Only a fraction of corporate risks and value-creation potential is disclosed in financial statements. Hence, the need for integrated reporting.

BP's Deepwater Horizon, Lehman Brothers' liquidation, the Arab political crisis and natural disasters such as the Japanese earthquake have strengthened the debate for improving corporate reporting standards. Focusing on long-term sustainability over short-term targets is fast gaining momentum among the shareholder community.

While laws like the Sarbanes-Oxley Act of 2002 have worked towards the mitigation of financial risks, a lot remains to be done to quell risks arising from social and environmental factors.

It is observed that only a fraction of corporate risks and value-creation potential is now disclosed in financial statements of companies. To quote Roland Schatz, CEO, Media Tenor International, “about 70 per cent of a company‘s actual value does not appear on the balance sheet.” This is set to change as rigorous corporate reporting standards encompassing both financial and non-financial parameters come into effect.

BEYOND REPORTING FINANCES

The International Integrated Reporting Committee (IIRC) is expected to present a new set of guidelines on Integrated Reporting (IR) at the G-20 Finance Minister meetings in October 2011.

The IIRC is a working group of a cross-section of leaders from the corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors as well as civil society.

Starting 2012, the committee plans to roll out a pilot programme followed by a worldwide release.

All listed companies today are required to present an annual report for shareholders and in some cases, an environmental sustainability and governance (ESG) report.

While there are established guidelines and rules for preparing annual reports, there is presently no uniform framework, metric and guidelines for disclosures on ESG reports. Therefore, ESG reporting is rendered ineffective as a means to evaluate and compare the company's performance.

As per a study by SmartView 360, of the 75,000 MNCs in the world, less than 3,500 (5 per cent) produce either sustainability or CSR or integrated reports.

Corporations are complex dynamic entities which interact with and take inputs from the environment in the form of natural, human and financial capital resources.

REDEFINED GOALS

With corporate goals being redefined in order to create long-term sustainable value for all stakeholders as well as the communities under its sphere of influence, an integrated reporting mechanism is fast gaining importance.

The implementation of IR will present a holistic picture of the health of an organisation by bringing both — financial and non-financial data together.

Thus, IR will ensure that the issue of safeguarding stakeholder interest becomes central to the corporate planning and decision-making process.

The effects of IR will go beyond the realm of financial accounting. We reckon that the first ecosystem to be impacted would be the $43-billion ERP (enterprise resource planning) providers' community comprising software vendors and IT service providers. With a majority of MNCs running on ERP, the use of technology will have to be maximised across the entire information value chain.

As a result, the role of ERP software vendors and IT service providers will become paramount. They will be expected to create new systems to capture, measure, analyse and integrate non-financial data with the material financial data under the guidelines set out by IIRC.

The non-financial accounting applications market, which will form an essential part of the technology landscape of IR, has been experiencing a growth of 400 per cent in 2010.

This market comprising predominantly energy and carbon accounting applications, will consolidate and integrate with the larger ERP market, becoming more mainstream. This trend is likely to continue as per the Groom Energy Study, which predicts a 300 per cent growth in 2011.

NEW SYSTEMS

The information value chain for IR will start with the capture of real-time non-financial data, which might be in the form of daily water, energy or carbon consumption data. This real-time non-financial data will then have to be reconciled with the financial data on a flexible, robust and content-neutral platform.

To achieve architectural convergence, the use of eXtensible Business Reporting Language (XBRL) is being proposed for IR. XBRL is a universally preferred language for transmitting financial data.

Once a standard integrated XBRL taxonomy is agreed upon, ERP vendors such as SAP, Oracle, Microsoft will then build on the new taxonomy and come up with their integrated digital platforms. The IR guidelines will require companies to gather and analyse vast amounts of data in order to discover linkages between them.

This need to mine enormous databases looking for linkages between financial and non-financial data will spawn a new generation of data analytics tools and applications, thus creating opportunity for new players.

The market for IR is expected to gain shape and then consolidate, as bigger and more established ERP players start taking interest and expanding their offerings.

In a few years, it will be the ERP and financial accounting applications which will play a significant role in the green field technology market of non-financial accounting.

(Contributed by Rahul Misra and Pallavi Patil. The writers are with PwC India.)

(This article was published on September 29, 2011)
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