Importance of Integrated Reporting in Value Creation
Question:
Discuss about the Integrated Reporting for Needs of Different Stakeholders.
The main aim of this report is to analyze and evaluate different aspects of integrated reporting in order to discuss the major benefits and limitations of integrated reporting in the business entities (de Villiers, Rinaldi and Unerman 2014). Integrated Reports can be considered as a concise communication that shows how the business organization’s strategy, governance, performance and prospect cane contribute towards the creation of value over the long, medium and short term. Thus, it can be said that integrated reporting (IR) assists the business organizations in enhancing the organizations’ way to think, plan and report the story of their business. Most importantly, the implementation of IR helps the business organizations in the communication of the needs of different stakeholders so that their needs can be fulfilled in an effective manner (Adams 2015). Business entities of all size can use IR in order to build trust and understanding within the business. The importance of trust is paramount among the managers, customers, suppliers, shareholders and others; and the implementation of IR helps in building trust by highlighting what drives values.
From the above discussion, it can be seen that IR has become an important aspect for the business organizations as it helps the business entities in value creation. In this context, it needs to be mentioned that an integrated report needs to be concise and should be able to highlight the process of value creation in the organizations (Flower 2015). Business entities can become majorly beneficial from the implementation of IR. The following discussion outlines the major benefits of IR in the business organizations.
With the implementation of IR, business organizations become able to develop a better and more concrete understanding about the elements that determines their ability for the creation of value for long, medium and short term. For this reason, IR helps in the planning process of the companies and helps them to develop a holistic view on the capital and resources important for the business model (Abeysekera 2013). The implementation of IR helps the business entities in understanding not only the financial capital of the companies, but it helps in gaining understanding about the other capitals for their better management. As per IR, there are six types of capitals in the companies; they are financial capital, manufactured capital, intellectual capital, human capital, natural capital and social and relationship capital. The involvement of IR can be seen in the consideration of different implications for the conception between these capitals, internal factors and external environment with the help of business model (Cheng et al. 2014).
The integrated reporting process plays an integral part in the development of a new a communication tool for addressing the issues and demands of the stakeholders of the companies. IR helps in the optimization of organizational reporting; for example, it can enable the collaboration of multiple departments on an interdisciplinary level for the sharing of information and creation of synergies (Cheng et al. 2014). This aspect helps in broadening the knowledge and understanding of the organizational people about the organization. Thus, one aim of IR is to strengthen the internal dialogue beyond the borders of individual departments that leads to the increase in the efficiency of the resources (García-Sánchez, Rodríguez-Ariza and Frías-Aceituno 2013). For example, the integration between a sustainability report with the annual report helps in saving both time and money of the companies as it is needed to design, print and distribute only one report. Moreover, IR makes the decision-making process of the organizations faster in the operational level due to the improvement in consistency in the value chain (Stubbs and Higgins 2014). Apart from this, IR brings simplification in the process of assessing opportunities and risks. The implementation of IR helps in the effective disclosure of relevant financial information and IR, as an external communication tool, helps in the enhancement of the company’s image to the people of financial community. More specifically, IR helps in the satisfaction of the needs of the investors to get a holistic picture of the company’s financial situation. The investors become able to get all the required financial information in order to determine the financial position and financial performance of the business entities (Cheng et al. 2014).
Benefits of Integrated Reporting in Business Entities
Business entities are judged by their recent financial performance that can be a limiting factor for the way of value creation. In addition, the stakeholders should have the access to the audited financial statements of the organizations for decisions making (Frías-Aceituno, Rodríguez-Ariza and García-Sánchez 2013). In addition, these users also have interest in other aspects like business model, business strategy and others that assist the organizations in achieving the organizational objectives. All these above-mentioned information can be found in the integrated reports for underatsding the outlook of the business. The inclusion of key financial information can be seen in the integrated reports. Apart from these financial aspects, IR puts focus on the significant non-financial measures and narrative information (Frías-Aceituno, Rodríguez-Ariza and García-Sánchez 2014). By accessing all the financial and non-financial information, the investors, lenders, creditors, customers, banks and others can gain the full picture of the business entities’ process of value creation. IR is not about the reporting of endless details. While it is important for the integrated reports to contain sufficient information so that the readers can understand the strategy, governance, performance and prospects of the organizations, there should not be burden of irrelevant and unnecessary information in these integrated reports. In this context, it needs to be mentioned that IR helps in the linking of information for providing the readers with more specific results.
From the perspective of the management, business organizations become largely benefitted from the implementation of IR due to the access in better data and information, easier decision-making and the creation of more efficient workflow. IR helps in bringing improvement in the risk management process with the help of transparent connection in the value creation process (García-Sánchez, Rodríguez-Ariza and Frías-Aceituno 2013). The implementation of IR helps in the increasing transparency that leads to the effective assessment of risk and opportunities and due to this, it becomes possible for the management of the entities to align strategic objectives with the business prospects and risks. Apart from this, IR helps in enhancing the internal understanding about the value processes and the identification of the employees in the companies. IR helps in the disclosure of value drivers and value chain. Another major benefit of IR is that it helps in the linkage between financial and non-financial capitals and it leads to the holistic presentation of the business organizations that includes the value drivers for the stakeholders (Cheng et al. 2014). Thus, based on the above discussion, it can be seen that the implementation of IR has major benefits including the creation of value.
The above discussion states about the major benefits that the business organizations enjoy due to the implementation of IR. In spite of these major benefits, business entities also have to face some major challenges while implementing IR that cannot be ignored. The following discussion discusses about the major challenges of the implementation of IR:
Creation of value is considered as the major objective of IR. However, value creation is also regarded as one of the major limitations of IR as many business organizations fails to identify and understand what is considered as value for the major stakeholders for the organizations (Brown and Dillard 2014). Connectivity is considered as one of the major limitations in the way of the implementation of IR as the requirement is the breaking down of the silos within the organization and to change the existing process of collecting data. In most of the cases of integrated reports, it can be seen that there was scope for the improvement in showing connectivity of information s that a better holistic picture of interrelatedness, combination and dependencies for the creation of value for the stakeholders (Crowther 2016).
Holistic View on Capitals in Business Entities
At the time of the implementation of IR, another major imitation faced by the business entities while reconciling the needs of different stakeholders. It has been seen that only 46% of the integrated reports become able to explain the materiality determination process and this particular limitation affects the overall efficiency of IR (Churet and Eccles 2014). Maintaining conciseness is considered as another major limitation of IR as most of the integrated reports have the lengths of more than 150 pages. For this reason, business entities find it very difficult in reconciling conciseness and effective communication with the key stakeholders. The lack of balance between the bad news and good news is considered as another major limitation of as more than 51% of integrated reports lack reliability as well as completeness. Business entities are required to know what good news looks like before the implementation of IR (Eccles and Krzus 2014).
Resistance to change is regarded as one of the major limitations in the implementation of IR. The managements of the business entities face resistance from the individual departments along with the individual employees due to the changes in financial reporting caused by the implementation of IR (Busco 2016). In this context, it needs to be mentioned that the business entities have to incur higher amount of costs or the implementation of IR. At the same time, there is an involvement of greeter degree of work for the implementation of IR. For this reason, both the high cost and increased work is considered as the major limitations of the implementation of IR. The implementation of IR provides the business entities with greater degree of transparency that makes the business entities expose to potential risks as the company has to disclose about the organizational negatives for the purpose of reporting (Stent and Dowler 2015).
It needs to be mentioned that the implementation of IR causes major changes in the business organizations and it taken lengthy time in order to be implemented. Several years are required from the initial decision to the publication of the final reports and it demands greatest coordination (Wild and van Staden 2013). In the presence of lack of experience, the whole implementation process can go in vein along with the wastage of time and effort. In the process of the implementation of IR, insufficient deliver of required data and information between the departments can make the whole process difficult as well as ineffective. It can lead to the failure of the implementation of IR. Apart from these, limited staff, time constraints, lack of financial resources and lack of work assignment and clear role are the regular limitations in the implementation of IR (Abeysekera 2013).
Conclusion
From the above discussion, it can be seen that the implantation of IR helps in increasing the overall efficiency of the business organizations and the companies become majorly beneficial from the implementation of IR. With the implementation of IR, the managements of the companies become bale to make an effective communication with the key stakeholders and become able to create value by satisfying their needs. In addition, the implementation of IR helps in providing a holistic picture of the organizations and makes the employees aware of different parts of the companies. At the same time, the business entities face limitations in the implementation of IR. High cost and higher amount of work can be considered as major limitations of IR implementation along with inexperienced workforce and lack of coordination along the departments. Moreover, lack of conciseness is also considered as the limitation in IR implementation. Thus, in order to avoid the limitations of IR, the companies are recommended to secure the support of all the departments before the implementation of IR. Apart from this, in order to make the implementation process smooth, it is recommended to the business entities to acquire external expertise. Moreover, the introduction of training programs and communication events like workshops ensure the effective implementation of IR. Most important, the full support from the executive management needs to be there in order to ensure the correct and effective implementation of IR.
References
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Adams, C.A., 2015. The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, pp.23-28.
Brown, J. and Dillard, J., 2014. Integrated reporting: On the need for broadening out and opening up. Accounting, Auditing & Accountability Journal, 27(7), pp.1120-1156.
Busco, C.A., 2016. Integrated Reporting. Springer,.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
Churet, C. and Eccles, R.G., 2014. Integrated reporting, quality of management, and financial performance. Journal of Applied Corporate Finance, 26(1), pp.56-64.
Crowther, D., 2016. A social critique of corporate reporting: Semiotics and web-based integrated reporting. Routledge.
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Eccles, R.G. and Krzus, M.P., 2014. The integrated reporting movement: Meaning, momentum, motives, and materiality. John Wiley & Sons.
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Frias?Aceituno, J.V., Rodríguez?Ariza, L. and Garcia?Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), pp.56-72.
Frías-Aceituno, J.V., Rodríguez-Ariza, L. and García-Sánchez, I.M., 2013. Is integrated reporting determined by a country’s legal system? An exploratory study. Journal of cleaner production, 44, pp.45-55.
García-Sánchez, I.M., Rodríguez-Ariza, L. and Frías-Aceituno, J.V., 2013. The cultural system and integrated reporting. International Business Review, 22(5), pp.828-838.
Stent, W. and Dowler, T., 2015. Early assessments of the gap between integrated reporting and current corporate reporting. Meditari Accountancy Research, 23(1), pp.92-117.
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Wild, S. and van Staden, C., 2013, July. Integrated reporting: initial analysis of early reporters–an institutional theory approach. In 7th Asia Pacific Interdisciplinary Accounting Research Conference (pp. 26-28).
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