Integrated reporting (<IR>) continues to be a contentious topic in accounting circles, with debate surrounding its implementation and efficacy. At IMA’s Annual Conference in June, Bob Laux, senior director, financial accounting and reporting at Microsoft, joined a panel discussion on the impact of <IR> for the management accounting community and its potential implications for the broader business world. I recently spoke with Bob about why <IR> matters, and how CFOs and their teams are encouraging its adoption.
This interview has been edited and condensed.
Jeff Thomson: As I wrote earlier this year, many U.S. corporations are hesitant to adopt <IR> for external disclosures, presumably due to lack of clarity on how investors benefit and corporate fear of litigation. In your opinion, are these valid concerns? Why should CFOs care about <IR>?
Bob Laux: While these concerns are valid, I believe they are overblown at times. The International Integrated Reporting Council (IIRC) needs to do more work articulating how investors benefit, which should probably include academic research. As has been reported a number of times, intangible assets currently make up more than 80% of the market value of corporations, but virtually none of that value (or how intangible assets can drive value) is currently communicated to investors.
With respect to fears of litigation, I believe it is the job of in-house counsel to be risk adverse and that affects their perspective on changes to financial reporting. However, I am not aware of any evidence that <IR> would lead to greater litigation. This is another area that probably needs more research rather than relying on emotional speculation.
CFOs should care about <IR> because it can enable them to report their financial information relative to how they run their business, with an emphasis on strategy.
Thomson: You believe all management accountants – even at the CFO level – have a “large role to play” in <IR>. Specifically, what actions should management accountants and the CFO take to encourage <IR> and/or integrated thinking within their organizations for either internal or external purposes?
Laux: Management accountants should ask themselves how they can best provide information that will help their company successfully execute its strategy. I believe the answer will not be by providing GAAP (Generally Accepted Accounting Principles)-based information, which is backwards oriented, but rather, by focusing on key performance indicators and other information that provide current trends and better predict future performance.
Thomson: Is there potential for CFOs and the senior leadership team to use integrated reporting and/or thinking to better articulate the organization’s “value story” to all stakeholders, including the board, employees investors or members?
Laux: Yes, when I think of <IR> I think about it as a way for a company to succinctly describe its strategy and how it uses its resources to execute on that strategy. <IR> emphasizes the importance of considering both tangible and intangible resources.
Thomson: Is there an issue with the “branding” of <IR>? For example, is there too much emphasis on reporting versus thinking and external reporting versus internal analysis?
Laux: Yes, I believe there is too much emphasis on reporting versus integrated thinking by those of us involved in <IR>. One of the problems is that many of us have a background in financial reporting. Besides better external reporting, one of the benefits of <IR> that we have not emphasized enough is integrated thinking. For instance, as indicated above, what are the key performance indicators that provide more current trend information? More robust integrated thinking would make it a much easier transition to integrated reporting for external reporting purposes.
Thomson: During the panel discussion, you said <IR> is “a blip on the radar screen” in the U.S. If it is a “blip,” does that suggest corporate officers are generally satisfied with the effectiveness of their external disclosures process? What changes need to be made for <IR> to be more widely accepted and adopted? Who is most responsible for making those changes?
Laux: No, I do not believe corporate officers are generally satisfied with the effectiveness of their external disclosure process. Rather, I believe they think of it as more a compliance exercise than a communication exercise. I discussed this in a recent blog I wrote for the IIRC, where I indicated we have convoluted the messaging of <IR> in the U.S. and have confused <IR> with ESG (environmental, social and corporate governance) and sustainability. In addition, a number of different organizations have issued reporting frameworks, further confusing people. I don’t think one company or a group of companies can lead the necessary changes to improve financial reporting. Rather, I believe the accounting profession needs to lead in demanding changes to our current approach to financial reporting.
For more on Integrated Reporting see: https://transitionconsciousness.wordpress.com/2015/04/10/integrated-reporting-2/