Importance of aligning reporting standards for effective oversight
Climate change is forcing greater interest in reporting integration and the availability of reliable data from outside the finance domain
Accounting and audit scandals in SA and the UK have renewed debates about effective oversight and structure of the industry, as well as the role of principles and ethics. The replacement of the Financial Reporting Council (FRC) in the UK by a new watchdog, the Audit, Reporting and Governance Authority, among others signal greater interest in governance.
The burning topic of climate change is also forcing greater interest in reporting integration and the availability of reliable data from outside the finance domain. Integrated reports by leading corporates worldwide confirms the growing sophistication of environmental, social and governance data.
While recent scandals such as Steinhoff and Carillion cause the accounting profession to reflect, technological developments and evolving societal expectations have led to wide-ranging initiatives related to the future of the profession and reporting as such. In 2018 the FRC launched an advisory group on the future of corporate reporting, 12 years since the CEOs of the Big Four declared that the financial reporting model of the 20th century has become redundant. At the request of the European Commission the European Financial Reporting Advisory Group recently established a corporate reporting lab that has started to investigate climate reporting. The world is also following with great interest progress made in SA with integrated reporting (IR), a hybrid form of reporting for which the country has become known as a leading innovator.
Guidance for IR is issued by the International Integrated Reporting Council (IIRC). At its recent annual conference in London there was no shortage of calls for transformation and harmonisation among diverse standards for different forms of accounting and disclosure. It was evident that worrying evidence of global climate change is causing a greater sense of urgency in revamping regulations and standards for corporate accountability and the type of information disclosed to investors.
The underlying disclosure logic is still, as a US supreme court judge famously put it in the 1930s, that sunlight is the best disinfectant. But a proliferation of standards and rating initiatives for businesses to disclose more information does not provide a complete solution. Information overload and complexity in reporting becomes problematic in itself. As a consequence, there is an ongoing debate on what is materially relevant and decision-useful to report users.
Standards and requirements
Any professional from the accounting, business management, sustainability and investment fields knows there are wide-ranging standards and requirements for businesses to apply. These among others relate to the financial accounting, management accounting and sustainability accounting professions. Lack of alignment across these disciplines is dragging progress and confusing not only markets but also regulators. For this reason the IIRC conference was dedicated to alignment. Considerable time was taken to feature the work of the corporate reporting dialogue, which involves the International Accounting Standards Board, its US counterpart Financial Accounting Standards Board, as well as the IIRC, Global Reporting Initiative and Sustainability Accounting Standards Board.
While recent scandals such as Steinhoff and Carillion cause the accounting profession to reflect, technological developments and evolving societal expectations have led to initiatives related to the future of the profession
In recent months the corporate reporting dialogue convened regional dialogues with stakeholders to take suggestions for alignment between frameworks for financial and prefinancial or sustainability disclosures. Speaking at the opening of the IIRC conference, professor Amy Zalman reminded participants that integration is a condition of our world, a given, not a choice. In a powerful message for arrogant disciplinarians and separatists alike, she noted that value arises from integration, not separation. Core values for the age of integration include being holistic and anticipatory. The latter implies being aware that change is not linear, and that the future will not be like the past.
Beware SA, where IR has been a listing requirement since 2011 and where the largest pool of IRs now exists. This includes reports, signed off at board level, by SA’s state-owned enterprises. Revelations of fraud and corruption at such enterprises does not bode well for the track record of IR. Similar in approach to the King 4 code, the IIRC’s IR framework puts the spotlight on the “collective mind of the board” and expects “those charged with governance” to issue a statement confirming their responsibility for the IR.
Speaking at the IIRC conference, SA’s Mervyn King contrasted “informed oversight” with “blind oversight” by the board. The IIRC has created a substantive equivalence initiative to assess how its recommended IR compares with similar reports found in different markets. These include the strategic report in the UK, the integrated corporate disclosure in Japan, and the annual review in Australia. Both the Australian corporate governance code and India Securities and Exchange Board now recommend use of the IIRC guidance. Revision of a narrative such as the management discussion & analysis (FASB) and management commentary (IASB) confirms that the financial statements do not tell a complete story, and the strategic discussion of risks and opportunities needs to address critical societal developments such as climate change. The better alignment project of the corporate reporting dialogue is paying special attention to early application of recommendations by the taskforce on climate-related financial disclosures.
Leading SA corporates have been integration pathbreakers in running IR processes overseen by CFOs. Yet assessment of IRs from different countries has found SA corporates to be weak in disclosing performance metrics. Working with climate and other developmental scenarios for years ahead will challenge their underlying measurement and reporting systems. Debates in London confirmed that accounting and audit will have key roles in this. Internal audit has evolved to addressing a full portfolio of risks and has both an advisory and assurance role. As financial auditors struggle to deal with nonfinancial data, the need for subject matter expertise and recognition of sustainability accounting as discipline is key.
Also clear from the London discussions was that alignment is a first step, followed by regulation to scale and improve the comparability of information disclosed. The development of a taxonomy of key concepts related to sustainable finance in Brussels is paving the way for information tagging, important for future use by fintech applications and investment analysts. Key market regulators including central banks and stock exchanges are taking note. For their part, investors are less fixated with specific reports and more concerned about getting the right data, irrespective of where or in what format it is published.
• Dr Van der Lugt is senior lecturer extraordinaire with the University of Stellenbosch Business School, specialising in integrated accounting, reporting and investment analysis. He works in responsible investment from Geneva, Switzerland.