Integrated reporting is creating a bold set of goals for the accounting profession.
Also with Roger Simnett
“I wanted to change the world. But I have found that the only thing one can be sure of changing is oneself.” Aldous Huxley, Point Counter Point.
Integrated Reporting <IR> has been established as a compelling response to the broader information demands of rapidly evolving capital markets and the needs of a diverse set of investors and other stakeholders.
<IR> highlights the challenges facing organisations striving to tell their story in a more cohesive, clear way in a changing world.
Auditing and assurance put both the value of <IR> and its associated challenges into sharp focus.
To capture corporate performance in higher definition, <IR> draws on a broader range of subject matter and presents disclosures that can seem more subjective than traditional, financially focused reporting.
This magnifies the need for credibility around both the interpretation and treatment of subjective disclosures that require specialised expertise in identifying, measuring and reporting – and highlights the value of independent assurance.
Most respondents to the International Integrated Reporting Council’s (IIRC) Consultation Draft of the International <IR> Framework considered independent, external assurance as a “fundamental mechanism for ensuring reliability and enhancing credibility”.
<IR> presents an important set of challenges for the assurance profession.
For instance, broader subject matter means an increased importance and complexity in the assurance skill set, potentially requiring additional expert input beyond financial accounting or the bringing together of multidisciplinary teams.
Disclosures more open to subjectivity raise a range of issues for assurance practitioners seeking to corroborate them.
As the assurance profession gears up for “integrated assurance” (IA), CPA Australia together with the UNSW Australia Business School and other industry participants are undertaking an Australian Research Council linkage project to investigate.
The shape of an integrated report
The IIRC’s International <IR> Framework issued in December 2013 specifies that an integrated report needs to be a “designated identifiable communication”.
Although financial statements have clearly established boundaries, the shape of an integrated report is still developing.
Some are included as part of another report, while others are presented as stand-alone documents.
Both approaches are acceptable under the Framework so long as all of the requirements are applied.
It has also been suggested that the reports could build on existing management commentary, or in Australia on the Operating and Financial Review (OFR) which shares many objectives with <IR>.
The form of an integrated report has a bearing on the issues associated with assurance, particularly in distinguishing between “integrated assurance” and “separate assurance”.
Integrated assurance or separate assurance?
<IR> has been described as resting on the pillars of other more detailed reporting – including financial reporting and sustainability reporting.
It is broadly agreed that <IR>, bringing these elements together in a cohesive way to tell an organisation’s value-creation story, is the right destination for corporate reporting.
Similarly, integrated assurance has been suggested as a holistic assurance engagement that covers both the financial and non-financial information in an integrated report and results in a single assurance communication with an opinion on both financial and non-financial matters.
This is the right destination for corporate assurance, and will cover issues such as connectivity, an important <IR> framework principle.
The alternative is “separate assurance” on the financial statements and disclosures of non-financial aspects of the integrated report, such as a sustainability report.
Having separate assurance conclusions on different aspects of an integrated report could confuse users of the reports and also miss the essential quality of connectivity.
Although a simpler, ready-made option, stopping short at separate assurance could impact on the relevance and value of assurance conclusions, and lessen the benefits flowing from <IR>.
Integrated assurance prompts a bold set of goals for the profession.
Major challenges include how a practitioner obtains assurance around the connectivity of information in an integrated report and how the report has been brought together.
This may require development of new assurance concepts and standards, or revisiting existing frameworks and guidance.
Forward looking statements?
A frequently cited anxiety regarding <IR>, particularly in Australia, is the perception that it includes more forward-looking information than is required in corporate reporting.
This has caused company directors to express concern about their liability.
Uncertainty around director liability even with respect to financial statements and the existing OFR requirements has compounded this issue.
It is important to recognise that integrated reports aren’t trying to predict the future, as is sometimes assumed; they’re reporting on how companies are placed to take their strategy into the future.
However, the concerns highlight both the importance of assurance and the associated challenges.
No doubt, investing in holistic, quality assurance would be an important consideration for directors and audit committees communicating with investors through an integrated report, just as it is with financial statements and sustainability reports.
Another major consideration for auditors as they move toward <IR> assurance is their own legal accountability.
Reform may be needed to remove unintended impacts of legal precedents developed before the advent of <IR> and many of the wider transformations that have led to its inception.
Decisions on what to include and exclude, and how connectivity between information is portrayed, are critical facets of an integrated report.
In financial reporting these relationships and decisions are largely grounded by reference to shareholders’ equity, profit and the accounting equation.
A conceptual grounding for assurance around connectivity and the effectiveness of how an integrated report summarises an organisation’s story needs to be developed.
Do we need new assurance standards?
Many of the challenges in assurance for <IR> touch on fundamentals that underlie current assurance frameworks.
Big questions include: at what point should the framework for assurance engagements be revisited? And where are new concepts and standards required?
Much of what is included in an integrated report is qualitative rather than quantitative.
Although questions on what it should contain are firmly on the agenda of the International Auditing and Assurance Standards Board (IAASB) – particularly given the tendency of financial statements to move into this territory – current assurance pronouncements offer little guidance on these issues.
Current auditing and assurance standards tend to be developed either for financial (International Auditing Standards) or non-financial engagements (International Standards on Assurance Engagements).
There is little guidance for engagements that involve both, or the issues arising from integrative information and its connectivity.
Some of the concepts underpinning these standards are stretched by <IR> and other areas where assurance is needed.
For instance, there are open questions around how well users understand the basic scale of “reasonable” and “limited” assurance, where the lines are drawn in terms of practitioners’ work effort and focus, and how well these terms fit with current demands for assurance.
<IR> opens the opportunity to revisit many of the fundamentals involved in corporate reporting, with a view to clearer communication that better fits with the needs of stakeholders in a changing world.
For an auditing profession facing questions of relevance in fast evolving capital markets, <IR> provides an impetus to address the critical challenges arising and achieve meaningful change.
Roger Simnett is Scientia Professor of Accounting and academic director of the Centre of Social Impact at the UNSW Australia Business School, and a member of the working group of the International Integrated Reporting Council.
Amir Ghandar is CPA Australia’s policy adviser on auditing and assurance.
Assurance on <IR>: An Introduction to the Discussion
, IIRC, 2014, www.theiirc.org/assurance
Access the following CPA Library items online
“A Growing Demand for Assurance in Sustainability Reporting”
by Maria Murphy, The CPA Journal, 2014
“Report Puts Business Models at the Heart of Integrated Reporting”
, Financial Management, 2013
“The Future of Corporate Reporting”
, The Business Times, 11 November 2013
Contact CPA Library on 1300 737 373 or email [email protected]
This article is from the October 2014 issue of INTHEBLACK.