Analysis of Integrated Reporting Implementation

Analysis of Integrated Reporting Implementation

On Companies in Indonesia For The Period of 2014-2016

Bella Nathaniaa, Hannab

aBusiness School, Universitas Pelita Harapan, Indonesia @gmail.com

bBusiness School, Universitas Pelita Harapan, Indonesia

[email protected]

ABSTRACT

This study is a descriptive qualitative and content analysis case study conducted to analyze the implementation of integrated reporting in Indonesian companies for the period of 2014-2016. The purpose of this study is to analyze and find out to what extent Indonesian companies disclose the integrated reporting element in their Integrated Report based on International Integrated Reporting Framework, to know whether the companies in Indonesia are ready to implement the Integrated Reporting to replace the current financial report, and to analyze the effort need to be improved by those companies in order to achieve the stakeholders expectation. This study uses a secondary data collected from Indonesia Stock Exchange (www. idx.co.id) and the official website of each company (PT. Timah, Pertamina EP, PT. Pertamina Hulu Energi, PT Pertamina Geothermal, PT. Elnusa, PT. Semen Indonesia, and PT. Aneka Tambang) that have already implemented integrated reporting for the period of 2014-2016. The result shows that Indonesian companies can be categorized as ready in implementing their Integrated Reporting Framework, with the highest score of mean that comes from risks and opportunities element and the lowest score which comes from basis preparation and presentation.

Keywords:Integrated Reporting, IIRC, IR Disclosure List, Value Creation

1. INTRODUCTION

Integrated reporting becomes very important, as the economy is now facing a new value paradigm regarding the creation of value in the organizations. The concept of value has fundamentally changed and slowly shifted from price based largely on tangible assets to intangible assets. But the problem that is being faced by organization is how to communicate those intangible assets in universal language by using financial report (Ernst and Young, 2014). Today, an organization must be able to create value not only for the shareholders but also for the society as a whole by means of a sustainable strategy. The backbone to this matter is the proposition that value is increasingly shaped by factors additional to financial performance, such as reliance on the environment, social reputation, and human capital.

To communicate a comprehensive value creation story which includes intangible assets, integrated reporting requires organization to identify the interdependency between all elements, especially the material elements both internal and external by trying to oppose silo thinking. Thing to be noted is that the organizations have to articulate all operational, functional, and capital units to contrive an integrated decision making and actions. Those integrated actions and decisions should also concern about holistic view of strategy, governance, performance, prospect, and time horizon will be translated in the integrated reporting.

The changes of value paradigm itself are not clearly reflected in the way financial reporting measure or report value. The traditional model of financial statement failed to adapt and reflect all the factors, especially the intangible assets that may have significant effect on the value creation which can cause a corporate shortfall. It no longer provides a complete picture of an organization. Based on Association of Chartered Certified Accountants (ACCA, 2014) research, the inadequacy of current financial report in communicating the value creation story caused by the missing link between current reporting, business strategy, and risk; insufficiency of current non-financial reporting and qualitative policy statement in which organization tends to emphasize more in quantitative Key Performance Indicator (KPI); and inadequacy in accountability mechanism as a part of non-financial reporting.

Indonesia is one of the developed countries that become the main destination for investor as Indonesia is located in the strategic trade traffic lanes. Besides the strategic location, Indonesia is known as one of the countries with a high stability especially in the economic field. Investors will need high quality information regarding the financial and non-financial activity of the organization as a basic of decision making process, and that information obtained from the annual report issued by related organization. High quality information covers comprehensive information that consists of financial and non-financial information combined in the integrated reporting. Based on the investors’ need, then, the committees started to construct a list of regulation regarding the information disclosure which has to be included in the annual report of organization.

Based on some reasons mentioned, the writer is interested to do a case study in the form of content analysis. This case study will analyze the implementation of integrated reporting in Indonesia, to see the extent of integrate reporting information disclosure that has been made by those companies and whether their integrated report has explained reporting entity’s interrelated financial, environmental, social, and corporate governance information in clear, concise, consistent, and comparable manner. This research also analyzes the readiness of companies in Indonesia in their effort to implement integrated reporting and to know the efforts which are still needed to be developed.

INTERNATIONAL JOURNAL OF BUSINESS, 22(2), 2017 / 145

1. LITERATURE REVIEW AND PREVIOUS STUDIES

A. Evolution of Organization Report

Financial report has an important role as a communication tools between management and other related parties, for examples investor, issuer, etc. Therefore, financial report is expected to be able to depict all the information needed by stakeholders. In advance, the form of financial report is simple, which consists of quantitative information about financial position, financial performance, cash flow of the organization, changes in equity, and the notes of financial report. As this form of report focused only in the financial and can’t depict the organization fact, fraudulent of financial reporting becomes more possible to be occurred. To avoid this problem, managements need to understand all the operational and internal control matter regarding the financial performance of the company completely and the form of report that has to be made is called management report. The development of business and technology encourages financial report to present not only financial performance but also non-financial performance that has a significant effect to the company as a whole.

Then, Peraturan Bapepam and L.K X.K.6 obligate all the companies to present the non-financial information that depicted in the part of CSR in the annual report. But because of there is no specific regulation, the disclosure of this information is below the expectation of stakeholder. After a long period of transformation, then came a new form of non- financial report which is sustainability reporting <SR>. As mentioned in chapter one, sustainability report is present the economic, environmental, and social changes that caused by daily business activity (GRI, 2016). Sustainability reporting becomes an important tool to communicate the performance of organization, and it is able to present the effect of organization continuity whether it will be positive or negative. Sustainability reporting guidance is issued by an international council called Global Reporting Initiative (GRI). So that companies in Indonesia started to present the annual report and sustainability report in the separated form.

But those separated reports get counterintuitive opinions from various parties since the information presented can’t be linked to one another (Berndt et al., 2014). This missing link creates difficulties for shareholder and investor to understand how the significant non-financial performance affects the organization. The cost to prepare those reports is also expensive compare to the benefit gotten. Therefore, those reports have to be combined and re-arrange to create a strong relationship between financial and non-financial report. In order to reduce the missing link between them, they are combined in one new form of report which is called integrated reporting. The benefit of integrated reporting is to increase the transparency in the organization’s operational activity in order to increase the stakeholder’s trust to the organization as the stakeholders can see the company’s performance in all aspect in which it can make the decision process becomes easier and more accurate.

1. Integrated Reporting

Integrated Reporting is developed in financial reporting practice and ESG (environmental, social, and governance) practice as an organization’s tool to manage operating activity, brand, and reputation toward stakeholders strategically. This reporting model prepares an organization in managing risk that may appear in the long-term business sustainability. Integrated reporting is a single report construction which provides stakeholders the adequate information about risk, chance, and strategy regarding social, environment, economy, financial condition of an organization, so that the stakeholder will be able to evaluate the organization’s capability in creating and maintaining their value in the short, medium, or long-term (Leuner, 2012).

Roth (2014) defined the integrated reporting as a report that provides information on all aspects, includes social, financial and environmental aspect to the stakeholders. This statement is enhanced by Roberts (2013), according to him integrated reporting is the result of integrated thinking from organization management; therefore to generate this report, all the commissioners, directors, and management have to be involved in decision making process regarding the source that will be used and in analyzing the interdependency between sources owned by organization which will have a significant effect to organization’s capability in creating value in the future.

Integrated report shows the holistic picture of a company about future targets as well as links between financial performances and non-financial performances (Jensen and Berg, 2012). Thus, it is the most effective to interact with stakeholders. In favor of IR, practitioners and supporters of integrated reporting assert that IR brings more transparency on corporate commitment to sustainability by showing the links between financial and sustainable performance in a single document (Adams, 2013; Eccles, et al, 2010).

The IIRC (2015) indicates that integrated reports are intended to help businesses think holistically about their strategy and plans, to make informed decisions, to manage key risks and to improve future performance. According to Stubbs and Higgins (2014), integrated reporting enables companies to make better financial and non-financial decisions; such reporting improves resource allocation decisions, breaks down operational and reporting silos and leads to improved systems and processes. Brown and Dillard (2014) observe that through improved internal processes, integrated reporting may help organizations to identify eco-efficiency gains, improve productivity and enhance brand loyalty towards the organization.

1. International Integrated Reporting Framework

On 13th of December 2013, IIRC published the first version of framework that can be a matrix for an organization who adopts integrated reporting voluntary. This framework tries to countervail the flexibility and set boundaries (Busco, et al., 2014). IIRC stated that integrated reporting adheres to principles based that give organizations flexibility in communicating their uniqueness in accordance with the elements required by IIRC Framework. This council is also claimed that the value created by an organization is not only influenced by organizations but also external environment. Based on IIRC Framework, the implementation of integrated reporting has to include focusing on strategy and future orientation, information relation, stakeholder opinion, materiality, concise, reliability and completeness, consistency and comparability.

The attention to these principles is a guarantee of the effectiveness of integrated reporting, that its’ implementation is really an improvement upon other types of reports and that it remedies the deficiencies of corporate reporting (KPMG, 2011; Jensen and Berg, 2012). An integrated reporting includes the following eight important content elements which consists of (1) Organizational overview and external environment - to see the activities done by company and the circumstances in which the company operates; (2) Governance – to see the governance structure that support company’s ability to create value in the short, medium, and long term; (3) Business model – to understand the company’s business model; (4) Risks and opportunities – to understand the risk and opportunities that may affect the organization’s ability to create value over the short, medium, and long term and organization’s response; (5) Strategy and resource allocation – to see where does the organization want to go and how does it indent to get there; (6) Performance – to see whether the organization has achieved their objectives and the outcomes in terms of effects on the capitals; (7) Outlook – to understand the challenges and uncertainties that likely to be encountered in pursuing company’s strategy and to see the potential implications for its business model and future performance; (8) Basis of preparation and presentation, and in doing so, takes account for general reporting guidance – to determine the matters that have to be included in <IR> to be next quantified or evaluated.

1. Previous Studies

Nazier and Umiyati (2015) provide an overview about the transformation of sustainability reporting toward integrated reporting regarding the improvement of accountability in corporate governance. Based on Ernst and Young (2014) analyzes, integrated reporting will also equip organizations to strategically manage their operations, brand, and reputation to stakeholders, so they can be better prepared to manage any risk that may compromise the long-term sustainability of the business even all research deriving from different theories has emphasized the importance of transparency about the quantitative and qualitative information. There is no single theoretical framework for business to systematize information about corporate responsibility or their contribution to sustainability (Branco and Rodrigues, 2007).

In depicting an organization’s accountability to its shareholder, integrated reporting roles as a tool that affects the way organization enhance its information and how they can communicate short, medium, and long term value creation story by showing the interaction between organization, social, environment, and investors who contribute in creating organization value (Leuner, 2012; Marcy and Burkholder, 2013). This interest in the communication of commitment to sustainability has led to the publication of international guidelines on the diffusion of such practices across the board. These guidelines may be useful in order to facilitate the diffusion of the various economic, social environmental, ethical and governance issues to a wide range of stakeholders (Chen and Bouvain, 2009).

Eccless (2012) stated in his research that integrated reporting is a new prospect for an organization in communicating and implementing the sustainable strategy which means, the organization will conceive value not only for shareholders in the long term but also to society as a whole. Based on the survey done by Fellow (2012), there are some advantages in implementing integrated reporting by giving a better understanding of how an organization creates a value over period of time, enhancing the consistency in communication with external parties, and enhancing beneficial analysis for the future.

1. RESEARCH METHODS

1. Research Designs

This research is using descriptive qualitative methods by analyzing the secondary data in order to see the extent of disclosure of integrated reporting element indicators made by Indonesian companies and their readiness in implementing integrated reporting. Descriptive model is designed to compile and accumulated all the information about a fact that is happening. The main purpose of using this method is to depict the condition that is running when the research is done and examine the causes of a particular phenomenon. In this research, writer tries to convert the qualitative data into quantitative data through scoring process.

1. Data and Sample

This research uses all the population which is all the companies in Indonesia that already implemented and published integrated reporting as the sample of study with the limitation of period 2014-2016. There are 8 companies which are PT Timah, Pertamina Gas, PT Pertamina EP, Pertamina Hulu Energi, PT Pertamina Geothermal, PT Elnusa, PT Semen Indonesia, PT Aneka Tambang. All related information regarding the integrated report or annual integrated report is taken from Indonesian Stock Exchange (IDX) website and each company’s website. The result shows that there are only few companies that have already implemented the integrated report or annual integrated report. While more companies in Indonesia still decided to use annual report or the separated report which consist of sustainability and annual report.

IV.FINDINGS AND DISCUSSION

1. Research Findings

After the process of making indicators list for each eight elements of IIRC Framework; researcher quantifies the result of implementation through a scoring which is based on Raar (2002). Score (1) is for the disclosure in the form of sentence, (2) is for the disclosure expressed in paragraph which according to the report presentation or, alternatively, when accumulated totaled three sentences or more in one paragraph, (3) for the disclosure expressed in one half page which is as the number of paragraphs, and/or sentences that, when accumulated, totaled the equivalent of one half an A4 page. (4) Disclosure that is in one A4 page. And (5) for the disclosure that is more than one A4 page. If there is no disclosure at all, the score that will be given to the indicators will be 0. The use of the number of sentences and page length was justified on the basis that more accuracy can be attribute test to the counting of sentences than words (Hackston and Milne, 1996).

Then, in the second scoring process, writer will find the total mean of the indicators as a whole which will be used to determine the readiness of companies in Indonesia in implementing the Integrated Reporting <IR>. The higher the score of mean; the more information has been disclosed, and the better the quality of information given in the integrated reporting. In this part, writer will discuss briefly about the analysis result. There will be three kinds of table that summarize the overall result.

Table 1

Mean of the Total Disclosure per Element for the Period of 2014-2016

No / Element / Min / Max / Mean / Disclosure
(%)
1 / Organization’s Overview and External Environment / 2.36 / 5.00 / 4.08 / 100%
2 / Governance / 0.00 / 5.00 / 4.02 / 90%
3 / Business Model / 0.00 / 5.00 / 3.66 / 95%
4 / Risks and Opportunities / 3.32 / 5.00 / 4.53 / 100%
5 / Strategy and Resource Allocation / 1.05 / 4.82 / 3.35 / 100%
6 / Performance / 0.41 / 5.00 / 4.09 / 100%
7 / Outlook / 0.82 / 4.86 / 4.15 / 100%
8 / Basis Preparation and Presentation / 1.73 / 4.68 / 3.02 / 100%
9 / General Reporting Guidance / 0.00 / 5.00 / 4.11 / 96.43%
Total mean / 3.89

Source: Researcher analysis