Oct 13, 2011
Navigating your way to a truly Integrated Report
Deloitte sets out to analyse trends and areas of excellence in integrated reporting among South Africa’s listed companies
Johannesburg, 10 October 2011-Following the September release of the International Integrated Reporting Council (IIRC) discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century, Deloitte can reveal the findings of the first Deloitte quarterly report on Trends in Integrated Reporting in South Africa.
While guidelines have been established, there are no generally accepted set standards on integrated reporting making this a potential minefield for listed companies which need to know what is regarded as best practice and how to achieve it.
Deloitte has undertaken substantial research into the quality and extent of integrated reports produced during the transition from the traditional annual financial report, supported by a sustainability report, to the inclusive integrated report as recommended by the JSE.
The initial research examined the reporting documents of 50 companies, split between those with year-ends before the 1 March 2011 cut-off for integrated reports (pre-regulation companies) and those with a year-end subsequent to the deadline) post-regulation companies). Of those examined, some were early adopters: those companies which had produced an integrated report prior to the introduction of the requirement. The analysis covered seven subjects, 58 principles and 160 questions seeking to measure actual performance against best practice.
Nina Le Riche, Director Risk Advisory and Competency Lead for Integrated Reporting, Deloitte who convened the research explains, “This research reveals that there is no definitive integrated report at this stage: no company can be singled out as having a report that excels in all aspects of Integrated Reporting. However, we found that there are pockets of excellence within the documents studied. For example, one company may cover stakeholder engagement with distinction, whereas another may be outstanding in reporting on sustainability implications of the supply chain”
Significantly, companies are no more than half way towards adequate integrated reports. The average level of adoption of Deloitte’s interpretation of Integrated Reporting stands at 48%. This indicates that companies in general have embarked on the journey, but have been generally slow in demonstrating the integration of the principles into their business model.
Overall, companies performed worst in terms of demonstrating a commitment by management to synthesizing environmental, social and governance issues (ESG) into strategy and ensuring that suitable structures are in place to ensure execution, with an average score of a mere 34% for this metric. The extent to which companies succeeded in engendering credibility to the non-financial information reported also scored poorly. With a score of 54%, communicating the corporate context proved to be the best achieved.
By contrast, the companies that subscribe to the principle of IR stand out. The early adopters (those companies which produced Integrated Reports prior to regulation) are doing relatively well with an average score of 63%.
Deloitte found that any window dressing was fairly obvious to identify. Many companies still do not yet see the relevance or value of integrated reporting. An astonishing 46% of listed companies with year ends on or after March 2011 that had reported by the time of the Deloitte review made no attempt to publish an Integrated Report. Only 42% produced an integrated report and the balance issued a variation of one.
Perhaps a crucial factor is that companies are grappling with setting measurable non-financial targets. Only a third of companies analysed were willing to disclose tangible targets linked to its strategy and stakeholder concerns.
To some extent, independent assurance of non-financial information is becoming more prevalent: there was a modest rise from 35% for the pre-regulation companies to 38% for the post regulation companies. The percentage noted was however significantly higher than in prior years. As audit committees are becoming more aware of their responsibility to ensure that credible non-financial information is produced, the prevalence of independent assurance over key indicators is increasing, but is still at a relatively low level.
It appears that companies are trying to shorten the integrated reports with some success.
Of the pre-regulation reports reviewed, 35% were shorter than 50 pages (excluding financial results) whereas the post-regulation percentage is 42%.
Contrary to popular belief the response to King III is not as strong as many boards believe.
Deloitte’s research showed an average disclosure score of 51% for listed companies with year ends commencing on or after 1 March 2010. Responsible boards should pay attention to this in anticipation of institutional investors adopting the recently-released Code for Responsible Investing in South Africa (CRISA) from February 2012 onwards.
A most common weakness lies with companies’ response to IT risk management and the effectiveness of its compliance programmes. More than half (54%) of them failed to contain specific information relating to IT risk management. Given that King III devotes a chapter to the governance of IT, this is of concern.
“Having established a benchmark, we will be able to build on the findings on a quarterly basis and plot the trends emerging in integrating reporting. Armed with the results, it is important companies seek guidance in the compilation of Integrated Reports and specifically, input on what constitutes best practice and how companies should go about their Integrated Reporting concluded Bertie Loots, Director leading the National Integrated Reporting team.
For more information, please contact Lana Pike.
Lana-Jane Pike
External Communication
+27 (0)11 209-6214
