Integrated Reporting Narratives: for and Against

An overwhelming number of previous studies in accounting narratives are mostly related to disclosures and narratives in annual reports ignoring new reporting models as integrated reporting. Subsequently, it is necessary to reinvestigate prior research findings in a current context considering the new changes in the annual reporting practices in recent years. Over the past decades the corporate and annual reporting requirements were subject to different changes in terms of style and presentation.

Specifically, the annual reports became more comprehensive including broad information on financial, environmental and sustainability reporting. It is also considered as tool of communication to maintain the public relations. In such conditions, the spread of impression management in accounting narratives are likely to increase if managers consider them as the opportunity to affect the perception of users via narratives of annual reports. One of such innovations is the integrated reporting (IR).

The IR is relatively new phenomenon established by the International Integrated Reporting Council (IIRC) in 2013. IIRC is a global organization founded in 2010 with the aim to form a global reporting framework for continuous value creation in organizational communication about corporate performance. The IIRC consists of key members such as accounting professionals, standard-setters, regulators, investors, NGOs, transnational corporations and academics. The IR is considered as a development based on the idea that the annual reports have failed in terms of transparency in the corporate reporting landscape mainly concentrating on the financial results and ignoring the sustainability and social issues. The main purpose of IR is to enhance and maintain integrated thinking merging the sustainability, social and environmental reporting with financial information. To combine these reporting materials, IR have established six capitals such as financial, manufacturing, intellectual, human, social and relationships and natural. These capitals are unified to build holistic integrated report covering all aspects of reporting package. Thus, the IR is anticipated to improve reporting practices by enhancing transparency and responsibility in business environment.

Previous literature has shown different points of view supporting and criticizing this new initiative. There are researchers who support this initiative considering it as an opportunity for companies to aggregate trust and accountability via enhanced transparency, for example, defines IR as an effective communication on how organizational capacities (such as governance, strategy, performance and prospects) creates the value in the short, medium and long terms under the pressures of external environment. Furthermore, Churet and Eccles (2014) argue that IR is a useful tool for the general quality of management which includes intangible asset management in view of possible damaging effects on the society and environment. Their research has found the positive and statistically significant relationship between integrated reporting and quality of management related to issues of environment, society and governance. The implementation of IR, therefore, is expected to overcome several issues such as communication of firm’s business model, the interconnection of financial information with sustainability, providing of perennial value creation throughout times. These constructive conditions of IR should also affect positively narrative content of the annual reporting package providing true and fair view of the information.

On the other hand, the integration of financial and non-financial reporting has caused an ongoing debate about the utility of IR. The criticizing literature on IR maintains the idea that IR can create favorable conditions for impression management. In previous studies of impression management in annual reports, Clatworthy and Jones (2003) correctly noted the unaudited nature of accounting narratives can incite application of impression management by executives. In the case of IR, this supported by the fact that increased content and length of integrated reporting may reinforce the expansion of narratives to reflect performance in positive light.

The recent research on IR by Chaidali and Jones (2017) suggest that the preparers of annual reports have doubted the potential positive effect of IR in contribution to the global corporate reporting practices. Preparers of annual reports were anxious about presentational aspects of IR and questioned the incentives of the IIRC experts. The main concern of the preparers was related to the factors such as the absence of concise instructions and guidelines by the IIRC, the shortage of ‘governmental’ support, high costs of preparation, the format and length of the report. As a result, overall empirical findings indicate that the trust of preparers on the utility of IR performance is limited. Additionally, Humphrey et al., (2017) specify that the IIRC didn’t properly indicate in what ways the IR could meet the needs of preparers and users.

Thus, the growing importance of the corporate reporting practices has created two-value judgments among scholars on benefits of IR.