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Integrated Reporting

Useful for investors?

Series:

Stefan Hannen

The introduction of Integrated Reporting (IR) is supposed to tackle shortcomings of corporate reporting that have been criticized for decades. The new reporting format intends to improve the understandability of corporate reports and broaden their often merely financial and backward-looking perspective. This study investigates the usefulness of IR for investors. A conceptual analysis provides an in-depth examination of the IIRC’s International Framework, the basis to prepare integrated reports. An empirical analysis examines the presence of IR in existing reports from South Africa and the USA, before testing potential consequences for the capital market. The findings have implications not only for investors, but also for the reporting firms, regulators and academics.

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1 Introduction

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1    Introduction

1.1      Motivation and objective of the study

Annual (financial) reports have been considered the centerpiece of corporate communication for a long time (Hütten (2000), p. 84, with further references). While the capital providers and other stakeholders of private firms often have access to insider information and thus do not rely on the firms’ reporting (e.g., Hope et al. (2013), p. 1716), corporate reports represent a way to gain and enhance investors’ confidence for public firms (Subramanian et al. (1993), p. 59).1 The reports enable investors to assess how effectively managers discharge their fiduciary duties and carry out their stewardship function (Kohut/Segars (1992), p. 7; Epstein/Pava (1993), p. 18), in addition to providing meaningful information on both the firms’ past performance and future opportunities (Kohut/Segars (1992), p. 7). Capital-market-oriented companies may therefore put considerable effort into preparing their reports to present themselves in a transparent and open way (Simpson (1997), p. 16).

Shortcomings of corporate reporting

In contrast to these purposes and to the intended importance of financial reports, current reporting practice is only of limited assistance for investors’ decision making, as lengthy reports and disclosures of low substance require their readers to undertake a long process of filtering the necessary information when analyzing a firm (Peñarrubia Fraguas (2015), pp. 597-598). At the same time, alternative ways to communicate (e.g., analyst presentations) gain importance so that financial reports are struggling to remain relevant (CA ANZ/EY (2015), pp. 6-7)...

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