Date: 2025-08-21 Page is: DBtxt003.php txt00028505
ABOUT CORPORATE REPORTING
INTEGRATED REPORTING
The State of the Art of Integrated Reporting ... written by Chiara Mio
INTEGRATED REPORTING
The State of the Art of Integrated Reporting ... written by Chiara Mio
Original article: https://www.academia.edu/59310529/
Integrated_reporting_the_state_of_the_art_of_Corporate_Reporting
Peter Burgess COMMENTARY
I have archived this paper on 'Integrated Reporting' because it is reasonably short, and quite comprehensive. I will use it as a foundation for some of my own current thinking on the subject.
I was a 'user' of management information right from the start of my working life, and my thinking on the subject has expanded over time.
There is an enormous amount written about accounting, manaagement and related subjects. There is also an enormous amount of experience that is not formally documented, and an enormous amount of writing that is not connected very usefully to practical experience.
My goal is to improve management information in a meaningful way ... where improvement has many dimensions ... in other words, all the dimensions that matter.
I want to build on the bits of what exists that are useful, fill in the some of the critical gaps while keeping it simple and practical ... not to menton low cost with high value and utility.
A central theme is being clear about 'purpose' ... and more specifically about ALL the purposes that management information needs to serve ... and at the same time be both fair and useful!
All of this is a challenge ... and helping to make management information 'better' is a worthwhile endeavour.
Peter Burgess
Te stream of accounting research on nonfnancial and voluntary disclosure has been developing a lot in the last fve years, also due to the introduction of Integrated Reporting (IR) in 2013 (International Integrated Reporting Council [IIRC], 2013). Tis increase in academic research has been mirroring an equally lively debate at the standard setter and policy maker level, which has been tackling several issues concerning the nature of nonfnancial information, the standards to be adopted and the regulation of such disclosure. As a consequence, academic research in this area has the potential to signifcantly contribute to practice. I frst discuss the evolution of Corporate Reporting, then I focus on Integrated Reporting, which is the state of the art of Corporate Reporting and, fnally, an overview of previous investigations and some suggestions for future studies were provided.
2. CORPORATE REPORTING
Accounting principles are often seen as totally disconnected from the economic and business context in which corporations operate. However, these principles are infuenced by the evolutions of the business landscape and consequently by the needs of capital markets. For instance, fair value accounting has been driven by investors’ need to take faster decisions. Tis was made possible by fair value accounting, which already refects market information.
More recently, reporting and – aferwards – accounting has been shifing towards nonfnancial information (NFI) disclosure because of market pressures. At frst, this evolution has been voluntary. According to Daub (2007) “a report can be considered a sustainability report in the strictest sense of the term if it is public and tells the reader how the company is meeting the corporate sustainability challenges. It must, in other words, contain qualitative and quantitative information on the extent to which the company has managed to improve its economic, environmental and social efectiveness and efciency in the reporting period and to integrate these aspects in a sustainability management system” (p. 77). Many companies published their Sustainability Report following some guidelines (among them, the Global Reporting Initiative guidelines are probably the most infuential).
Recently, NFI became mandatory in some countries, with the European legislator issuing Directive 2014/95/EU on nonfnancial disclosure. Tis regulatory evolution is hugely important, because it equals nonfnancial and fnancial disclosure in terms of obligatoriness, assurance, and compliance.
Also, in the case of NFI disclosure, the evolution of accounting can be traced back to changes in the economic context and, as a consequence, to the capital market information needs. In the current business environment, corporate value creation is more and more infuenced by externalities that go beyond the market logic and that are, therefore, difcult to measure in monetary terms. To generate value, companies rely on intangible assets, such as corporate reputation, human capital, and know how. Until the 1990s, most of the companies’ market capitalization was due to tangible assets, because such assets represented the key success factor in the value creation process. Te situation changed afer 2000s, with technological and social evolution, leading to a great (sometimes disruptive) economic development, and with intangibles being the key factors in value creation processes.
Traditional annual reports are unable to provide investors with enough relevant information to forecast the ability of corporations to create value in the long term. In short, the economic environment changed dramatically in the last 20 years. Accounting needs to change accordingly. Consider, for instance, the case of a company holding a patent. To determine its real value and the contribution it may be able to provide to the company’s value creation process, we would need to know how many years the patent will still be efective, whether other competitors own similar patents, if the market evolution will confer more value to the patent in the future, among others. To this extent, the historical cost does not provide enough information, and the fair value is scarcely relevant if we do not know the assumption leading to a certain fair value evaluation (assumptions that ofen are nonfnancial).
In this new economic and competitive context, which creates new information needs for investors, accounting needs to focus on Corporate Reporting as the new paradigm, thus holistically considering fnancial, nonfnancial and narrative reporting, corporate governance, remuneration, and sustainability reporting. Sustainability Reporting had (and has) some severe shortcomings, which is evidenced by the fact that stakeholders and investors do not normally consider the information contained in such reports when making their decisions. Instead, nonfnancial and fnancial information need to be communicated holistically by corporations through their Corporate Reporting system.
Financial and nonfnancial issues are, in the current business environment, tightly related and integrated, to the point that the distinction between the two categories no longer has sense. Investors need to have a holistic picture of the company, which allows them to have information on the value creation process in the short, medium and long term.
3. INTEGRATED REPORTING
From this perspective, Integrated Reporting (IR) can be seen as one possible type (although not necessarily the best) of Corporate Reporting. Diferently from other forms of reporting, it is not an additional but rather an overall and holistic component of the system. IR is intended to connect and bring together all the diferent components of the Corporate Reporting. Te International Integrated Reporting Committee (IIRC), in its 2013 framework, defnes IR as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, create value over the short, medium and long term” (IIRC, 2013, p. 7).
Te backbones of the IR Framework are the content elements (organizational overview and external environment; governance; business model; risks and opportunities; strategy and resource allocation; performance; and outlook) and the guiding principles (strategic focus and future orientation; connectivity of information; stakeholder relationships; materiality; conciseness; reliability and completeness; consistency and comparability). Among those, the most innovative are arguably the following: business model, forward-looking approach, and materiality.
Te IR Framework requires companies to disclose information about their business model, defned by the IR Framework as “the chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long term” (IIRC, 2013, p. 14). Business model analysis is central for investors to assess the ability of the company to create and sustain value over time. Tis is true in any kind of business but even more in innovative companies.
Te “strategic focus and the future orientation” guiding principles require that an IR provides insight into the organization’s strategy and as to how this relates to its ability to create value in the short, medium and long term and to its use of and efects on the capitals. Tis principle also represents one of the most important innovations introduced by IR, which may beneft investors the most.
Annual reports have been traditionally reporting past events, while the value of companies depends on the ability to generate value in the future. Finally, the IIRC defnes materiality as follows: “a matter is material if it could substantively afect the organization’s ability to create value in the short, medium or long term” (IIRC, 2013, p. 33). This approach to materiality is signifcantly diferent compared with the sustainability reporting approach, because the market is at the center of the defnition and not stakeholders. Tis diference can also be explained by relying on the institutional theory (Besharov & Smith, 2014; Dunn & Jones, 2010), which argues that organizations operate in pluralistic environments, characterized by multiple institutional logics. From this perspective, the most prominent logic in IR materiality is the market logic, while in sustainability reporting is stakeholder logic.
The common root of the guiding principles and content elements briefy discussed above (business model, future orientation, and materiality) is not stemming from the reporting but rather from the philosophical background of IR. Te cornerstone of IR is the integrated thinking approach, defined – conversely to the silo thinking approach – as the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses and afects. Integrated thinking leads to integrated decision-making and to actions that consider the creation of value over the short, medium and long term. In this context, integrated thinking is central, because it allows understanding the real scope of IR, which goes above and beyond reporting and can afect, among others, companies’ strategy, organizational structure, and stakeholder management.
4. CURRENT AND FUTURE RESEARCH ON IR
Since 2013, when the IR Framework was frst published, many researchers from several felds have investigated IR, its main features and the consequences for the companies implementing it (for a review, see de Villiers, Hsiao, & Maroun, 2017; Dumay, Bernardi, Guthrie, & Demartini, 2016; Mervelskemper & Streit, 2017). Tis literature can be split into studies focused on IR from the perspective of the external users (among others, Bernardi & Stark, 2018; Lai, Melloni, & Stacchezzini, 2016; Serafeim, 2015; Zhou, Simnett, & Green, 2017), from the perspective of the internal users, and from a management accounting and decision-making perspective (among others, Guthrie, Ricceri, Dumay, & Nielsen, 2017; Mio, Fasan, & Pauluzzo, 2016; Steyn, 2014; Stubbs & Higgins, 2014). Interestingly, Barth, Cahan, Chen and Venter (2017) merge the two perspectives. Tey show that IR increases frm value and propose (and fnd empirical evidence on) two channels: better decision-making (real effect – internal) and improvement in the information environment (capital market efect – external).
Studies on the capital market channel (see Abhayawansa, Elijido-Ten, & Dumay, 2018; Bernardi & Stark, 2018; Flores et al., 2019; Zhou et al., 2017) have focused on fnancial analysts and have generally relied on voluntary disclosure (Beyer, Cohen, Lys, & Walther, 2010) and information processing theory (Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012). Empirical results suggest that IR does improve corporate disclosure, thus increasing the ability of analysts to make better forecasts. Future research may study whether the increased ability of analysts is due to more information (thus leveraging on IR content elements) or to information being presented more efectively (thus leveraging on IR guiding principles).
Another interesting issue still underinvestigated is the role of IR assurance. NFI are ofen perceived by investors as being less reliable than fnancial information. Can assurance fll this gap in investors’ confdence? Reimsbach, Hahn and Gürtürk (2017), for instance, fnd that assurance does play a central role for investors, but more studies are needed on this research question. In particular, researchers may tackle the issue of the assurance on forward-looking information, as pointed out below. Moreover, they may draw the attention on the expectation gap related to the scope of assurance, an extremely important element in this context, to the point that the assurance efectiveness should be evaluated in terms of the reduction in such expectation gap.
According to Perego, Kennedy and Whiteman (2016), much of the embryonic IR-related research has yet to explore how internal performance measurement and reporting systems have been impacted by the adoption of IR. Tis gap needs to be covered, because, according to the authors, experts have called for further applied research analyzing difusion mechanisms across and within frms that are working on how to implement IR internally. Some of the studies focusing on the internal implementation of IR ( Lodhia, 2015; Mio et al., 2016; Steyn, 2014; Stubbs & Higgins, 2014, among others) generally explore the transition to integrated reporting, the drivers of change in the management control system,
the changes in corporate processes and structures afer the adoption of IR. De Villiers et al. (2017) develop a new conceptual model that can be used as a framework for understanding the various infuences of IR and as a way of identifying new, interesting and underexplored research questions.
This second stream of research, generally based on qualitative methods, stems from integrating thinking, which makes the IR framework a powerful instrument to induce organization change that goes beyond the reporting and that potentially involves all functions of the company. With the recent EU Directive on NFI, the role of the board of directors is much more central, because of the higher degree of responsibility and judgement that it requires. Tus, further research on the interplay between corporate governance and IR is needed, especially when IR becomes mandatory.
Other research questions that deserve an analysis are related to target setting. If long-term performance is driven by NFI and by intangible assets, then managers should be held accountable for their performance in those areas and should be remunerated accordingly. Did the adoption of IR actually shape companies’ MBO? Connected with this issue, there is the long-term orientation of adopting companies. Pushing managers to take decisions that allow companies to generate value in the long term is one of the main aims of IR. Also, by relying on the literature on the real efects of accounting, researchers may investigate whether companies implementing the IR framework (both reporting and integrated thinking) put more emphasis on long-term performance.
On the one hand, targets refect an internal dimension of analysis. On the other hand, externalities refer to impact on stakeholders. Merging these two dimensions (internal and external) may be challenging. One of the tools that may be used to this purpose is to measure the impact of corporate operations towards other stakeholders. Tese impact indicators allow both internally communicating targets and measuring externalities. Academic literature can contribute to this feld by proposing best practices and by studying the efects of impact indicators on both internal decision-making and on external stakeholders. Forward-looking information are central in IR, as one of its most innovative features is the orientation to the future. If this kind of information is extremely relevant to investors, at the same time, it may damage the corporation because competitors may have access to proprietary information. How do companies react to this possible shortcoming? Do they omit any forward-looking information because of confdentiality issues? What is the process through which they decide which information to exclude? Who is in charge of this activity?
Finally, exploring the role of benchmarking is required. Nonfnancial, forward-looking indicators may lack relevance because investors do not have enough information to benchmark these indicators against other companies. It would be probably important for them to have a benchmark at the sector. Terefore, further research is needed not only on the quality and reliability of such disclosure but also on the way in which they are benchmarked against competitors.
There is an urgent need of “relevant” investigations in this feld, which is able to impact on the quality of the companies and on the competitive arena and to improve business. Te tracks summarized above represent a (little) contribution and guidance.
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Integrated reporting: the state of the art of Corporate Reporting
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