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The evolution of reporting

Preparers of financial reports are increasingly expected to integrate non-financial information into statements, but how will this affect FDs? asks Rachael Singh

If the financial crisis has taught us anything, it is that the way business works must change. An evolution is descending upon the community, in the way credit is provided, in the standards of financial reporting, in how auditors work, and in the way businesses communicate with their stakeholders. One term that was heard of before the crisis, but is now uttered more often and louder, is integrated reporting.

Corporate communication must adapt to the changing needs of stakeholder demands, which will encompass all the information needed to draw a line in the sand for its current status, while presenting how it intends to move forward, and to where. Integrated reporting (IR) is a holistic view of a company’s performance, risks and opportunities in relation to six categories of capitals: financial, manufactured, human, intellectual, natural and social.

To help companies understand the metrics and methodology needed to pull together such diverse datasets, a formal framework is expected to be released at the end of the year by the International Integrated Reporting Council (IIRC) – a collection of representatives from the largest companies, institutes and firms with former director of the Financial Reporting Council, Paul Druckman, as its CEO. “For finance directors, it is important to look at the macro picture”, he says.

Just 20% of the capital of a business is tangible, which is why IR is the next logical step in corporate reporting, according to Sallie Pilot, director of research and strategy at reporting advisers Black Sun.

Tim Haywood, group finance director of FTSE 250 construction company Interserve, agrees, adding that FDs have a responsibility to communicate the business priorities and activities “in a more balanced and holistic way”.

The first step towards achieving this is to identify and understand how our use of natural, social, knowledge and financial capital is affecting the environment and the communities in which we operate, says Haywood. Businesses must then set measurable targets that challenge management, staff and stakeholders to reduce these impacts.

“It might help UK plc to reclaim corporate reporting from the over-prescriptive demands of the governance lobby and re-establish it as a primary and useful means of communication between investors and management,” he says.

IR starts with people getting their heads around the fact that their business operates as a whole, rather than as siloed business units. All of the various, and varied, impacts upon a business must be collated, understood and valued, explains PwC’s head of sustainability Alan McGill.

But for Paul Druckman, it’s not necessarily about the boardroom understanding the big picture – instead, work must be done by them to educate and inform further down the company chain.

Pilot programme
The IIRC has started a pilot programme of companies producing an IR. The programme involves about 80 public and private organisations across the world, including Interserve and software provider SAP, which has been producing a sustainability report since 2007. The international IT company produced its first integrated report at the end of March.

“SAP is taking a holistic view that is showing more than classical reporting where we can show the stakeholders the future prospects of the company,” says Daniel Schmid, SAP head of sustainability. As an example, lowering the workforce number affects more than just cost-cutting. But what about churn?

Currently, SAP employs about 65,000 staff worldwide. If just 1% of that workforce were to change, it could lead to €62m (£53.1m) financial impact due to issues such as the break in customer relationships with staff, as well as the cost of having to recruit and train people to the same level as those no longer at the business.

“You must consider the top and bottom line when calculating for the integrated report,” he says.

However, there are pitfalls of which FDs need to be aware as they assimilate more information about the company.

“Companies need to ensure the report doesn’t lack focus … an integrated report can lose focus because it is trying to bring too much information together,” explains Robert Bartosik, an analyst at sustainability consultant Verco.

Another issue is ensuring that good people are in place throughout the business to supply the right data. And Interserve’s Haywood also notes that there is currently no globally accepted standard for quantifying non-financial information – which can make it difficult to compare the performance of different companies.

However, you have to start somewhere – regardless of data quality – and attempt benchmarking, says SAP’s Schmid. The IT business has managed to save €220m on its carbon emissions since it began recording the data in 2007, he says.

“If we hadn’t benchmarked in 2007 then we would still be paying that €220m,” Schmid explains. “Don’t wait for everything to be perfect – it is a journey you build to show the non-financial and financial data.”

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