Four ideas for improving Integrated Reporting

The International Integrated Reporting Council (IIRC) recently completed the consultation period for its draft version of the International Integrated Reporting (<IR>) framework, with <IR> ‘Version 1’ to be released in December. IGAP researchers Dr Dale Tweedie and Prof. Nonna Martinov-Bennie raised four ideas for the IIRC to consider in its revisions.

????????????????????????????????????????????????????????????????????????????????????????1. Clarifying the relationship between <IR> and other reporting systems

The IIRC’s ‘value-creation’ approach to non-financial reporting is very different from the ‘impact-assessment’ approach used by the Global Reporting Initiative (GRI). Users of <IR> would benefit from greater guidance on how <IR> and GRI4 can be complementary in a practical reporting context; for example, by clarifying differences in the materiality determination processes of <IR> and GRI4 and which – if any – takes precedence.

2. Acknowledge and address stakeholder conflicts

The IIRC’s view that the interests of providers of financial capital – the primary audience of <IR> – and other stakeholders will align over the long term overlooks potential conflicts between these groups, and so how conflicts should be reported. An example in Australia is coal seam gas (CSG) exploration, which promises significant financial benefits to mining and energy organisations, but which other stakeholders have claimed is a long-term risk (e.g. to primary production and water supply). Given this perceived conflict, what should be reported by organisations engaged in CSG exploration? Further clarity on the ‘legitimate needs, interest and expectations’ of other stakeholders that an <IR> should acknowledge would help address these kinds of issues.

3. Increase comparability through a stronger ‘core’

As our earlier blog discussed, while a principles-based framework is a useful method of avoiding boiler-plate disclosures, <IR>s need sufficient commonalities to be comparable over time and between organisations. Providing a stronger ‘core’ of reporting requirements and methods, best practice guidance (e.g. on carbon reporting) and definitions of key terms could encourage comparability without sacrificing the principles-based approach.

4. Governance as accountability

The draft <IR> framework asks each organisation to explain how its ‘governance structure support[s] its ability to create value in the short, medium and long term’. While good governance is part of value creation, the key features of governance are accountability, transparency and ethics, which are fundamental to ensuring that the value that organisations create is managed and distributed in appropriate ways. Following the King Reports in South Africa, <IR> could play a greater role in emphasising and communicating the importance of these aspects of governance. 

Telework to ‘Anywhere Working’: The Next Steps

As reported in the Australian Financial Review, a key theme emerging from the recent Digital Productivity in the Workplace of the Future Conference, sponsored by Macquarie University and CSIRO, was that the conversation is moving on from ‘telework’ from a home office to ‘anywhere working’. Increasingly we will see employees working from locations such as a café, a partner’s, supplier’s or customer’s premises, a smart work centre, a co-working centre, from home, a car, an airport lounge or anywhere that is conducive to achieving the outcomes and levels of productivity required to achieve organisational strategic objectives.

On the latest statistics, around six percent of Australian workers have formal anywhere working arrangements. The statistics on informal arrangements for working from anywhere are more difficult to ascertain. This is an important area for research because workers with informal anywhere working arrangements typically have more autonomy to complete ?????????????????????????????????????????????????????????????????????????????????their tasks and projects, and so this is where we are more likely to see productivity gains.

Clearly not all organisations see anywhere working as an effective strategy, and prefer their employees to work from an office.  Marissa Mayer, CEO of Yahoo, famously (or infamously) banned all work from home arrangements early this year. Ms Mayer argued that innovation and creativity only occurred when people were together. Yahoo are not alone. Google publically stated that their organisation did not condone working from home.

However, several developments may mitigate the limitations of working from home that Yahoo and others have cited. Co-working or collaborative working spaces are providing opportunities for freelancers and entrepreneurs to collaborate and connect. Hub Australia has hubs in Melbourne and Sydney with another to open in Adelaide later in the ?????????????????????????????????????????????????????????????????year.  Fishburners is a co-working space for technology start-ups and has two locations in central Sydney.

Smart work centres (SWCs) provide an alternative for those employees who are unable to work from home for a variety of reasons including social isolation and lack of space. Employers may be more open to employees working from SWCs because these centres can address issues that arise when working from home such as work, health and safety and difficulties in managing remote employees. A sustainable business model will be critical for the success of SWCs, which is another key area for future research.

A second key theme emerging from the conference was the perceived lack of management and leadership for anywhere working employees. Job design should include autonomy so that employees are able to be productive without the constraints of ‘presenteeism’ (being seen in the office). As Dr Blount from Macquarie University discussed on Sky News, management are unclear about how to develop a business case for anywhere working, and are unsure about the skills required to manage workers who are not office-based. While many employers have the HR policies in place for anywhere working, management resistance is an ongoing barrier to an increased uptake of working more flexibly. Alan Dormer – research leader at the CSIRO’s Government and Commercial Services division – has used research from the The Economist to argue that the reluctance of management to devolve responsibility might be preventing significant gains in both worker productivity and well-being.

The Australian Anywhere Working Research Network – which aims to provide a framework for collaborative research on anywhere working – invites any researchers, employers or government representatives interested in this field to join. To become involved, please contact Dr Yvette Blount in the Department of Accounting and Corporate Governance at Macquarie University.

Internal Audit ‘After the Crisis’

In the aftermath of prominent corporate scandals and the global financial crisis, corporate governance has received close attention from regulators and the public. Regulatory responses have focused on increasing governance requirements and disclosures and this has, in turn, driven increased awareness and demand for internal assurance within organisations. Internal audit is integral to corporate governance, and is well placed to provide this assurance. In a recent article, Dominic Soh and Nonna Martinov-Bennie used interviews with audit committee chairs and chief audit executives to investigate internal audit functions in the Australian context, and to consider how their effectiveness might be improved.

 KEY FINDINGS ??????????????????????????????????????????????????????????????????????????????????????????????

1. The scope of the internal audit function has expanded and refocused in recent years. Internal audit is increasingly involved in risk management rather than traditional “tick and flick” financial audits. There is also greater engagement in operational areas, and increased focus on performing a value-adding role, such as identifying how businesses can increase their efficiency and effectiveness. There is a clear expectation that in addition to its assurance role, this ‘value-added’ emphasis will continue.

2. The changing role of internal audit is largely due to regulatory reforms. Increased sensitivity to directors’ liabilities, particularly of those directors on the audit committee, has meant increased acceptance of the importance and value of the internal audit function as the ‘eyes and ears’ of the organisation. Some audit committee chairs described the assurance and comfort from internal audit as greater, and perhaps more valued, than from external audit.

3. The effectiveness of internal audit depends on its structure, resourcing and organisational status.

  • There was a clear preference for an in-house function (or at least an internal chief audit executive), on the basis that intimate business knowledge contributes to an effective audit function and makes it better equipped to meet the audit committee’s assurance needs.
  • Interviewees highlighted the importance of key competencies (audit, finance, operational, technological, and legal), but especially the capacity of the chief audit executive to ‘command the confidence and respect of the people out in the field so as to be able to gain access and cooperation’.
  • Good relationships with, and support from, the audit committee and senior management were seen as critical to an effective internal audit function. For example, it is imperative that the audit committee supports and protects the status and visibility of the function e.g. by providing a platform for internal auditors to present their findings at audit committee meetings, ensuring the chief audit executive is present in operations meetings, and ensuring that management undertakes appropriate remedial action in response to audit recommendations.

4. Performance metrics have not evolved in line with internal audit’s role. Common measures of effectiveness related to the annual audit work plan and to measures of acceptance and adoption of audit recommendations. Since these measures were similar to prior surveys, it is clear that performance evaluation mechanisms have not evolved alongside the expansion and refocus of the internal audit function.

IMPLICATIONS:

1. Internal audit cannot be evaluated in isolation. The quality and effectiveness of the internal audit function is largely dependent on other parties within the organisation, especially the audit committee and senior managers. Consequently, an ineffective internal audit function might indicate that there are broader issues in the organisation’s corporate governance.

2. Whether internal audit meets stakeholder expectations is unclear. The misalignment between the current and evolving role of internal audit and static performance measures makes it difficult to assess whether internal audit is meeting stakeholders’ expectations. Given that the internal audit function serves different stakeholders (who at times have divergent interests) within the organisation, more diverse metrics are required to measure whether internal audit is meeting the potentially different needs of stakeholders. For example, while audit committee chairs emphasised the value of assurance, chief audit executives emphasised ‘value added’ from the organisation’s perspective.

3. New performance metrics may be required. Given the increasing emphasis on the consulting and value adding role of the internal audit function, alternative metrics such as value tracking by cost savings or value creation may better measure the performance and effectiveness of the function. There is however a potential risk that such metrics would impair internal auditor’s independence and objectivity, with implications for the external auditor’s evaluation and reliance on the internal audit function.

4. The chief audit executive skills need careful assessment. The increasing involvement of internal auditors in consulting and operational areas requires staff with industry knowledge and experience. In addition to strength of character and an inquiring mind, the chief audit executive needs strong communication skills to build bridges with all business areas, and to confidently report to higher organisational levels. Developing these competencies is no mean feat, and would take considerable time. Organisations therefore need to consider how limited tenure or rotation of this role could work, if it is required or even tenable.  These also have implications for what the career path of a chief audit executive would ultimately look like.

See: Dominic Soh’s and Nonna Martinov-Bennie’s article and abstract: