The external reporting of non-financial measures is all the rage right now. The statistic that over the last 40 years the value of a company has gone from 80% based on items on the balance sheet to 80% based on items not on the balance sheet, is sited time and again as a major reason investors and other stakeholders need information beyond the audited financial statement. As a result we have regulatory initiatives on non-financial reporting from conflict minerals reporting to the SEC “recommending” discussion of cyber security threats and attacks in a company’s 10-K report. We also have groups like the International Integrated Reporting Council (IIRC) developing reporting frameworks to integrate financial and non-financial reporting into a single coherent document that links the impact of the non-financial results to the financial results of a business. And, finally we see groups like the Sustainability Accounting Standards Board (SASB) issuing “standards” for determining and reporting various non-financial measures.
Almost by definition many of these non-financial measures are being developed and reported internally in companies by organizations other than finance. This includes organizations like purchasing, human resources and IT. The question that immediately comes to my mind is do these organizations take the same care to set up an appropriately controlled process to ensure the reported metric is accurate, timely, consistently calculated, etc. This control mindset is second nature to many professional accountants, but may not be for members of organizations outside of finance.
Really, this control mindset is important whether the non-financial information is reported externally or “just” internally. If the information is used by management to make important decisions, the validity and accuracy of that information is critical to the ongoing performance of the organization. This is why professional accountants in business should care about non-financial measures and be involved in the reporting of this non-financial information. It’s not our job be a gate keeper that prevents important information from being reported in the organization; rather it is our job to make sure decisions are being made based on accurate and relevant information. As professional accountants we understand the importance of a rigor in reporting while taking a balanced cost-benefit approach to developing an appropriately controlled process.
The choice is really very simple. Either we get involved in the reporting of these non-financial measures or we stand by and watch the relevance of our work continue to erode just like the percentage of company value derived from the balance sheet.
My guess is that most of you have not been following the developments International Integrated Reporting Council (IIRC) and the recent issuance of its draft framework for integrated reporting. It’s not like public or private companies in the U.S. or most countries in the world are about to be required to adopt an entirely new reporting model as a result of this report. This does not have the authority of an IASB, FASB or regulator behind it, but it is a widely supported effort that standard setters and regulators are paying attention to and it will result in impacts to corporate reporting across the globe at different paces depending on where your corporate headquarters is located.
The IIRC Integrated Reporting Draft Framework (IRDF) was issued on April 16 and will be open for comments until July 15, 2013. There are many important concepts introduced in the IRDF, but for this blog I want to focus on the six “capitals” that are the subject of an integrated report. Those capitals are:
- Financial – The pool of funds used in the production of goods or the provision of services
- Manufactured – Manufactured physical goods that are available for use in the production of goods or the provision of services
- Intellectual – Knowledge based intangibles such as patents, software, organizational knowledge, brand and reputation
- Human – People’s competencies, capabilities, and experience and their motivations to innovate
- Social & Relationship – The institutions and relationships within and between communities and groups of stakeholders including the ability to share information and enhance individual and collective wellbeing
- Natural – All renewable and non-renewable environmental resources
The main idea behind integrated reporting is to report on and tie together the increases and decreases in all six of these capitals as they were impacted by the activities of the reporting organization. The intended target audience of this new type of reporting is still the provider of financial capital, but other stakeholders will often find such reporting useful as well.
There have already been attempts at reporting on each of these capitals, but those attempts have generally been through a silo approach only addressing one or maybe two of these capitals at a time with no significant attempt to integrate them together into a single coherent story. Whatever your personal feelings are about the intent of this type of reporting, it is important for everyone in business and industry to at least become aware of these principles and begin to think about how they relate to your organization. Standard setter and regulators are certainly paying attention and it will only benefit you and your organization to at least keep up with this important development.