IMFO conference (KZN)

7 March 2016: Integrated reporting (IR)Presented by: Vanuja Maharaj

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Reputation promise

The Auditor-General of South Africa

(AGSA) has a constitutional mandate and,

as the Supreme Audit Institution (SAI) of

South Africa, it exists to strengthen our

country’s democracy by enabling oversight,

accountability and governance in the public

sector through auditing, thereby building

public confidence.

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Background to integrated reporting (IR)

• The IR committee (IRC) of SA in January 2011 released the worlds first discussion

paper on a Framework for IR

• In December 2013, The International Integrated Reporting Council (IIRC) released

the Framework for IR

• March 2014, The IRC endorsed the Framework on how to prepare an integrated

report

����So how does King III on corporate governance align to the IR framework?

����King III covers the principles of IR whilst the Framework for IR covers the

“How to” prepare the integrated report.

����If an entity finds that a principle of King III is not being met by applying the IR

framework, then it should explain this (Note King compliance is on an apply or

explain basis)

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So why was IR developed?

IR has been developed due to the following…..

• To be consistent with a number of corporate/government reporting trends taking

place across the globe

• A range of market drivers are currently not being satisfied by complex and dated

reporting methods

• There is a greater need for transparency, inclusiveness, and more information that

is material to modern business

• The need to report on sustainability in terms of “People”, “Planet” & “Profit” is

getting more attention

• Global risks, namely the impact of water crises, electricity shortages, severe income

disparity, and climate change, and global slowdowns has a heavy impact on the

sustainability of business and government programmes

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Understanding of definitions

• Integrated report: An integrated report is a concise communication about how an

organisation’s strategy, governance, performance and prospects, in the context of

its external environment, lead to the creation of value in the short, medium and

long term

• Integrated reporting: A process founded on integrated thinking that results in a

periodic integrated report by an organisation about value creation over time and

related communications regarding aspects of value creation

• Integrated thinking: Integrated thinking is the active consideration by an

organisation of the relationships between its various operating and functional

units and the capitals that the organisation uses or affects. Integrated thinking

leads to integrated decision-making and actions that consider the creation of value

over the short, medium and long term.

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Capitals of IR

• The capitals are stocks of value that are increased, decreased or transformed through the activitiesand outputs of an entity. They are categorised as follows:

����Financial – (Funds used for the production of goods and services or from finance)

����Manufactured– (Physical objects available for use in the supply or production of goods/services, e.g. Buildings and

equipment and roads and bridges)

���� Intellectual–(Organisational knowledge based intangibles, such as patents and know-how, licences , protocols and

copyrights)

���� Human– (Peoples competencies and skills and their abilities to innovate and lead based on the entity’s strategy )

���� Social and relationship – (The institutions and the relationships within and between communities, groups

of stakeholders and other networks, and the ability to share information to enhance individual and collectivewell-being.

���� Natural capital– (All renewable and non-renewable environmental resources and processes that provide goods or

services that support the past, current or future prosperity of an organisation.

• It is becoming increasingly apparent that the non-financial capitals, namely: human, intellectual,social and relationship, and natural contribute to a larger portion of business assets and liabilities

• The concern is that the non-financial capitals have not been diligently managed over time and onlyafter economic collapses occur then is a quick fix implemented

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Interplay between six IR capitals

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Relationship between IR and public sector reporting

In terms of the Public Audit Act, 2004 of South Africa:

• Financial and performance management is audited as part of the annual audit

process. Accordingly, the auditor's report reflects an opinion or material findings

on the following:

• Financial information, through the auditor's opinion on the financial

statements or similar reporting

• Reported information on performance against predetermined

objectives

• Compliance with applicable legislation relating to financial matters,

financial management and other related matters

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Relationship between IR and public sector reporting

Performance audits - section 20(3) of the PAA

The AGSA may report on whether the auditee's resources were procured economically and

utilised efficiently and effectively. These audits are referred to as performance audits.

Audit-related services and special audits - section 5(1)(a) and (d) of the PAA

These audits are conducted in accordance with International Standard on Auditing (ISA) 805

Audits of single financial statements and specific elements, accounts or items of a financial

statement, ISAE 3000 Assurance engagements other than audits or reviews of financial

information or ISRS 4400 Engagements to perform agreed upon procedures regarding financial

information, as appropriate. (Environmental audits, review engagements, donor funding, due

diligences)

• Seeing that the AGSA audits/reviews three different areas as part of its mandate, IR is done

partially by entities, however, much more needs to be done by regulators and key stakeholders to

promote IR

• The AGSA reviews financial viability to assess the future position to state entities as part of a value

add exercise, coupled with a review of forward looking key controls

• The AGSA audits financial and non-financial items, as well as compliance with a value chain and

integrated mind-set

• Other audits are also conducted based on reports included in annual reports or based on forward

looking information

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Relationship between IR and public sector status

IR Principle: Strategic focus and future orientation: An integrated report should provide insight into the

organisation’s strategy, and how it relates to the organisation’s ability to create value in the short, medium

and long term, and to its use of and effects on the capitals

Current status in public sector and improvement areas

• Parastatals such as Eskom and Transnet prepare integrated reports based on the IR frameworks

• Municipalities and departments prepare a 5 year plan and annual plan that talks to value creation. The

outcomes of these plans are reported in the annual reports which are subject to audit/review

• The annual reports however need to be scalable and user friendly and systems and controls over the

preparation thereof need to be improved

• Instead of the annual report being seen as a year-end process, the process should be seen as a monthly

assembly of information with key controls over the preparation thereof being institutionalised

• The future orientation of data and statistics needs to be constantly checked and adjusted as necessary to

provide users with accurate and meaningful results

IR Principle: Connectivity of information: An integrated report should show a holistic picture of the

combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to

create value over time

Current status in public sector and improvement areas

• Value chain reporting is becoming a norm with integration being a buzz word. Many CFOs, however, still

continue to grapple with the fact, that their functions are inextricably interwoven with performance

reporting

• CFOs are informed by best practice and experiences. Their experiences should be applied to enhance IR

in the same way that they produce financial reports

• CFOs regard IR as being irrelevant to them and therefore are unable to see the importance of how actions

taken today map the future value of an entity as well as governments wealth.

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Relationship between IR and public sector status

IR Principle: Materiality: An integrated report should disclose information about matters that substantively

affect the organisation’s ability to create value over the short, medium and long term

Current status in public sector and improvement areas

• In terms of sustainability reports, materiality is more difficult to assess and requires extensive

judgement across as potentially vast array of issues. Currently annual reports include a lot of

information and are back-ward looking and very rarely make the link between financial and

sustainability issues, as well as strategy

• Most reports do not address critical disclosure gaps to enable stakeholders to make an informed

assessment of whether the goals and objectives of government are being realised

• The critical link between value drivers and social, natural and economic systems is overlooked

• The resources, skills, operating systems and public sector culture that is required to deliver on promises

made is sometimes overlooked

IR Principle: Conciseness: An integrated report should be concise

Current status in public sector and improvement areas

• Reports are prepared for compliance purposes without having due regard to the systems and processes

and an ever-changing societal context

• The old adages of “less is more” and “a picture paints 1000 words” should be used as a tip to enable an

IR report to be user-friendly and transparent

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Relationship between IR and public sector status

IR Principle: Reliability and completeness: An integrated report should include all material matters, both

positive and negative, in a balanced way and without material error

Current status in public sector and improvement areas

• Negative matters are not adequately contextualised in reports to provide users with transparent

information

• Integrated reports are not prepared to outshine competitors or win reporting awards. The objective

should always be to communicate in a responsible, transparent and user-friendly manner to key

stakeholders

IR Principle: Consistency and comparability: The information in an integrated report should be presented:

(a) on a basis that is consistent over time; and (b) in a way that enables comparison with other

organisations to the extent it is material to the organisation’s own ability to create value over time

Current status in public sector and improvement areas

• Reporting frameworks in SA requires that performance information be presented in a manner that is

comparable and consistent

• Leadership and management should use trends that tend to be predictable over time to make informed

assessments on global reporting initiatives that have spearheaded reporting on non-financial

information

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Relationship between IR and public sector reporting

IR Principle: Stakeholder relationships: An integrated report should provide insight into the nature and quality

of the organisation’s relationships with its key stakeholders, including how and to what extent the organisation

understands, takes into account and responds to their legitimate needs and interests

Current status in public sector and improvement areas

• Risk assessments are sometimes conducted as mechanical tick box processes without understanding what

matters most to key stakeholders. As a result processes fail and it is too late to fix issues

• Deepening the understanding of stakeholder needs and assurance stakeholders in a transparent manner

that their interests are protected is paramount for value creation

• Continuously scanning the environment for changes and responding to these will strengthen the value add

and confidence of society

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Illustrative example

A district municipality recently built an airport in PMB to increase tourism and enable

passengers to take flights from PMB to JHB instead of travelling to King Shaka in

Durban. In carrying out this service there are carbon emissions (output). The

municipality relies on various inputs, namely vehicles, roads, fuel, drivers and other

staff, customers and a reputation for reliable service. The significant outcomes

resulting from the business activities and outputs include:

Capital Positive result Negative consequences

Financial The profit and added income made is

reinvested in the municipality and

ploughed back into the PMB economy

to uplift service delivery

Manufactured • Wear and tear on the fleet vehicles

• Heavier traffic flow to the airport

increases the need for regular road

repairs and maintenance by local

government

• The airstrip will have to be

maintained frequently

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Illustrative example

Capital Positive result Negative consequences

Intellectual Systems, knowledge and technology in

the municipality airport has been

enhanced through development and

business experience

Human Enhanced skills through management

training and advanced driving training,

and salaries paid have benefited staff

members

Staff morale is lower than usual because

of the retrenchments that were

necessary in certain departments to

enable the airport to be built

Social and

relationship

• Reputation and brand have been

enhanced through reliable service

• Customers have benefited from the

reliable flight capability, as has the

economy

• Government has benefited from taxes

and licences

• The local community has benefited

from jobs and income flow and the

company’s funding of solar-powered

traffic lights

• Increased road traffic heightens

safety risks and the traffic congestion

can be detrimental to the efficiency

of other businesses

• Human and animal health are

negatively affected through poorer air

quality

Natural Air quality deterioration through

increased air pollution, and the increase

in carbon emissions effects broader

climate change

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Pros and cons

Based on the framework for IR and the illustrative example IR will without doubt improve value creation and

confidence for the public sector. For IR to be successful:

Integrated thinking is a must

• All staff, management and leadership needs to understand their purpose and how they fit into the value chain. Without

integrated thinking being embedded in the DNA of the entity IR will not be very successful

• Integrated thinking and innovation must be embedded in performance contracts to stimulate economic prosperity and service

delivery

Integrated assurance is a must

• Akin to the concept of combined assurance is a concept of integrated assurance. Leadership, governance, management controls,

processes and systems, internal audit and external assurance need to be harmonised to provide balanced and integrated

assurance

• Quick and expensive solutions are to appoint consultants to prepare the integrated report. This should be avoided as far as

possible as management and leadership are closest to understanding how the business fits together

• A sustainable option is to create an integrated assurance plan

Data completeness and accuracy is a must

• While financial reports are complied on a monthly basis, integrated reports are only compiled at year- end

• The time-consuming nature of the reports and manual processes further complicate the process

• IR information is often unstructured and needs to be extracted from various sources increasing the risk of human error

• Tight deadlines, last minute changes and lack of version control leads to a highly stressful environment

• Automating and integrating the IR process can reduce many of the mistakes and stresses but it is still key to ensure that the IR’s

include information that is relevant and material

• Training and awareness and the understanding of value chains by all staff must be effectively understood

• The IR must be concise and a collective voice and not just prepared for a cursory review and approval at year-end

• The IR process should not be a costly process

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The end……………………..

Thank you

Questions

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