The ever-changing trait of financial and non-financial reporting standards and their frameworks for the business corporates often obscures their importance and makes the adoption process of these standards harder for corporates in the developing world. The professional bodies, responsible for standard setting, have come up with a wide range of different standards and best practices. As a result, moving towards a uniform framework for financial and non-financial reporting becomes an uphill struggle. Nonetheless, the standard setters have finally announced their collaboration to set up an integrated reporting framework for corporate disclosures. 

Bangladesh, a developing nation, with a downtime of several years follows the developments in the developed nations which are leading the world in standard setting and framework building. As one would expect the hurdles are manifold for Bangladeshi corporates to adopt these standards. A lucid understanding of the importance and necessity of these standards by removing the opacity is the first step in the long haul. Moreover, a chronology of the continual developments in the evolution of integrated reporting along with a brief discussion on its significance maybe helpful for Bangladeshi readers, specially who are not working straightaway in the field of standard setting.

Integrated reporting integrates financial reporting with sustainability reporting (a form of non-financial reporting). Financial reporting is nothing but the preparation of annual accounts of a business entity that aims to track, analyze and report the business’s financial performance and financial position. This helps the investors and other stakeholders to make informed decisions about how to manage the business. The annual accounts were prepared by the business corporates following International Accounting Standards (IAS) which were adopted by Institute of Chartered Accountants of Bangladesh (ICAB). At present time, the IASs are accompanied with a set of new standards and altogether known as International Financial Reporting Standards (IFRS) issued by IFRS Foundation along with the International Federation of Accountants (IFAC). 

The financial reports comprise of financial statements and notes there on have taken over the annual accounts of business corporates. After the introduction of IFRS, the financial reports of business corporates have come up with more disclosures compared to their annual accounts but was not enough. The limitations of financial reports were widely felt by the standard setters. The rigidity of historical costs which become incomparable with recent data, bypassing the inflation adjusted information, overlooking the intangible assets, non-disclosure of non-financial issues such as environment, social and governance (ESG) and some other limitations instigate the standard setters to put on the table a new set of standards.

In 1997, a not-for-profit organization named Global Reporting Initiative (GRI) was established. GRI has developed the first corporate sustainability reporting standards. Sustainability reporting is the disclosure and communication of environmental, social, and governance (ESG) goals—as well as a company's progress towards them. Sustainability reports were the missing piece in the puzzle, but they have been taken care of thanks to a long-drawn pandemic and a rise in adverse climate incidents. After the financial crisis of 2008 the global business leaders along with the standard setters felt the urgency for adopting sustainability reporting standards. In 2011, Sustainability Accounting Standard Board (SASB) was set up in the United States and in 2021 International Sustainability Standards Board (ISSB) was set up by IFRS Foundation. 

It is widely accepted that social and environmental concerns imply future business threats; investing time and resources into sustainability solutions may allow any company to meet the challenges. In other words, sustainability reporting is a way to strengthen its long-term strategy. The benefits of sustainability reporting include better risk management, costs and savings optimization, decision-making facilitation, and improved corporate confidence and reputation ― toward customers as investors. According to a Harvard Business Review (HBR) report 90 percent of the world’s largest companies now produce sustainability reports. However, only a few of these reports are validated or audited by third parties. Absence of proper reporting standards leads to voluntary sustainability disclosure by the companies following GRI standards. And many other organizations struggle in navigating through this confusing landscape of sustainability disclosure.

Moreover, sustainability reporting by a company makes a disjoined view of organization’s long term benefits with social responsibility and environmental care. Soon after, the need for combining financial reports and sustainability reports under a common framework was extensively felt by the standard setters. In this context, GRI and International Integrated Reporting Council (IIRC) finally announced their collaboration, with the aim of helping companies to see how they could use both GRI Standards and IIRC frameworks in their sustainability reporting. IIRC developed the International Integrated Reporting Framework or the Framework to fulfill the following objectives: 

• Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
• Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time
• Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their independencies
• Support integrated thinking, decision-making, and actions that focus on the creation of value over the short, medium, and long term.

IR have opened new windows for corporate reporting, addressing various information requirements (especially, non-financial) of diversified stakeholders. However, the framework is struggling with verifiability and comparability. IR is focused on the capital providers’ requirements and long-term value creation of the firm; other related stakeholders and short-term investors find it difficult to relate IRs in their decision-making process. Despite the challenges the large companies are fast aligning for integrated reporting to be the next best thing in corporate disclosure.

Writer: Md. Arifur Rahman, PhD, Director, Civil Audit Directorate (email: arif.rahman@cag.org.bd)

BDST: 1524 HRS, APRIL 05, 2023
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