The transformation of business reporting is at risk of being undermined by bias.
Every so often there are encouraging signs in the business community of a consensus to adopt initiatives that will address problems of global consequence.
Prominent examples are the separate and joint activities of the World Business Council for Sustainable Development and World Resources Institute, collaboration between the United Nations and finance sector that has given rise to the Principles of Responsible Investment, and continuing modernisation and harmonisation of international business law under the umbrella of the United Nations Commission on International Trade Law (UNCITRAL).
Indeed, the current International Financial Reporting Standards (IFRS) would not have been possible without national regulators, the business community and professional bodies surrendering parochial interests (and some pride). The upshot has been a global approach with achievement of capital market efficiencies and transparency paramount considerations.
Another initiative that has resulted from a broad business constituency – within which accounting bodies and the profession have played a major role – is the development of integrated reporting (IR), culminating in December 2013 with the International Integrated Reporting Council releasing the IR Framework.
Taking a slightly philosophical bent, IR calls on accountants to reflect on their role in organisations and the purposes to which their professional skills are applied – not only in terms of defining a lead or ownership role for oversight and presentation of IR, but in the challenge of shaping the ends to which IR itself is applied.
Implicit in this is the need to confront a friction in the debate around IR’s primary purpose. Is it about business transformation or the de-cluttering of corporate reporting? In Australia, the latter seems to have taken ascendency, representing a lost opportunity.
Evidence of a bias in arguments for the uptake of IR is apparent from the emphasis given to legal protections that ought to be extended to companies and directors in making forward-looking disclosures.
There is also a persistent view that while IR might be a beneficial medium of corporate disclosure, its adoption should entail a trade-off in the abandonment of some other disclosure – quite likely sustainability reporting.
The harder road of achieving business transformation may need to be returned to by both accountants and the broader business community. The 31 March 2014 release of the Intergovernmental Panel on Climate Change (IPCC) (Working Group III) Fifth Assessment for Policymakers highlights such a need, and moreover, opportunity for accountants and business alike.
Actions of the type called for by the IPCC, which centre on the assessment and management of climate change risks, are an opportunity for accountants to redefine their leadership role within organisations and for business itself to develop new sources of sustainable competitive advantage.
IR was conceived as part of an optimistic endeavour to transform corporate reporting. Nonetheless, in a wider context it has also taken place during a profound shift in understanding the ways in which the wealth of future generations may be created and – equally significantly – distributed. This is evident in the statement by the IIRC as to why we need IR, in which it emphasised the interdependencies:
- growing policy activity around the world in response to financial, governance and other crises
- heightened expectations for corporate transparency and accountability
- actual and prospective resource scarcity
- population growth
- environmental concerns.
This theme of interdependencies (also termed connectivity) is applied in an organisational context within IR. It occurs through the IR Framework’s description of the wealth creation process, which has at its core an organisation’s business model.
The IPCC’s Fifth Assessment differs from its predecessors in that there is an increased focus on risk and decision-making with regards to climate change. It is encapsulated in the statement: “Climate change adaptation is an iterative risk management process with multiple feedbacks. People and knowledge shape the process and its outcomes.” The report goes on to illustrate an interconnected loop of scoping, analysis and implementation.
Risk, decision-making and learning are also at the core of IR, with the framework defining as one of its fundamental concepts: “Continuous monitoring and analysis of the external environment in the context of the organisation’s mission and vision identifies risks and opportunities relevant to the organisation, its strategies and its business model.”
IR calls on accountants to reflect on their role in organisations and the purposes to which their professional skills are applied.
Clearly, one of the critical cues in monitoring and responding to identified risks and opportunities is observing and learning from similar processes that evolve in the wider environment. An organisation’s risk management and its economic sustainability are not remote from the influence of – and learning from – macro-level policy.
IR does offer a very real opportunity for business to contribute to, and gain from, the necessary transformation to a sustainable and growing economy. However, to do so those responsible for IR’s further development and implementation need to demonstrate vigorous engagement with the critical issues that shape and set economic activity. Of course, such influences have never been static, but now, more than ever before, our knowledge of related social and environmental interdependencies and extended impacts must be brought to bear.
To allow the debate on IR to be dominated by issues of liability and reporting burden (while no doubt valid concerns), renders us prone to mere incrementalism, with IR falling significantly short of its initial promise and leaving us, in the words of Prince Charles, “battling 21st century challenges with, at best, 20th century decision-making and reporting systems”.
John Purcell is CPA Australia’s policy adviser – environment, social, governance.