CONTEMPORARY

ISSUES IN

ACCOUNTING THEORY
Article 2

Question (a)

An integrated report is a succinct communication about how an organization's strategy,

governance, performance, and prospects lead to the creation of value over the short,

medium, and long term. Integrated reporting is a "process that results in communication,

most prominently a periodic "integrated report", about the creation of value over time.

The companies are willing to include more of the principles around integrated reporting

in their business because integrated reporting helps the businesses to report on the non-

financial domain, identify a risk that emerges due to Covid-19 and deal with the climate

change risk. As the companies are striving for efficiency as well as sustainability, the

requirement of principles regarding integrated reporting is increasing. The seven guiding

principles of integrated reporting are as follows:

 Strategic focus and future generation

 Connectivity of information

 Stakeholder relationships

 Materiality

 Conciseness

 Reliability and completeness and,

 Consistency & comparability.

While implementing integrated reporting within the organization, businesses are willing

to include more of its principles because of the following reason:

Driving better business performance: Integrated reporting helps in creating a competitive

advantage for the corporates via creating a more sustainable business model.

Putting forth strategies for the future: To include sustainability as a part of business

strategy and meets the individual and corporate level expectations.

Raising awareness across all types of stakeholders: To keep all types of stakeholders

engaged within the business, the companies are willing to include more principles.

Differentiating themselves from their competitors: This is also one of the major reasons

why integrated reporting is increasing.

For example, Australian companies are implementing integrated reporting to attract as

well as retain large-scale investors and enhance their beliefs that they are investing their

money in ethical businesses that put a positive impact on society and the environment.

Three theories of Integrated reporting are as follows:

Agency theory: An explanation and solution for problems in the interaction between

business owners and their agents are found in the notion of agency. This kind of

interaction most frequently exists between shareholders acting as principals and firm

executives acting as agents.

Legitimacy theory: One of the ideas that have received the greatest attention to explain

the occurrence of voluntary social and environmental disclosures in corporate

communication is the legitimacy hypothesis. According to the legitimacy theory,

businesses use social and environmental reporting to increase, preserve, or restore their

credibility.

Positive accounting theory: The efficient market hypothesis, the capital assets pricing

model and agency theory are all major components of Watts and Zimmerman's positive

accounting theory, which is based on economics research. The bonus plan hypothesis,

debt hypothesis, and political cost hypothesis are the three main hypotheses.
Question (b)

Value erosion means the loss of the value or profit of a company due to various non-

financial factors such as society, environment, climate change, poor corporate

governance, etc. The author means the reduction in the responsibility of the companies

towards economic, social, and corporate governance while they discuss value erosion.

The large-scale investors or other stakeholders of the companies having an interest in the

day-to-day operation of business want to know about the risk and downside of the

business. Thus, the companies should implement an integrated reporting framework

within the organization to avoid value erosion. With the help of integrated reporting,

companies can report on the risk which emerges due to climate change such as a decline

in the status of societal values.

The strategies businesses can able to adopt and manage successfully to avoid value

erosion are as follows:

Disclosing sustainability report: This is one of the ways the companies can avoid value

erosion. Here, the company is required to present information about the economic value

of an entity, and the environment as well as the social value of the business.

For example, after analyzing the sustainability report, 2021 of Medibank Private Limited,

it has been identified that the bank has supported around 133k customers through their

Member Health Service. Not only that, during Covid-19, Medibank has given back $103

million to its customer in Covid permanent net claim savings via premium relief. In this

way, Medibank has successfully supported society and also report on them in their

sustainability report to avoid value erosion and deal with risks emerging during the global

pandemic.

Structure of organization: One of the ways through which companies can avoid value

erosion is by forming the board structure of the organization and reporting their roles and

responsibilities.

For instance, as per the corporate governance statement of Medibank Private Limited, it

has been identified that the board structure of the bank comprises nine directors out of

which eight are non-executive directors. Including the majority of directors as non-

executive is one of the significant measures through which independent decisions in the

favor of companies and their stakeholders are easily taken by the bank. Directors bring

independent judgment on the fairness and truthfulness of the financial and non-financial

statement which further help the investors to a decision whether the bank is socially

responsible and ethical or not.

Medibank Private Limited to avoid value erosion are highly committed to incorporating

gender equality within the business. The bank is ensuring to represent at least 40% of the

senior leadership population as women as well as 40% of women on the Medibank

Board. They also report on the issues such as the rise in cases of corona within the

country in their report as well as the measures they take to avoid the same. Such as social

distancing policy at the workplace is a measure adopted by Medibank to avoid the Covid

spread issue and protect the lives of their employees.

The above-mentioned are some of the points and examples of Medibank limited which

state the importance of integrated reporting or reporting on sustainability as well as

corporate governance to cover the risk the bank is facing which leads to value erosion.

This also helps the company to communicate the steps and actions they are adapting to

deal with the issue and successfully manage ESG (environmental, social, and corporate

governance measure).
Question (c)

Similarities between the guiding principle of the Integrated reporting framework and the

Conceptual framework:

Communicating with users of financial statements: This is one of the guiding principles

which is similar to both conceptual as well as integrated reporting frameworks. It is

because, under both frameworks, the main aim of companies is to present the information

of the company to its users or stakeholders. The similarities are that financial statements

or annual reports are prepared under both frameworks.

Material information: Whether to implement a conceptual framework or an integrated

reporting framework within the business to communicate financial or non-financial

information, both frameworks have similar guiding principles of materiality. It means the

information should be material in nature and affect the decision of the stakeholders. For

example, corporate social responsibility, ESG measures, etc.

Consistent and annual reporting: Under both the reporting framework, the companies

should report annually on 31st July. The consistency principle of both framework state

that companies are required to consistently use one policy over the period to disclose or

present financial as well as non-financial information. The change in policy and concepts

is only possible in case of an emergency and enhances the reporting quality of the

company.

Reliable and complete statements: The statement presented under the conceptual as well

as an integrated framework should be complete and reliable. This is also a similar guiding

principle example of both frameworks.