The growing global concerns over environmental and economic volatility are changing the outlook and focus of business practices around the world. The depletion of natural resources and energy, surge in waste production, increase in the cost of materials and transportation, and economic instabilities are adversely affecting businesses. There is also increased pressure on corporates from regulators, customers, and stakeholders towards social and economic responsibilities.Download a Insight
In light of this complex and interconnected business environment, organizations are beginning to acknowledge the importance of sustainable development as a critical part of good governance. Sustainable development is the balanced synthesis between an organization’s economic, social, and environmental priorities, obligations, and opportunities. Integrating sustainability to business strategies not only addresses corporate transparency and accountability but also creates economic value and contributes to healthy ecosystems.
To achieve this, there is a need for organizations to disclose the financial stability of their business and highlight both positive and negative non-financial influences with emphasis on long-term business viability. The numerous reports on financial performance and sustainability that organizations release periodically to stakeholders often contain significant gaps and fail to make the connection between the organization’s socio-economic strategy and financial performance.
This led to the evolution of corporate reporting where integrated reporting is maturing as a best practice for companies focusing on sustainability and competitive advantage.
Value Creation through Integrated Reporting
Integrated report is a forward-looking single report that holistically represents an organization’s strategy, governance, performance, and prospects in a way that reflects the commercial, social, and environmental context within which it operates. It is the most current global reporting framework that centers on managing business sustainability which expands upon the triple bottom line - a process by which companies manage their financial, social, and environmental risks, obligations, and opportunities1.
The framework for integrated reporting was rolled out in 2013 by the International Integrated Reporting Council (IIRC), a coalition of regulators, investors, companies, standard setters, accounting professionals, and non-governmental organizations (NGOs) . This framework provides guidelines to produce a concise and consolidated report on how organizations can create value in the context of their strategy, governance, performance, and external environment.
The Framework, as illustrated in Figure 1.1, categorizes all the resources and relationships engaged by an organization into six areas: financial, manufactured, intellectual, human, social and relationships, and natural. It refers to these resources and relationships as “capitals”, and describes the business elements and processes likely to affect these capitals as “ content elements”. There are eight content elements in an integrated report: organizational overview and external environment; governance; the business model; risks and opportunities, strategy and resource allocation; performance; outlook and mission and vision . Underlying these are the Guiding Principles which govern the preparation and presentation of an integrated report (IR) in line with the Reporting Guidance for an organization.
The Framework provides the following visual representation, conceptualizing the relationship between the capitals and the content elements.
The prerequisites for creating an integrated report are bringing together disparate business functions and aligning an organization’s sustainability strategy with its business strategy. This should be supported by an effective governance framework for inclusive view of the activities overseen by skilled resources. Technology is used for analyzing and consolidating the information, while a combined assurance framework must cater for assurance of information.
Organizations are beginning to adopt the integrated reporting methodology, and are putting new structured processes in place to streamline business activities in a collaborative manner. In doing so, they embrace the concept of integrated thinking for internal business management, which acts as a catalyst for bridging operational silos and adopting a common focus on business targets, performance measures, issues, and corporate strategies. Internal Audit can play a key role in facilitating knowledge sharing and integrated thinking by building on its relationships with key teams in the organization.
Integrated thinking helps promote the value creation process for integrated reporting through meaningful management of knowledge and data. Although integrated reporting is still in a nascent stage, businesses are identifying the numerous benefits it has to offer, including:
- Improved stakeholders’ engagement and lowers reputational risks: Integrated reporting increases transparency, enhances accountability, facilitate inclusiveness and more information that provides stakeholders with deep visibility into the finances and materiality of the organization.
- Sustainability and business performance: Integrated reporting provides intelligence on the execution of an organization’s socio-economic objectives and performance indicators. This leads to better decision making on business model innovation and revenue growth.
- Conformance to internal and external reporting requirements: Integrated reporting enables organizations to be compliant with regulations, and effectively manage regulatory risks. This fosters better communication and resilience by understanding opportunities and risks.
However, the integrated reporting brings with it the additional challenge of ensuring the accuracy of measures and procedures used to capture the data required for reporting, the need to understand the different factors involved, and the various connections and interdependencies. How do you ensure that controls are effective, the right things are measured, and processes are in place? This assurance is important to establish the credibility of a company’s sustainability. This increases the responsibility of Internal Audit to take a strategic role in the organization’s preparation for, implementation of, and journey towards a mature integrated reporting process. Internal Audit’s broad presence across an organization, knowledge of the source of information, and understanding of the risks and controls makes it the relevant function for this purpose.
Internal Audit’s Contribution Towards Integrated Reporting
Internal Audit’s role, as an independent assurance provider, supports the integrity and transparency underlying integrated reporting, giving shareholders the necessary reassurance on the business sustainability.
Internal Audit’s assurance role can be achieved through different types of engagements such as assurance on various financial and non-financial functions, governance assessment, risk management, and control processes supporting the main objectives of integrated reporting. Additionally it also supports the management’s process design with recommendations for improvements during the rollout phase of integrated reporting, and establishes a culture of integrated thinking within the organization.
However, Internal Audit’s involvement is not limited to assurance alone, and can evolve to provide a range of advisory and consulting services in the area of integrated reporting, depending on the maturity of the reporting process and the roadmap of the organization. A well-resourced, appropriately positioned, and technologically enabled Internal Audit function has the potential to assist in identifying key trends and opportunities to create or protect strategic business value or revenue. Additionally, it can proactively report on progress in terms of sustainability, financial performance, and issues.
Technology can be leveraged by Internal Audit in order to bring in data consistency and integrity, stronger collaboration among functions, concise information, and real-time visibility to help identify key areas of focus. It also enables effective and continuous monitoring of data, as well as advanced analytics to identify gaps, key risks, metrics, and common issues.
An integrated report helps build a sustainable and resilient organization by shifting the focus from meeting short-term financial goals to meeting long-term strategic and sustainability goals. While the management, board, and technology are key to effective integrated reporting, the Internal Audit function can play a prominent and proactive role by providing assurance and advice related to governance and the processes required to create an integrated report. In order to achieve this, Internal Audit may have to expand its current capabilities. However, it is uniquely positioned in the organization to enable effective integrated reporting and improving business performance.