Morning Knowledge /14. Accounts

EVEN RESPONSIBLE COMPANIES TRY TO DIVERT ATTENTION FROM THEIR WEAKNESSES, ARIELA CAGLIO SAYS. BUT WE SHOULDN'T THROW OUT THE BABY (INTEGRATED REPORTING) WITH THE BATHWATER


In case of suboptimal performance, companies yield to the temptation to tinker with their corporate reports by adopting strategies aimed at obfuscating bad performances and emphasizing the good. That’s true even for the companies participating in the International Integrated Reporting Council Pilot Programme and adopting IR, a cutting-edge attempt to connect a firm’s financial and non-financial performance in a single document, according to research by Ariela Caglio and colleagues.
 
Such disclosure strategies not only depend on the level of firms’ performance, as suggested by previous studies on narrative disclosures, but also on the type of performance (financial versus non-financial) that managers would like to conceal.
 
In particular, firms with weaker financial performances publish integrated reports that are longer, less readable and more optimistic than the rest. Interestingly, they are also more complete in terms of information about non-financial performance, possibly signaling a disclosure strategy aimed at redirecting attention from hard numbers to softer aspects of their performance.
 
In presence of a weak social performance, reports are foggier (less readable) and less complete. This suggests that firms with low non-financial performance adopt reputation management strategies based on the manipulation of syntactical reading ease and thematic content, especially moving the focus onto coverage of environmental ‘‘fine-tuning”, social and governance topics.
 
Nonetheless, Prof. Caglio concludes, we shouldn’t throw out the baby with the bathwater, as Integrated Reporting is a good idea with lots of benefits.

by Fabio Todesco