Recently, the Institute of Chartered Accountants of Nigeria (ICAN) inaugurated Nigeria Integrated Reporting Committee (NIRC) and made Innocent Okwuosa its chairman. In this interview with OMOBAYO AZEEZ, Innocent draws the direct correlation between adoption of integrated reporting (IR) standard in Nigeria and inflow of foreign investments in the country, and how the IR is the future of global corporate reporting, among others. EXCERPTS:
What is the state of corporate reporting in Nigeria now?
Corporate reporting in Nigeria is just a bit above infancy. Nigeria is still ahead of many countries when it comes to corporate reporting. But given the position of Nigeria in Africa as the biggest economy, competing with South Africa in attraction of foreign direct investment (FDI), one expects that corporate reporting should be at a higher level than it is now. If I can summarize, if we talk of corporate reporting, it involves information you disclose in financial reporting using International Financial Reporting Standard (IFRS), because Nigeria has adopted IFRS. There also is corporate governance report; there is also within the IFRS, the management discussion and analysis. And you also have sustainability reporting which talks about social and environmental sustainability whereby companies are expected to report the social and environmental impacts of their operations on their communities. You will discover that that is lacking in Nigeria.
You will discover not many companies are doing that. At best, you will see companies saying that they are doing corporate social responsibility (CSR) but CSR is not necessarily sustainability reporting in the sense that it is a case of companies showing pictures of what and what activities they have performed to help the community but when you interrogate that, you discover that they are only trying to help themselves and not actually the community.
For instance, they will tell you: “a bank has constructed a road and that is corporate social responsibility.” You will find out later that that road the bank has constructed actually allows customers to conveniently come to the bank to come and bank, put money in their bank accounts and access the office. So, when you look at it, that is not really CSR as it is ought to be. But unfortunately, that is the kind of reporting that you see in Nigeria among the listed companies.
If this is not the right reporting standard, what is the expectation and where is corporate reporting headed in the country?
There has been a recent development because corporate reporting progresses in such a way that in developed countries, sustainability reporting emerges as a separate report from the financials. What happens is that those two reports do not talk to each other. They operate in silos. Due to this, investors felt that something is inappropriate. They need a situation where those two reports can interact. And a movement that started in South Africa on integrated reporting metamorphosed into that which took a shape in London. But then again, London, incidentally, has a history of pioneering reporting. Even the IFRS that is now globally accepted started in London. So, another thing that happened is that international integrated reporting council became a movement that is now pioneering a corporate reporting whereby you see the integration between sustainability and financial reporting, and that is Integrated Reporting. And that is the state of corporate reporting and the future of corporate.
But when we talk of corporate reporting in Nigeria, integrated reporting is the future. And if you speak to accountants who man corporate reporting in most companies, they are not aware of that and that is where corporate reporting is headed in Nigeria because already in South Arica, it is mandatory and grounded. It is a requirement mandated by the Johannesburg Stock Exchange (JSE) as a listing requirement. I think South Africa has been doing that for many years and if Nigeria wants to compete and be seen as being in the forefront of corporate reporting, then the country has to embrace integrated reporting.
You just talked about the NSE making integrated reporting part of pre-listing requirements. That is for listed companies. How do you get others that are not on the stock exchange to adopt integrated reporting?
Incidentally, there is a way corporate reporting is regulated in Nigeria, if I can put it that way. Although I use the term corporate reporting but the scope of corporate reporting is wider than financial reporting. And the fact really is that most of these organizations we are talking about concentrate more on financial reporting. In Nigeria, we have what can be called sectoral regulation. We have the Central Bank of Nigeria (CBN) regulating the banking industry. We have the PENCOM regulating the pension industry and NAICON regulating the insurance sector. We have the security and Exchange Commission (SEC) regulating the listing of companies in the capital market and we have the Nigerian Stock Exchange (NSE) regulating listed companies as regards what they should summit as their financial reports. So, the NSE has gone ahead by encouraging listed companies to prepare their sustainability reports and to lead by example, the stock exchange itself has also prepared its own sustainability report setting the examples to companies to emulate. So, within this, when you see sustainability report happening, if at all anything like that is going to happen, but aside that, nothing is happening.
It is quiet and it is even quiet to the extent that in practice, most companies would like to comply with the minimum. The minimum is what they go for. If the regulator says “this is what you are supposed to do as the minimum”, that is all the companies do. They do not go extra. Currently, sustainability reporting to these companies falls within what is called voluntary disclosure or reporting. You have to voluntarily do it for yourself. And when you voluntarily do something, there is a way of cost-benefit analysis. You ask yourself the question: “what do I stand to gain by preparing this report?” And until the companies are educated on the benefits of doing that, most of these corporate organizations are not going to get involved.
ICAN just has just inaugurated Nigeria Integrated Reporting Committee (NIRC) and you serve as the chairman of the committee. What prompted the creation of the committee?
Like I already gave a background to the state of corporate reporting, what I gave you there is the state of corporate reporting globally. The state of corporate reporting globally is a movement towards integrated reporting. Many countries have picked this up. Like I said, South Africa, Japan, Australia and the European Union are already doing fine with integrated reporting. In fact the EU has mandated social and environmental reporting disclosures in their reporting. So, it is a global trend. What that means is that if you talk about transparency in reporting, companies that go beyond financials to include sustainability tend to be seen as being more transparent in their reporting. Then it should now get to the point of integrating sustainability and financials; then you provide information which investors need most because investors want to see that connection between sustainability and financials.
So, if you do silo sustainability that investors do not see, integrated reporting is not involved. The reasoning and logic behind that reporting will connect it with the financial and investors would be happy to look at that report. I spent time interviewing institutional investors in London and that is what most of them told me – that if you prepare a separate sustainability reports, they don’t know who you want that report to serve its purpose. But by the time you connect sustainability and financials, then, they see you that you are trying to address investors’ information need. And so, if that is the future of corporate reporting, Nigeria cannot afford to lag behind. Because as I said, the South African economy has already embraced integrated reporting and it is such that they know this even in the United Kingdom. I went for a conference in the UK and I was surprised that people there were saying: “you guys in South Africa are ahead of us.” ‘Ahead of us’ in what sense? Because South Africa has already embraced integrated reporting and even the UK can now acknowledge that South Africa is already ahead of them. But what happens in the investing community, in the capital market is that investors want a market that is more transparent in reporting because transparency is what boosts investor confidence to invest in a company. They do not want to invest in a company they do not have enough information about. When you transparently report your account, investors can now have the confidence and stake their fortune.
So, the Institute of Chartered Accountants of Nigeria (ICAN), realizing this need and knowing this global trend felt that Nigeria should key in, and therefore decided to inaugurate integrated reporting committee to advocate integrated reporting in Nigeria. Incidentally, I’ve been a member of African Integrated Reporting Committee at African integrated reporting level. The Pan- African Confederation of Accountants (PAFA), with World Bank’s assistance, came together and said, given the nature of Africa, we have to get onboard with integrated reporting and encouraged about six member countries that started the movement to set up committee for integrated reporting at national levels. So, I had to champion that within ICAN. The institute bought into that idea and that led us to the inauguration of the Nigerian Integrated Reporting Committee (NIRC). So, the NIRC is the body set up to promote the adoption of integrated reporting in Nigeria, giving the fact it helps in transparency of information would lead to attraction of foreign direct investment (FDI) because foreign investors want where information is reported in a transparent manner. We are making sure that we are not left behind in the global trend and ensure that we are able to compete with other countries such as South Africa in attraction of FDI and that will support the government’s efforts in diversifying the economy with FDI.
What are the specific objectives of the committee and what time frame do you have to achieve them?
After inauguration, the committee has met in Lagos. We had another meeting on the 7th of February and at the last meeting we had in December, an action plan was drawn. Those action plans revolve around advocacy, awareness and capacity building. Awareness is the first. It the starting point for people to know and understand the need for integrated reporting in Nigeria. And this awareness will come from getting relevant authorities to know and be aware of this trend. Incidentally, membership of the NIRC revolves around those sectoral regulators that I talked about such as the CBN, Pencom, NAICON, SEC, NSE, among others.
The NIRC is of the view that if we can create awareness among these regulators, they in turn will create that awareness in those industries they regulate; and then, the wider awareness will come from the company down to peer companies and those that are not listed will also learn from those that are listed and the awareness would spread. So, that is one way of creating the awareness. And the advocacy again, is promoting that through these bodies and I have gone on a training in the UK. Myself and a few others… we are also leveraging the big four auditing firms comprising PwC, Delloite, S&Young, and KPMG. They are also part of the NIRC and given their network, we can leverage on this to build capacity among companies that are willing to implement integrated reporting. So, that is our action plan which we hope to achieve within the second quarter of this year.
There is more action plan we are going to institute. One thing is that if you say you want to promote something, you have to be at the forefront of it. One of the things happening is that the ICAN is going to work towards producing its own integrated reports. We are also approaching most capitalized companies in Nigeria, the Dangote Group. If Dangote Group also prepares its integrated report, that also sends a good signal. These are part of the action plan that we are thinking.
How does the proposed corporate reporting award speak to the mandate of NIRC?
We want to institute Corporate Reporting Awards. The Corporate Reporting Awards would assess the corporate reports produced by companies and select which of these companies have produced the best corporate reports that exist and such company will win the recognition. We are going to do this in conjunction with the Nigerian Stock Exchange. If we work with the NSE and we give the award to the best reporting company, that also sends a signal to the wider community. The point is that, for you to win an award, your corporate reporting will be seen to be the best; and for your report to be the best, you have to have all these features which include financials, corporate social responsibility, governance, environmental and sustainability reports integrated. Your sustainability and others must interact with the financials. So, a company that is presenting an integrated report is more likely to have the best corporate report that suits investors. And that is what the award is targeted at.
You believe integrated reporting in Nigeria will attract more FDIs into the country but there are other economic factors that can frustrate FDI even with the adoption of integrated reporting. What other areas need effort aside the IR?
Let me borrow from the concept of integrated reporting (IR) which is why we are promoting it. It talks about six capitals. Corporations currently focus on financial capital to the exclusion of other capitals which integrated reporting is talking about. These other capitals will include things like intellectual capital. Intellectual capital is organizational knowledge. There is also the human capital, which resides in individuals that enables innovations to take place. Without the human capital, there would not be innovation. Then you have the natural capital which includes natural resources such as oil, minerals and others that we have. We can also talk about social and relationship capital, which is social license for a company to exist. When a company loses its social license to exist, then there is a conflict between the company and the community where it operates. Then, we have the manufactured capital. These are the six capitals. If corporations can concentrate on how to manage these capitals effectively and efficiently, they would see how the economy would grow in quantum leap.
Today, we talk about sustainable development goals (SDGs). These goals are interlinked with what integrated reporting is trying to promote. If we can use integrated reporting to link with the SDGs, then integrated reporting is seen at the governmental level too, and not just residing at the corporate level. It becomes a nation’s economic-wide thing. A government that can have the vision like that and what integrated reporting is promoting would see interconnection between these related parts. Yeah, we talk about infrastructure and others, but even the development of these infrastructures we are talking about is linked to the human capital and the intellectual capital that reside within the ministries, departments and agencies (MDAs) of the government. So, if all these capitals reside in there, how are they being harnessed? How are they being optimized? You will see that integrated reporting would have far-reaching consequences and effect in the wider economy if we can transit to that reporting standard that speaks the language of integrated reporting because it is a systematic thinking and not when you think in silos and you begin to think about financial capital as if it’s all that exists.
Of course, there are other capitals. In fact, there is a study that has been conducted which shows that, among listed companies, those other capitals that are not financial and manufactured capital constitute about 80 per cent of the value of the companies. So, the implication is that those corporations concentrate only on 20 per cent. Governments also concentrate only on 20 per cent of that which is capable of adding value. If you don’t concentrate and manage the other 80 per cent, you can see the quantum effect on both the company and the economy as a whole and that is where governments are heading to.
With the action plan you have designed to rollout, what level of change do you expect in the medium term regarding adoption of integrated reporting in Nigeria?
I predict that integrated reporting would be the future of corporate reporting in Nigeria. I predict that integrated reporting will determine how companies and corporations will fare. And besides, it is not just companies and corporation that we are talking about, the public sector is also included. So, that is going to be the future. Hopefully, with the advocacy and awareness that we are going to create, that knowledge would get to the nooks and corners of the country and everybody would get onboard. We will now know the new language of reporting and we would have a multiplied effect in the way resources are managed by corporations and government.
Can you envisage a time when compliance will be backed with laws if there is resistance by some companies at this early stage?
Actually, in our environment like I said, most companies may be looking at cost-benefit analysis and it is in cost-benefit analysis that you may see some resistance that you are talking about. But the truth about that is that it is a myopic cost-benefit analysis that is being carried out. You cannot carry out cost-benefit analysis when you lack the knowledge about the issue that we are talking about. You would look at it from that narrow perspective, so your cost-benefit analysis is not actually the right one because it is limited to your knowledge. If you have more knowledge you would widen the scope of your analysis. The resistance would come because of the fact that people are not used to integrated reporting and would even look at it from a narrow perspective.
However, I believe that with the awareness and advocacy that we are going to embark upon, we would widen their knowledge. When we widen their knowledge, the resistance would be reduced. Companies will naturally get onboard. Having now been informed about the advantages that would flow from adopting IR, it will be easier for them to also key in. Also, membership of NIRC, like I told you, includes all those sub-sectoral regulators and the reason we brought them in is for them to be able to play their own part. And if they play their own part, we would move from encouraging companies to adopt integrated reporting standard to making it a requirement. So, that is the trajectory and the future where we are going. I also see integrated reporting moving in that direction from where there would be initial resistance by people not being knowledgeable enough to where they have the knowledge and would be willing to do that voluntarily and they are also encouraged to do it; then to the point where they are not only encouraged to do it, but are required to adopt it the regulators are then convinced about the advantages of you doing it and getting all the benefits attached.
However, I don’t think that is going to happen soon. It is going to happen over time because even the International Integrated Reporting Council (IIRC) never advocates a mandatory integrated reporting. It has been a case of companies seeing the benefits of doing it and eventually doing it without ado. I think the same approach will be used in Nigeria.
Deal November 12, 2019