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Integrated Reporting – is it good for New Zealand?

Professor Ralph AdlerMore and more organisations are looking at Integrated Reporting (IR) as a way to increase both communication and accountability when they report to their stakeholders.

Integrated reporting looks beyond financial records to incorporate the economy, environment and society into a performance report for commercial or not-for-profit organisations.

The University of Otago Centre for Organisational Performance Measurement and Management (COPMM) hosted a symposium in July to explore the components of IR as an organisational tool in New Zealand.

COPMM Chair Professor Ralph Adler said interest has grown since it was developed in 2010; so it is important to foster discussion in New Zealand on how IR adoption could impact board members, senior management and accounting professionals.

A wide range of factors determines the value of an organisation - some financial or tangible and easy to account for in financial statements (e.g. property, cash), while many such as intellectual capital, competition and energy security are not.

Unlike the ‘backward looking’ orientation of conventional organisational reporting, IR adopts a holistic, forward-looking approach to communicating how an organisation’s strategy, governance, performance and prospects are likely to impact current, medium and long-term performance.

Professor Adler said IR reflects the broad and longer-term consequences of the decisions organisations make to create and sustain value, which in turn helps to manage risk and resources, giving a clear overall picture of its current and future status.

While an increasing number of the most influential global entities now use IR, Warren Allen, External Reporting Board CEO, pointed out New Zealand is lagging behind, which is atypical given the country is often a leader or fast-follower.

Mr Allen sees IR as a user-led revolution. “Users are demanding more understanding from companies; a wider group of stakeholders are seeking accountability. They want organisations to demonstrate long-term sustainability and how they create value.

“Integrated Reporting not as much about the reporting – it is a paradigm shift into integrated thinking that starts in the boardroom.”

He suggests integrated thinking begins with understanding the organisation’s “Social licence” to operate. Social licence is an informal and unstipulated set of rules issued by the community that all entities have, and which needs to be discussed in boardrooms, documented, managed and reported to meet expectations for operating.

There are many examples of where failing to fulfil the social licence to operate goes wrong – United Airlines having security drag a customer off a plane because they had overbooked seats is a good example of a business crossing the line of acceptable behaviour. And closer to home, the Chiefs rugby team’s decision to hire a stripper for an end-of-season event in 2016 also failed to win community support.

“This is where IR can help to present non-financial impacts; such issues could have been avoided if there had been adequate discussion in the board room, consultation with the community and understanding of social acceptability.”

Mark Hucklesby, Partner and National Technical Director in the New Zealand accounting and advisory firm Grant Thornton, believes short-term gains in a “live for today” environment shape many of our actions; consequently, lip service is paid to accountability.

IR on the other hand is more efficient, and means more integrated thinking, greater clarity on business issues and performance, and improved engagement, relationships and reputation. It also improves gross margins. “Financial network models focus on market dynamics and linkages but the world is connected – we need to report on what matters to individuals.”

He believes strategy should be at the heart of every IR, incorporating organisational overview and external elements that influence the entity’s operations.

Craig Deegan Professor of Accounting, RMIT University Melbourne says one of the positive aspects of IR is that it requires answers to “Where does the organisation want to go and how does it intend to get there?”

“It requires consideration of connectivity and interdependencies, and helps to question how the organisation’s governance structure supports the organisation’s ability to create value in the short, medium and long-term.”

However, he believes stakeholders expect Integrated Reporting to mean transparency, and as such, suggests it needs to develop more focus on accountability rather than value creation.

Mark Yeoman, Warehouse Group Limited Chief Financial Officer, sees an important role for Integrated Reporting beyond the investor and into wider communities.

The Warehouse has also adopted the reporting system, initially working on integrated thinking as a way of explaining trade-offs and priorities.

Mr Yeoman pointed out IR helps organisations to recognise value in more ways than just through financial measures, by assessing the positive and negative capital attributes for an organisation, describing and measuring benefits and understand risk, and factoring this into decision criteria.

Many investments have non-financial costs and benefits, and both controllable and uncontrollable factors which influence value. The Integrated Reporting framework has six major stores of value that makes it easier for an organisation to state its purpose:

  • Financial capital
  • Natural capital
  • Human capital
  • Manufactured capital
  • Social and relationship capital
  • Intellectual capital

Integrated Reporting facts and figures

According to the International Integrated Reporting Committee (IIRC), Integrated Reporting (IR) is defined as a process founded on integrated thinking that results in a periodic integrated report by an organisation about value creation over time and related communications regarding aspects of value creation.

  • IR started with a pilot programme involving 130 companies across many countries and now there are 2,000+ entities actively in IR networks worldwide.
  • South Africa mandated IR in 2011 for listed entities.
  • The first New Zealand IR adopters were Sanford and NZ Post - their ongoing achievements in IR have been globally recognised.
  • IR has meant a reduction in cost of capital (of up to 50 basis points).

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