Integrated Reporting: Built To Last

Four months ago, I wrote about the International Integrated Reporting Council’s (IIRC’s) efforts to update its 2013 sustainability reporting model. The world has confronted numerous new challenges since that time, and the financial community has risen to these challenges by pouring resources into ESG focused index funds.

As of the last quarter, for instance, a quarter of a trillion dollars were invested in such funds. Furthermore, the amount of capital that flowed into sustainable funds in 2019 was roughly four times as great as the amount in 2018, and six times as great as the amount in 2013.

It thus appears reasonable that the IIRC wishes to update its 2013 model to account for new developments, doesn’t it? Four months ago, for instance, I noted that the IIRC’s “String to Spring” approach bore some helpful similarities to COSO’s relatively new 2017 Helix model of Enterprise Risk Management. So how far from the IIRC’s original 2013 framework has its 2020 revision progressed?

Page 13 of the “Companion Document” of the 2020 revision contains the details. It compares the original 2013 Framework to a “mock-up” of the revised framework. How many of the proposed changes are radically new?

In a word? None. Indeed, the new mock-up merely contains five clarifications of the original Framework:

“Outcomes” are now referred to as “Short, Medium, and Long-Term Outcomes” to emphasize that organizations must assess impact throughout the time horizon.

“Business Activities” are now referred to as “Activities” to incorporate the non-business activities of organizations.

“Mission and Vision” are now expanded to “Purpose, Mission, Vision” to emphasize that a holistic sense of purpose should define all strategic activities.

“External Environment” now appears above the organization and not below it to emphasize that organizations must survive within their environments.

“Value Creation” is now expanded to “Value Creation, Preservation, or Erosion Over Time” to explicitly remind organizations that their actions may destroy value as easily as they build it.

None of these revisions is truly new. In fact, these concepts were already embedded in the original 2013 guidance. The 2020 mock-up simply presents these implicit points in a more explicit manner.

Thus, a model that was developed seven years ago to address the world of 2013 has been updated to address the radically transformed world of 2020. And yet this update does not include any radically new concepts at all.

It appears that the original Integrated Reporting Framework was built to last. Like the QWERTY keyboard — a model that remains just as indispensable on a 2020 Apple Macbook as on an 1893 Remington typewriter — the Integrated Reporting Framework perseveres as the leading standard of sustainability reporting.

The Historical (And Yet Contemporary) Importance of Behavioral Accounting

Note: This post has also appeared on the blogs of Econvue, the Public Interest Section of the American Accounting Association, and the Sustainability Investment Leadership Council. I encourage you to use these links to peruse these outstanding online publications.

The field of behavioral finance studies the behavior of the investment markets. Similarly, the field of behavioral economics studies the behavior of the global economy and the numerous national, regional, and local economies.

But what of the field of behavioral accounting? How does it resemble the fields of behavioral finance and economics? And how does it differ?

Behavioral accountants, like their colleagues in the other financial professions, focus on elements of human characteristics that can be identified in aggregate data sets. They recognize that organizations, like markets and societies, are composed of individuals who make personal decisions in often-predictable ways. Thus, because behavioral researchers can understand and predict individual decisions in various situations, they are also able to understand and predict the impact of aggregate decisions.

Accountants, though, specialize in the development of organizational reports that describe the conditions of organizations. Internal and external users of their reports rely on them to make important decisions that impact the well-being of those organizations. Thus, at times, accountants feel inherent tensions between the goals of “measuring and reporting data accurately and objectively” versus “measuring and reporting data that persuades the user to make decisions that help the organization.”

Individuals study to become public accountants to learn how to implement measurement and assurance procedures in support of the first goal. Separately, they study to become behavioral accountants to learn how to support the second goal. These goals overlap, but they are not mutually exclusive. In certain situations, they are perfectly aligned. In other situations, though, they have little in common, and they may even conflict.

A Controversial Example of Behavioral Accounting

A prime example of controversial behavioral accounting is commonly known as “greenwashing” in sustainability circles. Organizations cherry-pick data that appear to portray them as responsible guardians of the environment, and then present that data to persuade readers that they are responsible stewards of the natural world.

Volkswagen’s notorious collection of falsified emissions testing data is an obvious and egregious illustration of greenwashing behavior. Other illustrations are more subtle in nature, generating healthy debates over whether the content is misleading at all.

Consider, for instance, the pledge that was made by E. Neville Isdell, Chairman and CEO of The Coca-Cola Company. In 2007, he declared that “Our goal is to replace every drop of water we use in our beverages and their production.

On the one hand, the firm produced data that indicated the successful achievement of that goal. But on the other hand, investigative reporters have noted that “… ‘every drop’ includes only what goes into the bottle. The company does not count water in its supply chain — including the water-guzzling sugar crop — in its ‘every drop’ math.

Indeed, a public accountant may be able to provide assurance that the “drop for drop” phrase is (technically speaking) an accurate description of Coca-Cola’s water utilization patterns. But a behavioral accountant may protest that the vaguely defined phrase invites selective interpretation.

A Universally Admired Example of Behavioral Accounting

Ben & Jerry’s provides a contrasting illustration to the controversial food and beverage example of Coca-Cola’s environmental accounting practices. The ice cream manufacturer is often credited with producing the world’s first Corporate Stakeholder report (i.e. Integrated Report) more than two decades ago.

Using an internally developed proprietary format that the firm called Social & Environmental Assessment Reports (SEARs), Ben & Jerry’s published sustainability data on its web site for many years until concluding the practice in 2018. The reports employed colorful graphic imagery to express its core values, its focus on its social mission, its multiple year planning processes, its goal setting practices, and its outcomes. It also hired an independent public accounting firm to prepare annual independent review reports on the information.

The playful graphics, the earnest social messaging, and the metrics all served to reinforce the impression of Ben & Jerry’s as a socially conscious firm that made business decisions in support of the public interest. The behavioral impressions that were produced by the SEAR Reports undoubtedly supported the decision by Unilever to purchase the firm on friendly terms.

From The Past To The Future

Why did Abraham Lincoln begin his 1863 Gettysburg Address by noting an event that occurred “four score and seven years ago,” instead of simply beginning with the phrase “in 1776”? He must have known that his audience would have leaned into the arithmetic calisthenics of computing the year, thereby placing them in an appropriate frame of mind to focus on his intellectual argument about the war’s threat to democracy.

And why did he end his Address by vowing to protect the “government of the people, by the people, for the people”? Why didn’t he simply vow to protect “democracy”? Once again, he must have anticipated that the repetitive rhythmic triadic cadence would be more memorable to his audience. It’s also why Martin Luther King repeated “I Have A Dream” nine times in his immortal address, and “Free At Last” three times at the very end of the speech.

Lincoln and King both knew that the levels of the persuasiveness of the information that they conveyed to their audiences were just as important as the objective validity of their logical arguments. Such knowledge continually inspires today’s behavioral accountants to redefine traditional profitability measurements into more esoteric metrics like Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Adjusted Consolidated Segment Operating Income (ACSOI).

From Abraham Lincoln to the Chief Financial Officer of Groupon, the principles of behavioral accounting have been widely used to influence the decisions of stakeholders. Indeed, it is not sufficient for an accountant to simply “get the numbers right.” It is also important for an accountant to “persuade the user of the numbers to behave in a desirable manner.”