafeim, 2015).
REFFERENCES:

ACCA 2014, ‘Understanding Investors: The Changing Corporate Perspective’. London: The
Association of Chartered Certified Accountants
Adams, C 2013, ‘Understanding Integrated Reporting: The Concise Guide to Integrated
Thinking and the Future of Corporate Reporting’, London: DoShorts.
Armbester, K Clay, T Roberts, L 2011, ‘Integrated Reporting: An Irreversible Tipping Point.’
Accountancy SA, April. p29-31.
Bebbington, J Larrinaga, C Moneva, J M 2008, ‘Corporate social reporting and reputation risk
management’, Accounting, Auditing and Accountability Journal, vol. 21, no. 3, pp. 337-361.
Brown, D L Guidry, R P Patten, D M 2010, ‘Sustainability reporting and perceptions of
corporate reputation: An analysis using fortune’, Advances in Environmental Accounting and
Management, vol. 4, pp. 83-104.
Cabedo, J Tirado, J 2004, ‘The disclosure of risk in financial statements’, Accounting Forum,
vol. 28, no. 2, pp. 181-200.

Couldridge, D 2014-2015, ‘Investors and Integrated Reporting’, Accountancy SA, Volume

Special Reports, pp. 32-34.

Eccles, R. Krzus, M 2010, ‘One Report: Integrated Report for a Sustainable Strategy’, New
York: Wiley

Eccles, R G Armbrester, K 2011, ‘Two disruptive ideas combined: Integrated in cloud’, IESE
Insight, vol. 8, pp. 13-20.

Eccles, R.G Saltzman, D 2011, ‘Achieving sustainability through integrated reporting’,

Stanford Social Innovation Review, vol.9, no. 3, pp. 56-61.

Gore, A Blood, D 2010, ‘Towards sustainable capitalism’. Wall Street Journal Eastern Edition,
vol. 24, p. 21.

GRI 2011, ‘Sustainability Reporting Guidelines’, Version: 3.1. Amsterdam: Global Reporting
Initiative

Hughen, L Lulseged, A Upton, D R 2014, ‘Improving stakeholder value through sustainability

and integrated reporting’, The CPA Journal, vol. 84, no. 3, pp. 57-61.

IIRC 2011, ‘Towards Integrated Reporting: Communicating Value in the 21st Century’.
International Integrated Reporting Council, Discussion Paper, London
Jensen, J Berg, N 2012, ‘Determinants of traditional sustainability reporting versus integrated
reporting: An institutionalist approach’, Business Strategy and Environment, vol. 21, pp. 299-
316.

Jhunjhunwala, S 2014, ‘Beyond financial reporting-international integrated reporting

framework’, Indian Journal of Corporate Governance, vol. 7, no. 1, pp. 73-80.

King, M 2011, ‘Foreword. In Integrated Reporting Committee’, (IRC) Framework for

Integrated Reporting and the Integrated Report, Discussion Paper. South Africa: Integrated
Reporting Committee of South Africa.

Morros, J 2016, ‘The integrated reporting: A presentation of the current state of art and aspects
of integrated reporting that need further development’, Intangible Capital, vol. 12, no.1, pp.
336-356.
PWC 2013, ‘Integrated Reporting: Going Beyond the Financial Results’. United States:
Pricewaterhouse Coopers LLP.

Serafeim, G 2015, ‘Integrated reporting and investor clientele’, Journal of Applied Corporate
Finance, vol. 27, no. 2, pp. 34-51.

Simnett, R Huggins, A L 2015, ‘Integrated reporting and assurance: Where can research add
value? Sustainability Accounting’, Management and Policy Journal, vol. 6, no.1, pp. 29-53.

Simnett, R Vanstraelen, A Chua, W F 2009, ‘Assurance on sustainability reports: An

international comparison’. The Accounting Review, vol. 84, no.3, pp. 937-967

Stacchezzini, R Melloni, G Lai, A 2016, ‘Sustainability management and reporting: The role
of integrated reporting for communicating corporate sustainability management’, Journal of
Cleaner Production, Volume Forthcoming, no. 65, 7e8.

Wadee, N 2011, ‘Integrated reporting: An opportunity to reshape business’, Accountancy SA,

December, pp. 6-8.

Weybrecht, G 2010, ‘The sustainable MBA: The manager’s guide to green business’. West
Sussex, England: John Wiley & Sons.