DRIVING VALUE
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Integrated Reporting For SMEs and the Role of SMPs

June 17, 2019
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Integrated Reporting For SMEs and the Role of SMPs

By Jenny Chua and Yu Jo Jin

In the era of multi capitals, intangibles contained within an organisation such as skills, knowledge and ideas, or outside an organisation such as the networking and good relationship with various stakeholders may be the true value drivers of a successful organisation. Organisations, regardless of size, can use IR to have a wider view of ‘capitals’ in order to create holistic understanding and trust in their businesses. Small and medium enterprises (SMEs) can achieve significant benefits from the adoption of IR, and accountants can be a key driver in their IR adoption.

SMEs interact with many stakeholders, and IR can be the main tool to demonstrate that they take into consideration and actively communicate with the community of which they are a part, said Jonathan Labrey, the Chief Strategy Officer of the International Integrated Reporting Council (IIRC), speaking at a roundtable with small and medium practitioners (SMPs) on the theme ‘IR for SMEs in Malaysia’.

Benefit – Access to Finance

IR is crucial for Malaysian businesses as a means of attracting capital and enhancing their communication with key stakeholders. ‘IR is very important for SMEs who wish to be listed in the Leading Entrepreneur Accelerator Platform — better known as the LEAP Market,’ said Dato’ Dr. Chua Hock Hoo, the Executive Chairman of Cheng & Co Group. LEAP Market is the capital raising platform for underserved SMEs in Malaysia. ‘However, the fact is there are investors who want to invest but they are hesitating due to the lack of information. Therefore, I think that IR is wonderful if SMEs can connect the financial and non-financial factors that drive long-term growth, in order for investors to assess the true potential of SMEs,’ added Dato’ Dr. Chua.

Needed – SMPs to Advocate for SME Integrated Reporting Adoption

‘But at the end of the day, IR needs accountants, who act as business advisors for SMEs, to promote to SMEs the benefits of having IR,’ said Dato’ Dr. Chua.

Jonathan suggested that SMPs should guide SMEs in the IR journey and help them to realise their value creation potential over time.  He encouraged SMPs to log on to the IIRC website for further technical guidance and some examples of IR are also available in the IIRC’s Examples Database. Although the IIRC can assist to create awareness via events, technical talks and report reviews, the impact will be greater if the push comes from regulators, investors and financial institutions that collectively will act as a catalyst and provide the momentum.

Accountancy firms and associations have played a leading role internationally in moving towards IR and similar developments are taking place in the accountancy profession in Malaysia where MIA plays a significant role in promoting the benefits of IR to companies and investors.

Managing the Information Deluge

Nevertheless, there are practical issues such as the perceived overload of information in the current reporting landscape by businesses in Malaysia. ‘As Malaysian SMEs are still struggling with the fundamentals of financial reporting, their priority now is to address the need of financial reporting, before they can move on to better reporting such as IR,’ said Michael Tan, sole proprietor of Tan Cheng Hooi & Co.

‘The usefulness and relevancy of IR must be evaluated in detail for those smaller listed companies. To encourage wider adoption of the new reporting approach, regulators can carry out a survey amongst the stakeholders, to determine the frequency of current periodical reporting and volume of reporting information generated. A balanced approach should be achieved so that the management and preparers can generate more relevant and useful information. Resources must be utilised effectively and efficiently to enhance value for the stakeholders,’ said Mr. Chen Voon Hann, CEO of CAS International.

Research done by the IIRC together with other organisations found that IR facilitated better understanding of strategy by investors, promoted higher market valuation of the company, and companies who are doing IR outperform others. These research findings showed that there will be demand for a more integrated reporting of non-financial information by reporting entities, including SMEs, given that they provide stakeholders and financial institutions more confidence in their long-term strategy. This may lead to greater demand for competent professional accountants in IR as advisors for SMEs.

To know more on how IR can create values for SMEs, please refer to IFAC’s publication on Creating Value for SMEs through Integrated Thinking: The Benefits of Integrated Reporting, at http://integratedreporting.org/wp-content/uploads/2017/08/IFAC_CreatingValueforSMEs.pdf

Please also visit the IIRC website at http://examples.integratedreporting.org/home for some examples of IR reports in the database.