As downgrade looms, South African companies need integrated reporting

South African Institute of Professional Accountants
9 September 2019

With the country facing another potential downgrade, more South African companies need to embrace integrated reporting to demonstrate their value to existing and potential investors. This is according to Faith Ngwenya, Technical and Standards Executive at the South African Institute of Professional Accountants (SAIPA). “Integrated reporting offers assurance to investors that a company is being governed with integrity and foresight, and has control over its future prospects,” she says.

Moody’s, the only rating agency that has not dropped the nation into junk status, will review its credit ranking in November. However, observers are not optimistic about its chances of maintaining its current standing.

South Africa ahead in integrated reporting
According to the International Integrated Reporting Council (IIRC), 21 countries accounted for 85% of those using integrated reporting. Of these, South Africa and Japan are the top two reporters, making up 43% of total reports. This was revealed in the Council’s recent study of 2017 submissions, commissioned by the French Autorité des Normes Comptables (ANC). However, the same report found that more developed countries are lagging in adoption, with only 29 US companies doing integrated reporting as of 2019. The IIRC is chaired by Professor Mervyn King, Chairman of the King Committee on Corporate Governance.

What is integrated reporting?
Over time, the requirements of corporate reporting have evolved to encompass a number of elements: financial statements, management commentary, sustainability, and governance and remuneration.

Even today, much of the work done to compile these reports are isolated to the concerns themselves, resulting in duplication of effort and lack of cross-reference between them. The result is complexity in the final output, making it difficult for consumers to clearly determine an organisation’s position.

Integrated reporting strives to consolidate the different activities, streamline the process, and promote collaboration on cross-cutting concerns. Its goal is to deliver a concise, standalone report that offers clarity and certainty to its users on a business’s past performance, current operations, and future prospects. Of course, it must also assure them that whatever the enterprise’s intentions, it will proceed with integrity and due concern for the public interest.

Investment opportunity
Integrated reporting provides South African companies with a vital opportunity to convince investors of their worth. First, they can highlight how, in the past, they were able to maintain their sustainability, even during difficult periods of low economic activity. Second, they can highlight critical parts of their strategy from which an investor may infer that the business has taken every precaution to cement its sustainability, thereby promoting confidence in its leaders. Third, they can establish the viability of future endeavours, indicating a positive long-term outlook for investment. Last, they can emphasise strong ethical governance and their support for their community, the environment and the wealth they bring to the nation as a whole.

Competing for investment
In a tight economy, both foreign investors and local investors, like insurance companies and pension funds, will become more sensitive to risk and more selective about their investment choices. “Organisations who commit themselves to integrated reporting, suggesting better governance of their business, will be the ones that win funding,” says Ngwenya.