With increasing pressure on companies to report transparently on environmental, social and other impacts, the Chartered Institute of Internal Auditors (IIA) has called for greater scrutiny of the accuracy and rigour of information reported.
Previously seen as the purview of the media and politicians, reporting on information related to the environment, human rights, diversity and anti-corruption measures has become increasingly important to investors who seek companies with sustainable business models.
An EU Directive setting a 2017 deadline for large companies to start publishing a wide range of non-financial information is pushing reporting of non-financial information up the boardroom agenda. Internal auditors are well-placed to provide assurance to boards in this area.
Dr Ian Peters, IIA Chief Executive said: “The move towards reporting non-financial information poses obvious challenges for companies; it requires them to bring together information on what may be disparate parts of the business.
“Organisations need to ensure that the right things are measured, and that the systems are in place to capture the data needed. But more than that the public needs to know that the non-financial information being reported is fit for purpose.
“Internal auditors possess a broad view across the entire business. They are ideally placed to offer a comprehensive view of how an organisation manages its resources and to provide assurance on data integrity. As companies respond to demands for more non-financial information, internal audit needs to play a central role.”
Integrated reporting aims to address the shortfalls associated with traditional one-dimensional financial reporting. It examines the connections between financial, environmental and social impacts of an organisation to give a more complete picture of its sustainability and long term value.
The role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively. This broad view across the whole company’s systems and processes means that internal audit is ideally-placed to provide advice and assurance around corporate social responsibility and other information generated for integrated reporting.
Companies are now facing increased demands generally from regulators, politicians and investors for more comprehensive and transparent corporate reporting. In 2013, the UK government introduced new rules under the Companies Act requiring all listed companies to produce a Strategic Report covering a wide range of non-financial information.
Integrated reporting is increasingly viewed by companies as a good way of ensuring compliance with these new regulatory demands. It is also hoped that it will enhance business performance and improve stakeholder engagement by ensuring that businesses increase their focus on non-financial issues.
The IIA’s report outlines the central role that internal auditors have to play in integrated reporting:
- Evaluating the adequacy of governance, risk management and controls processes related to financial and non-financial capitals
- Giving assurance on the Integrated Reporting processes
- Providing assurance on data integrity
- Reviewing key risks and opportunities
Case studies: Non-financial and Integrated reporting- the role of Internal Audit
Marks & Spencer
- A member of the International Integrated Reporting Council.
- Intends to publish a fully integrated annual report in the next two years.
- Already publishes information on a wide range of non-financial issues- including social, environmental and ethical- in its sustainability report.
- In the 2014 sustainability report, measures illustrating progress towards M&S’ one hundred ‘key commitments’ were outlined. Around half were assured by M&S’ internal audit team. The remaining half were assured with the help of a specialist external team.
The Crown Estate
- First published its Integrated Report in 2013.
- Has evolved its business planning process to take account of all material issues which could affect performance.
- Internal audit brought to assist with understanding what capitals and resources Crown Estates relies on to do business and relating inputs, outputs and incomes.
- Chief Internal Auditor played a key role in responding to requirements laid out in the UK Corporate Governance Code (October 2012) for annual reports to include a more holistic view of threats facing a company.
- Internal auditor reviewed the company’s annual report, alongside the Quality Assurance Manager and was able to offer assurance that it met the necessary standards.
- The Chief Internal Auditor sits in on all audit committee meetings at the regional level and some at the national level and also attends some executive committee meetings so he can see the execution of strategy at a day-to-day level.
- Has published an integrated annual report since 2008- linking its business strategy with environmental and social trends.
- Worked with external auditors but faced challenges to provide high levels of assurance for non-financial data.
- Brought in an internal audit team in 2014 with the hope of improving the assurance process