Thinking and reporting in an integrated manner – A micro, small and medium enterprises approach
The COVID-19 pandemic continues to cause significant concerns through the world and can be considered a mega-force that has created significant impact on a global scale.
The economic impact is estimated to be billions of US dollars globally. According to the 2021 federal budget, the economic cost of COVID-19 was $311 billion.
The Australian Treasury estimated the cost of a lockdown to the Australian economy at approximately $1.4 billion a week, annualised at $50 billion. The economic fallout has had a direct impact on organisations in Australia, as many have struggled to manage this unforeseen risk which has threatened their very existence.
While most larger corporates have the financial ability to overcome or survive such a mega-force, the most vulnerable have been in the micro, small and medium enterprise (MSME) sectors. According to the Small Business Counts December 2020 report from the Australian Small Business and Family Enterprise Ombudsman’s office, the MSME sector counts for nearly 98 per cent of all Australian businesses based on number of employees or turnover.
According to Australian Bureau of Statistics data, the MSME sector employs around 4.7 million people, which is about 41 per cent of the total employment. More than 60 per cent of all MSMEs have a turnover of less than $200,000 per annum. The MSME sector contributes around 56 per cent of the economy, whereas large businesses contribute around 44 per cent. The importance of the MSME sector is therefore very significant to the Australian economy.
The mega-force of COVID-19 has had more of an impact on MSMEs, and this highlights some of the major issues with MSMEs and their operations. Many MSMEs do not necessarily have a broader understanding of the markets they operate in and are affected by. MSMEs may not necessarily have the resources or time to invest and understand the internal and external elements that may affect their business.
The International Integrated Reporting Framework is one such tool to assist MSMEs to have a better understanding of their own organisation and reap the benefits that integrated thinking (and reporting) will bring to their business. The International Integrated Reporting Council has now merged with the Sustainability Accounting Standards Board to form the Value Reporting Foundation (VRF). The three frameworks or tools that the VRF is providing would be the Framework, Integrated Thinking Principles, and the Sustainability Accounting Standards Board Standards.
The key objectives of the VRF are to evolve and align integrated thinking principles and the integrated reporting framework, together with the SASB standards, and to support adoption of all three tools by businesses and investors alike. The VRF aims to assist different stakeholders in simplifying and globalising the field in terms of standards.
The concept of integrated thinking is defined by the Framework as “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”. Integrated thinking is at the heart of the Framework, though it is called the “integrated reporting” framework. Integrated thinking is about looking at an organisation or business in a holistic in the context of its external environment, lead to the creation of value in the short, medium and long term”. This is the result of integrated thinking and the integrated reporting process. An integrated report in essence is the output of a better understanding of the business, and a means through which an effective, holistic story of the organisation can be communicated by the business to its stakeholders.
There is a genuine case that can be presented for MSMEs to consider adopting the Framework and concepts of integrated thinking. However, there is a perception that adoption of the full Framework may be too onerous from an MSME’s perspective. There is a drive by the Business Reporting Leaders Forum (BRLF) to specifically look at the concept of Lite for MSMEs, which focuses on the needs of MSMEs. A Special Interest Group on MSMEs (SIG-MSME) of the BRLF has been created to specifically focus on the needs of MSMEs and extend the concept of with the specific needs of MSMEs in mind. The Lite framework simplifies application of the Framework to better equip MSMEs to realise the benefits that integrated reporting and thinking will bring to their businesses.
The concept of Lite is focused on the MSME in terms of “what”, “with” and “how” they run their business. The diagram (p28) gives a summary of how the Lite framework links with, and applies, integrated reporting language. The concept of “what” relates to the purpose and strategy of an MSME. This encapsulates the value that the MSME creates for itself and others in the short, medium and long term.
The “with” refers to the capitals, or resources and relationships. There are six capitals that are defined broadly by the Framework, namely: i) Financial (refers to funding of the business); ii) Manufactured (physical assets used by the business to create value); iii) Social and Relationship (e.g. the networks that the business has); iv) Human (the people that work in the business); v) Intellectual (the knowledge within the business); and vi) Natural (the natural resources used within the business). The MSME can recognise its own capitals and is not necessarily required to use ‘capitals’ terminology.
The “how” refers to how value is created by the business, namely, the business model and business activities, the risks and opportunities, and how the business is managed in order to create value.
In essence, the key concepts of Lite enable the MSME to tell its own story, about “with”, “what” and “how” they do their business. By better telling the story of the business, it will lead to better understanding of the business and better decision making in the short, medium and long term.
The Lite framework aims to provide a simple and powerful approach for MSMEs to implement integrated thinking and reporting, without needing significant resources as compared with those available to larger corporates. It is our belief that through Lite, MSMEs will benefit significantly and be better equipped to face the post COVID-19 future through better understanding of the business and its external environment.
Let’s look at a hypothetical MSME called “Business Small”. Through integrated thinking, “Business Small” can better understand their business by asking some key questions such as, what is the purpose of our business, what is the strategy and what resources do we have? How are we allocating? How are we doing both financially and non-financially? How would we do in the future? What is our key business knowledge (intellectual capital) and who are our key people (human capital)? What are our networks (social and relationships capital)? How do we do business and what are the outcomes?
Documenting operations of the business through an integrated report, and by asking the above questions, it will help “Business Small” to better communicate the “story of the business”, through an Integrated Report, with their providers of different resources.
Some of the key advantages that “Business Small” can reap through Lite could be cheaper and better access to funding through better communicating their story. “Business Small” can possibly improve efficiencies within the business through better knowing their business and different components of it. The business can also identify who their key relationships are and how to better engage with them.
Most importantly, “Business Small” could have a better understanding of the external environment that it operates in, and through which it can better navigate the opportunities and threats that the environment may bring.
In summary, MSMEs would significantly benefit from embracing the integrated reporting framework, but it needs to meet the specific needs of MSMEs. The Lite framework would be ideally fit for this purpose.
For further information, please contact the Institute of Public Accountants on firstname.lastname@example.org.
Luckmika Perera Deakin Integrated Reporting Centre, Deakin Business School Michael Bray Deakin Integrated Reporting Centre, Deakin Business School Darren Scammell Grant Thornton Australia