Featured image: Matevž Paternoster photo of 5.200 years old wheel found near Ljubljana
Integrated reporting (IR) is global initiative to upgrade organizational reporting.
From the perspective of traditional reporting IR objectives are difficult to understand. Or better: they could be understood, but those that are familiar with financial reporting only and are suspicious already about environmental or CSR reporting take them as too vague and unattainable.
My simple explanation of IR objectives is slightly more direct as the one mentioned on IIRC page. I would rather state that:
IR aim is to make a story from numbers and extract numbers from stories.
To understand this statement one should understand couple of predispositions that traditional accountants and corporate reporters do not take as important for the business they run:
- Organizations (corporations, NGO’s, governmental institutions, public companies, municipalities, states…) are memetic entities. The only difference of human organizations from all other known organizations (physical, biological …) is that they might sometimes produce physical outputs and that they use physical resources, but their production of added value happens on memetic level only. Birds use woods for their protection while humans use woods for protection and for memetic value exchange. (Please follow tag “memes” on this page to find more about memes).
- Values of goods for humans do not lie in their physicality, but in their memetic value. Same piece of woods is worth almost nothing if its memetic value is “a log” but if it’s memetic value is “5.200 years old wooden wheel from Slovenia” then its value is enormous. Artefacts produced by humans have values on memetic level. Organizations are human artefacts. That is why book value of any company tells you very little about the real value of such company. Book value can be understood as “log value” of mentioned wheel, while incomparable larger value of such company lies in its memetic value.
- It is true that traditional accounting tried to decipher “real value” through concepts like “goodwill” or “intangibles”, but especially “intangibles” gives us completely wrong impression of something that can not be expressed in words. Quite contrary: such “intangibles” lie solely in domain of words and pictures. What else one could expect from traditional accountants than to lead us into dead end. It is book value that is really intangible and something that IR has to do tangible (memetic) while so called goodwill as a story has to find solid (integrated) financial expression. Let us be clear: There is book value there is memetic value of any human artefact.
- Success of any biological creature rests on its reporting system. Each phenotype (emerged from its genotype) gets vast number of outside and inside reports: about the temperature, predator threats and mating opportunities from outside and zillions of internal feedbacks from one cell to another and from one organ to another. Each biological organization employs highly elaborated integrated reporting system on genetic (biological) level. Biological reporting system that would not be integrated would not be successful.
- Humans developed parallel system to genetic (biological): memetic. Memes are second replicators that “produce” stories as memotypes as genes produce phenotypes. (Both systems differs though, but for this purpose such parallel suffices.) So each human being instinctively integrates both reporting systems. We do integrate physical feedbacks when our head bumps into a wall with memetic feedbacks as for instance fake stories that physical world exists only in our imagination. Widely known but not enough understood statement is: “Perception is reality”. This statement tells us all about our memetic nature. Human perception has this additional dimension that it is expressed in memes and stories and not only in precepts like in all animals (but not in plants). Humans integrate reporting from both systems instinctively.
- Organizations as man made entities (artefacts) live only on memetic level. They exists on physical level, but do not live on physical level. They are not biological entities that could live on physical level. They cannot reproduce on genetic level, but they reproduce vigorously on memetic level. For that reason they follow all rules that evolutionary biology explained as prerequisites for life. Organizations are alive on memetic level. They reproduce on that level. Organizations are memotypes. Memes use them (and us) for their reproduction. Memes reproduce through organizations.
It was important to state those above predispositions for they instruct us how to understand the reality that we have to express its reporting system. We cannot report about something that we do not understand. Traditional accounting not only does not understand organizational reality but even misleads us all about it.
The concept of 6 capitals introduced by IIRC is a good step towards integration of various value creation mechanisms and finally towards their reporting. But until they won’t be understood as end results of memetic activity, of memetic value chain creations, the gap between numbers and words will not be breached. Apparently there is not so easy for accountants to understand that the number (value) is only frozen end result of memetic value creation. It is a task for IR community to focus on memetic value creation first.