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The International Integrated Reporting Council (IIRC) recently published a draft framework outlining how it believes businesses ought to communicate with their stakeholders. In this context the purpose of an “integrated report” is to promote corporate transparency by clearly and concisely presenting how an organization’s strategy, governance, and financial and operational performance will create value for shareholders and other stakeholders in both the short and the long term. Such a report aims to address broader needs than only those of investors’ and therefore must be more than a simple extension of a company’s external financial reports, which are aimed at a specialist audience including analysts, regulators and lawyers.
Those with long memories may recall that in the 1990s the United States Securities and Exchange Commission (SEC) implemented a “plain English” requirement that replaced then-prevailing legalese with something easier for laymen to understand. But despite this mandate, unless you’re familiar with them, these financial filings can be daunting documents to navigate and understand. Financial filings must conform to a structure defined by regulatory authorities to be all-encompassing and to obey an exhaustive list of requirements that may not be relevant to general readers. Every company required to file financial statements with the SEC, for example, must have a section on mine safety disclosures – even Apple and McDonald’s. Thus the filings contain a mass of information that in its totality may not be useful or even comprehensible to those without formal training in financial analysis. An integrated report can address this unwieldiness, being more concise in presenting details, more discerning in presenting risks and more comprehensive in presenting strategy, opportunities and salient trends in its external environment.
The IIRC’s work is still at the draft stage, so it’s hard to know how the design of the integrated report will evolve and how responsive it will be to the needs of companies creating them and people reading them. Its backers recognize that many elements of the concept are foreign to people who are used to creating financial reports to shareholders. Beyond that, however, there are important cultural differences that will make it difficult to gain consistent adoption worldwide. For example, compared to European ones, corporate “stakeholders” have fewer rights (either statutory or by consent) in most countries with an Anglo-Saxon corporate tradition. In some countries and/or industries, employees own their jobs, not just their labor. Companies that are consumer-oriented, depend on government largesse or are heavily regulated must be more sensitive to public perception than those that aren’t. The latter may be far less willing to disclose details of, say, long-range capital spending plans if they consider them proprietary, particularly if their competitors aren’t doing the same. Especially in countries with a litigious tradition (such as the United States), it may be hard for internal legal counsel to sign off on a list of risks and opportunities without copious disclaimers and case law that extends “safe harbor” provisions to these reports. If there is a contemporary SEC filing with a concise risks section, I haven’t found it. And then there’s likely to be an overarching concern about achieving accuracy and comparability between companies’ reports in areas where standards are not well developed, such as in measures of sustainability. Organizations such as the Sustainability Accounting Standards Board (SASB) are in the process of developing these standards, but they are not yet fully available.
As we know, corporate reports of all kinds these days depend on information technology. It is for those involved in preparing them to wonder whether their company will need new reporting tools to conform to this reporting framework. In our view, the answer is, Probably not. Corporations will still be using the same sort of data stores, reporting tools, spreadsheets and balanced scorecards that they use now to manage the data that will go into an integrated report. In fact our research into organizations find that spreadsheets are used quite frequently (74%) that I have already indicated the importance of finding alternatives. Yet they likely will need to capture different categories of internal operating data and of external industry and general economic data. Creating such a report would be another use case for “close-to-disclose” software that many organizations are currently using to prepare their financial regulatory filings. As well, companies that create integrated reports should plan on making these available on interactive Web pages, as I have discussed before, not just on paper or static Internet reports.
Skeptics may view integrated reporting as just a fad, but there is a real need for it. Management accounting, which looks forward and is designed to serve the needs of executives and managers rather than shareholders, is now an outdated reporting method introduced more than a century ago. Still, it’s not clear that integrated reporting has a bright future. Calls for more socially aware reporting methods in the past have gone nowhere, and this may be the latest futile iteration. The idea is bound to encounter resistance. For the average U.S.-based corporate counsel, for example, integrated reporting may be fraught with terror, since, despite its good intentions, it opens up a potential avenue for lawsuits and attempts by outside groups to hijack corporate governance. In many emerging markets, financial reports to shareholders are far more opaque than in developed ones. It’s not clear how forthcoming their integrated reports will be and how accurate the more difficult-to-audit components will be. Consequently, corporations that are not susceptible to public or consumer pressure may be balk at adopting integrated reporting without a legal requirement and legal protections. That noted, senior corporate and finance executives should continue to monitor the progress of the integrated report to be prepared for changes it could bring.
Robert Kugel – SVP Research
I’ve been using spreadsheets for more than 30 years. I consider this technology tool among the five most important advances in business management of the 20th century. Spreadsheets have revolutionized many aspects of running an organization. Yet as enthusiastic as I am about them, I know the limits of desktop spreadsheets and the price we pay if we fail to respect those limits. The essential problem arises when people use desktop spreadsheets for purposes beyond what they were originally designed to do. Desktop spreadsheets were designed to be a personal productivity tool, and they are good for prototyping models and creating analytics used in processes, performing one-off analyses using simple models and storing small amounts of data. They were not designed built to be used to manage or support repetitive, collaborative enterprise-wide processes. As a rule of thumb, when a spreadsheet is used by more than six people six or more times, it’s time to look for an alternative. Otherwise, errors and inconsistencies easily creep in and undermine the accuracy and value of important data.
But long-time business users, especially the most skilled ones, keep on using spreadsheets inappropriately. They often rationalize continued use by insisting that the ease with which they can create spreadsheets is a reasonable trade-off for the problems they routinely encounter (especially errors and excessive time spent maintaining shared spreadsheets). As well, these persistent users typically believe that alternatives to desktop spreadsheets are too expensive and require substantial training. But this view is out of date. Today, there are relatively inexpensive spreadsheet alternatives that address their common shortcomings and are designed for business users, not IT professionals.
One area where spreadsheets are commonly misused is as a “data off-ramp” for business intelligence and other systems, leaving the highway of reliability for a back road that is hard for others to follow. Our recent benchmark research Spreadsheet Use in Today’s Enterprise found that three-fourths (74%) of companies use spreadsheets and BI systems frequently or all the time. This also applies to other enterprise data sources such as ERP or CRM systems. Ad-hoc analyses or reports, prototypes and exploratory models are examples of work that’s probably best done in a desktop spreadsheet. And many of those who use a spreadsheet as a data off-ramp are not abusing the technology. However, when people use desktop spreadsheets to repetitively create analyses and reports that they share with others, they are creating a problem. Downloading data from an enterprise system into a spreadsheet severs the connection between the source system and the report. This is a root cause behind inefficient processes that ultimately blunt the effectiveness of company executives and managers. It also can present governance and compliance issues since these spreadsheets may not be controlled and therefore may not represent the source information properly and may contain material errors.
What people usually find missing when they employ desktop spreadsheets as an enterprise system off-ramp is revealed in the top three capabilities that research participants find absent in their spreadsheets. Heading the list was the ability to make real-time connections to company data from within the spreadsheet, cited by three-fourths. Dumping BI system data into a spreadsheet model and/or a report is handy and expedient, but doing so severs the link to the source systems, rendering the data static. Maintaining the link to data ensures that those viewing the numbers are seeing the most up-to-date version. It cuts down or even eliminates the time spent recreating the analyses and reports to produce an updated version and reduces the probability that people will be looking at different versions of the report. Nearly as many participants said they’d like to be able to drill down into the underlying data when using spreadsheets. Again, by severing the link to the source data and lacking multidimensional links to that data, users are unable to uncover the numbers that are behind the numbers in their static spreadsheet. This same root cause is behind the desire by almost as many (72%) who want decision-makers to be able to refresh and filter the reports that they receive.
The most interesting fact about these research findings of what users would like to have in spreadsheets is that these capabilities are already available in software that is easy to use and, for many companies, affordable. For many years desktop spreadsheets were the only solution, but today inertia is the main reason why more organizations aren’t using spreadsheet alternatives. Few people are aware that affordable and easy-to-use alternatives to desktop spreadsheets exist, and fewer still are looking for them. Companies – especially their finance departments – need to find ways to automate mechanical repetitive tasks to free up resources for more useful and productive activities. Desktop spreadsheets are an indispensible tool, but they are not capable of doing everything well. There are a wide array of applications that can help – you just have to look for them. We recommend making that effort now.
Robert Kugel – SVP Research