Is Integrated Reporting Suitable for SMEs?

What Is integrated reporting?

Compared to traditional annual financial reporting, integrated reporting represents one of the most innovative concepts introduced in the reporting arena in the last decade or more. The idea stems from evidence that financial reporting alone cannot sufficiently satisfy the needs of heterogeneous stakeholders. The International Integrated Reporting Council (IIRC) believes that integrated reporting provides businesses with a reporting approach that is conducive to understanding and articulating their strategy, which helps to drive performance internally and attract financial capital for investment, while helping investors understand how the strategy being pursued creates value over time. The integrated reporting idea is not only a tool for reporting; it is a tool for management, providing directors and managers with an exhaustive view of the system the entity relates to, in order to create value in the medium and long term. From this perspective, the integrated report is only the final step of a process or chain of integrated thinking, action/execution, and reporting. It might be argued that small- and medium-sized entities (SMEs), with a stronger need to connect more closely to their stakeholders in order to survive compared to larger companies, are in fact already naturally applying many components of integrated thinking—just without using the label.  

On a more a technical note, the IIRC, whose creation has been strongly supported by IFAC, recently developed the International Integrated Reporting Framework, in order to set generally accepted guidelines. The Framework defines an integrated report as “[a] concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term” (IIRC, Framework, par. 6).

Integrated reporting leverages both financial and non-financial data, not only providing a combination of these two sets of information, but also trying to articulate the overall performance of an organization (in all its facets), including the impact of its activities on the local community. By providing information on the various inputs (financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, natural capital), and how they are used to create outputs through its business model, strategy, and governance, the entity will be able to better demonstrate its performance.

The Framework had originally been conceived for public companies (who sometimes seem to have lost the ability to provide a concise narrative on what makes their business tick and how they fare) to help them inform investors and capital lenders about their approach to business and strategy, in addition to the results of their operations, in order to demonstrate how all parts of the company are aligned with its objectives. The question for us is whether SMEs can readily adopt the IIRC’s guidelines and, if so, how small- and medium-sized practices (SMPs) can help SMEs implement these guidelines. These questions were posed in the 2013 IFAC SMP Quick Poll in which roughly half the respondents acknowledged the value of integrated reporting to SMEs. The report showed a similar number predicting that within five years, SME clients would ask for assistance with integrated reporting.

Can SMEs Readily Adopt the IIRC’s Guidelines?

We believe that smaller entities can also achieve significant benefits from the adoption of the new International Integrated Reporting Framework. In general terms, SMEs typically interact and impact many entities, and integrated reporting can be the main tool to demonstrate that they take into consideration and actively communicate with the community they are a part of.

Even if an SME does not have a wide range of stakeholders, it may still have a responsibility to account for how it manage its resources, for example, if it operates with the help of public grants or subsidized loans, or because the nature of its business requires a high level of transparency. Based on these considerations, various non-profit organizations have already efficiently pioneered the adoption of integrated reporting to explain their behavior and management strategy.

In addition, banks and financial institutions are typically significant stakeholders for SMEs. Integrated reporting can satisfy their need for information as it aims to illustrate how an organization’s strategy creates value in the medium and long term, which provides a critical insight on how it is able to achieve its objectives, including financially.

It is clear that the approach and methodology for preparing an integrated report is another crucial issue, especially for SMEs but also for the practitioners or SMPs acting as their consultants. SMEs and SMPs typically struggle in fully complying with “big generally accepted accounting principles, or GAAPs,” as they often face acute time and resource constraints and the required information can be too onerous to produce and elaborate. This shouldn’t be the case for integrated reporting, as it does not require compliance with specific technical requirements. The Framework is, today, a principles-based document, which can be applied, even adapted (Framework, par. 10), to SMEs using a personal approach. From this perspective, there is no need to apply scalability principles or simplification processes. It is nonetheless extremely relevant to have an appropriate knowledge of the purpose and methodology to be applied in order to plan and organize the reporting process adequately.

How Can SMPs Help SMEs Implement the Guidelines?

There are various approaches to preparing an integrated report for an SME.[1] Here is some general guidance:

First, the entity should set up a small task force representing its various departments (senior management, sales, operations, finance, communications), which should explain to the practitioner the approaches and the modus operandi that is applied in running the business. This is meant to help the practitioner to comprehend the managerial and organizational dynamic of the entity and provide an opportunity for debate on the usefulness and effectiveness of the tools and approach suggested by the practitioner and, at a later stage, for feedback on the final outcome.

The first operating step should allow the practitioner to understand the “philosophy” of the organization. This step usually includes meetings with the entity’s managers. This exercise can produce benefits for the entity itself, as it obliges managers to discuss their views of reporting and organizational processes, highlighting potential misunderstandings and inefficiencies. At this stage, the practitioner should explain the purpose of the project and share with the entity’s staff the scope and the expectations. It would be appropriate for the practitioner to prepare grids or questionnaires to map the current situation and present future activities and scenarios.

Then, the practitioner should determine which data is readily available and the information that, on the contrary, needs to be produced or refreshed in order to determine a path to the creation of value in the medium-long term. This second step aims to map (or formalize) the integrated thinking of an entity, coordinating the different aspects. In this step, the practitioner should determine, starting from the generally accepted practice, which instruments to use to pursue the proposed goals in the most effective and efficient way.

Once the required data has been collected, the practitioner should prepare a first provisional draft of an integrated report, by combining the various pieces of relevant information. To this end, it is worth observing that conciseness is a fundamental principle of integrated reports. One of the most common complaints in recent years about financial reports is that they are too long and too complex. The IIRC maintains a database of integrated reports, including SMEs’ reports, which offers illustrative examples that SMEs and SMPs might wish to examine.  

After having debated the results with the task force, the practitioner is then ready to collect the final comments and ideas and to present a quasi-final integrated report. Once the report has been finalized and shared by the team, the directors, who should have been kept informed during the process, should review, approve, and decide whether to disseminate it to the entity’s stakeholders.

Conclusion

Integrated reporting can be a good investment for an SMP and its SME clients, as it is not only a reporting tool but also a management control model, which can help SMEs gain a better understanding of the strengths and weaknesses of their operating processes.

Learn More

See the Gateway’s resources in relation to integrated reporting and practice management resources from around the world.

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