Frustration is growing internationally with the existing corporate financial reporting model, which is fundamentally an accounting and financial model of the business. There are many initiatives—the triple bottom line (environmental, social, financial), The Prince of Wales Accounting for Sustainability Project, and many more—that are trying, for various reasons, to show that the business story needs more information than monetary figures (and their voluminous footnotes) can show. Many of these initiatives are now signing on to the International Integrated Reporting Council (IIRC), which operates under the logo for Integrated Reporting.
The IIRC describes itself as a “global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs that share the view that communication about value creation should be the next step in the evolution of corporate reporting.” The approach to business reporting, defined in the Integrated Reporting Framework document, is to provide a balanced and integrated financial and non-financial picture of a corporate entity with a future-looking orientation defined by the short-term, intermediate and long-term impact and evolution of the key business model (or models).
What are the potential impacts on manufacturing from such a shift in business reporting? First, manufacturing is typically the repository of the majority of business process nonfinancial information as well as employee and product safety, product/process quality, and environmental compliance information. A highly probable outcome will be a clearer value proposition for improved manufacturing information systems. The second implication is that manufacturing systems will become the subject of increasing audit and assurance interest as the information becomes part of external business reporting. As you may expect, the CEOs of all six international audit firms are active members of the IIRC. The third implication is that accountants may have to learn business operations, become team players, provide meaningful internal decision support information that actually connects to operations and resources, and stop hiding behind financial reporting standards.
The third point is interesting because the logic behind it is a pretty scathing indictment of the current financial accounting and reporting structure. In the IIRC publication “Creating Value,” there are many arguments along the line of the following quote: “Many companies find that, as they move towards , they need to develop integrated thinking across the organization. This leads to more integrated internal management reporting and is also having an impact on decision-making, according to latest IIRC research conducted by Black Sun.”
This document also identifies financially oriented business reporting as promoting silos, impairing organizational cohesiveness, and not promoting integrated internal reporting and thinking. The sad fact is that current financial reporting standards assume that management will create integrated information, financial and non-financial, for their internal decision-making.
Financial reporting standards are not designed to support internal reporting and decisions. Why isn’t there more focus on internal information? The first reason is a lack of knowledge in the accounting profession about creating information beyond the GAAP financial model. Secondarily, external financial reporting has become so complex and fraught with legal liability that it is an all-consuming activity for the CFO, and is about all the business performance information the C-Suite and the board of directors have time to consider.
points out current financial reporting misses human capital, intellectual capital, social and relationship capital, often misrepresents manufacturing capital, and makes financial results difficult for most to comprehend. This column has discussed integrated approaches for internal financial and nonfinancial business modeling that exist today. These approaches present economic impact based on cause and effect factors, not financial reporting rules. Industry leaders are using these tools; perhaps initiatives like will help educate everyone.
>>Larry White, CMA, CFM, CPA, CGFM, [email protected], is executive director of the Resource Consumption Accounting Institute (www.rcainstitute.org), which trains and advocates for improved cost information connecting operations to business performance.
