Integrated Reporting – A New Reporting Model for Business
The concept of integrated reporting has recently occupied the first pages of professional publications in the world of accounting. The global financial crisis has revealed the need for a new economic model that could protect business, investors, employees and society from a series of subsequent deeper crises.
Currently, for the purposes of many companies, short-term benefits often prevail over the long-term goals of improving society’s life, by launching mechanisms that are more risk-aggressive in business behavior and decision-making models. This cannot but lead to market instability of a scale that threatens entire industries and economies. One aspect of criticism of this corporate reporting model is that it does not currently pay enough attention to factors such as risk, strategy, oversight, and the sustainability of an enterprise’s business model.
Advocates of the new integrated reporting model suggest that the inclusion of all these non-financial, but nevertheless critical for the functioning of the business components in the reporting will improve its quality and reflect the significant impact of the environmental factor, social and regulatory factors (environmental, social and governance, ESG): it is about the use of natural resources, the protection of human rights and the impact of business on social phenomena and climate change. The new model is considered as a possible way to get a more complete picture of the activities of the reporting enterprise, reflecting risks and opportunities and more logically linking together ESG factors and financial results.
The goal is to create a unified and comprehensive concept of corporate reporting, which would be structured around the strategic objectives of the organization, its business model and corporate governance. The objectives of this concept are formulated as follows:
– Satisfy the information needs of long-term investors by showing the consequences of long-term decision-making.
– Reflect the relationship between ESG factors and financial factors in decision-making affecting the long-term results of business activities, making clear and transparent the relationship between sustainability of a business and its economic value.
– Provide a format for reporting on ESG factors for systematic inclusion in the decision-making process.
– To shift the emphasis in the indicators of evaluating business results from short-term to long-term.
– Reflect in reporting more information that management uses for daily operations management.
Figure 1 presents the main components of integrated reporting that should find their place in the concept being developed: financial information already published in various forms, information on the social factor and the environmental impact of business, information on the implementation of supervision and existing management compensation, as well as comments management.
The idea of developing and using a “new business reporting model” is far from new. It has already become a kind of tradition during periods of economic cataclysms to talk about the insolvency of the old business reporting model and to call for substantial reform – right up to the development of a radically new approach. The history of such discussions begins in the 70s. of the last century, and the fact that the global application of International Financial Reporting Standards (IFRS) has been consistent for more than 30 years allows us to understand the difficulty of reaching global consensus.
But even if we leave aside the questions of the practical implementation of the new model, at the conceptual level there is no single approach to either “modeling” business reporting, or to the very need for such drastic changes. Only on the basis of the formal application of a clear definition of “model” can a large number of proposed options be screened out.
The term “business reporting model” is used in the literature quite freely. Christian Nielsen defines the main characteristics of a business reporting model as follows:
– purpose (external communication);
– description of the content;
– the disclosure structure of this content;
– method of obtaining data.
Figure 2 shows the task of combining the two types of reporting when creating the third – business reporting, but whether this will be a “competent” addition of models or a fundamentally new model will be created is not yet clear.
Reporting is forced to evolve due to the need to reflect changes in the business itself, in information technology, in the needs of users. Different jurisdictions have different requirements. Within one jurisdiction, as a rule, there are different approaches to various enterprises – depending on their size, type of ownership and activity.
And finally, the requirements themselves are changing – this is an ongoing process. But how much should the process of these changes reflect the revolutionary nature of the statements about their necessity?