Perceptions of corporate executives in the adoption of Integrated Reporting in Vietnam

145 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam Perceptions of Corporate Executives in the Adoption of Integrated Reporting in Vietnam Nguyen Thi Thu Hanga, Tran Van Thuanb aUniversity of Economic and Technical Industries, bNational Economics University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract Integrated Reporting (IR) has been widely adopted by companies around the world. Therefore, the purpose of this paper is to assess managers’ perceptions towards benefits, challenges and training requirements of organizations to prepare and publish integrated reports in Vietnam. Questionnaires were sent to 300 companies listed on the stock market of Vietnam, however, only 532 answers were received in which 369 responses of 135 listed companies were valid. Respondents included senior executives, finance directors, chief executive officers, chief accountants, accounting managers. The results showed that none of the surveyed companies adopting IR, some companies are considering adopting IR due to its benefits. The study proved that the perception of managers is a decisive factor in the adoption and implementation of IR.. Keywords: Awareness, Benefits, Cost training, Integrated reporting, IIRC JEL: M4 - Accounting and Auditing JEL: M41 - Accounting 1. Introduction Generally, financial statements (FSs) of enterprises provide financial information. These are usually static documents that do not encourage readers to analyse further the situation of the enterprises. In 2008, the global financial crisis was "not a random event" but it was a failure in addressing economic problems (Eccles và Kruzus, 2010). The collapse of the housing bubble had led to bankruptcies of many companies, consequently, stakeholders 146 believed that corporate executives have been providing dishonest FSs, hiding unsustainable business strategies. Most information in the FSs did not provide information on the development strategies, business performance and business risks, as well as non-financial information (Busco và cộng sự, 2013). As a result, stakeholders lose confidence in traditional reporting and begin to analyse the relationship between financial performance and sustainable development. Investors want more accurate, reliable information which is aligned with the business model, the process of creating corporate value and governance risks. In order to meet the information needs, companies have published both FSs and the sustainable development reports (SDRs). However, the release of these two reports is separate resulting in a problem that there is no connection between these two reports. Although the SDRs are prepared in accordance with international regulations and standards and are considered more transparent, however, the SDRs remain voluntary so information on these reports is collected by the organizations themselves with low reliability. Since there is no consistency among organizations, it is difficult to make comparisons. In addition, the FSs and the SDRs are reports of past information, which does not highlight future activities and relative risks of stakeholders, so it is critical to have a more comprehensive report to fulfil such information needs. In addition, many countries in the world, especially developing countries, are seriously affected by climate changes, resource scarcity, poverty, inequality, and alarming situation of CO2 emissions. Significant changes in policies and development strategies of the government and enterprises should separate the economic growth from greenhouse gas emissions to create prerequisites for developing a sustainable economy that meets the needs of both present and future generations. It requires enterprises to pay attention to non-financial information to enable stakeholders to have a comprehensive view of business operations, to assess their ability to create and maintain corporate value in the future. The “green” model should be established to develop a sustainable, low-carbon economy (Zyl, 2013). The International Integrated Reporting Council (IIRC, 2013) provided that reports of enterprises have changed dramatically over time with a growing trend of accountability to stakeholders including accountability to the environment and society in general. Therefore, enterprises, nowadays, must report information in many different areas in addition to their business performance such as: governance, risk management, and sustainability (Owen, 2006; Gray, 2012; Eccles và Saltzman, 2011). Consequently, the appearance of IR in 2010 is inevitable to meet the current information needs of stakeholders. Vietnam is one of the countries which do not require companies to prepare FSs as requirements of IIRC. The current FSs of companies in Vietnam are prepared in accordance with Vietnamese Accounting Standards, issued from 2001 to 2005 based on IAS. With the rapid change of the market economy, the Vietnamese Accounting Standards have many limitations. Particularly, the quality of accounting information on the FSs and the annual reports of enterprises reveals certain weaknesses and transparency of the FSs is relatively low which affect interests of investors, causing difficulties for the management of the state agencies, reducing confidence of the public. In addition, the FSs of Vietnamese enterprises 147 disclose accounting information that is not systematic, and is incomplete, with simple and discrete content. Especially, these reports only publish financial information, and non- financial information is presented on a separate report, causing difficulties for readers when connecting financial and non-financial information. Therefore, integrating these two types of reports into a new report is in accordance with the global trend which is to prepare FSs in accordance with the IIRC 2. Literature Review/ Theoretical Framework and Methods 2.1. Literature Review IR has emerged as a new policy in corporate reporting that reflects “integrated thinking” within an organization. Furthermore, it demonstrates how organizations create and maintain corporate values. Thus, IR can be considered a modern management tool promoting organizational changes towards the more sustainable development (Eccles and Krzus, 2010). Although IR is a relatively new phenomenon, there is an increasing global interest in this reporting system and the emphasis is placed on the adoption and implementation of IR as a new management tool of enterprises. In fact, there has been much research examining IR as an emerging issue (De Villiers et al., 2014), especially, some studies focused on the results and benefits of IR (Stubbs and Higgins, 2014; Adams, 2015; Jensen and Berg, 2012). Other studies emphasized the reasons why and how organizations adopt IR early (Stubbs and Higgins, 2014). These studies provide an insight into thinking, policy and practice of IR. However, there still exist research gaps regarding how IR can be diffused globally. To solve this problem, Robertson and Samy (2015) used Diffusion of Innovation (DOI) theory to test the perception of executives about IR on certain issues such as providing a comparative advantage over current practices; compatibility with existing processes and management systems; past experiences, needs and its complex perception affecting the application and dissemination of IR. The study of Robertson and Samy (2015) also examined factors affecting the diffusion of IR prior to the introduction of IR of IIRC (2013), which created a gap in knowledge of how IR is diffused in reporting system of different countries. In addition, Nuwan Gunarathne and Samanthi Senaratne (2017) also applied the DOI theory to investigate the perception of senior executives about the adoption of IR in Sri Lanka. The research results proved that Sri Lanka is in the diffusion phase of IR in which more and more companies are adopting IR. Early adopters remain formalistic due to active diffusion of IR. The study also provided that adopting IR is the development of the SDR. These studies are considered a lesson of learning experience for developing countries adopting IR as a management technology and countries at various stages of diffusion of IR. One advantage of IR is that non-financial information must be integrated not only in reporting but also in all decision-making processes of an organization. Adams (2015) argued that the adoption of IR improves the decision-making process of organizations as well as risk management processes. Making the best decisions based on the results of IR will encourage managers to acknowledge and appriciate non-financial factors in their decisions (Hampton, 2012). IR also supports organizations in changing business expectations, meeting 148 the increasing stakeholders’ demand of information (Eccles and Krzus, 2010). Lodhia (2015) stated that IR helps to improve the association between departments, reduce individual work as IR requires the collaboration of different functions in an organization. Stubbs and Higgins (2014) provided that the process of preparing IR allows the integration of financial information and organizational strategies provided by traditional FSs and sustainable developemnt reports. Eccles and Armbrester (2011) assumed that the adoption of IR to build long-term sustainable strategies helps the organization to create value over the long term, at the same time, providing information to stakeholders which promotes the stock price of organizations. In a study conducted in South Africa, Steyn (2014) found that the respondents fully supported the adoption of IR of South Africa as it drew attention from the stakeholders. Financial operations have been accepted as an important part of IR, but non-financial informtation should be included along with the financial information. IR helps investors understand the sustainable development issues of the company in addition to the financial information to make the right investment decisions. Overall, the previous studies have provided critical arguments for the current reporting system and provided guidelines for the adoption of IR instead of the FSs and sustainable development reports. Especially, the adoption and implementation of IR have showed certain benefits and superiorities in many organizations around the world. Any long- term commitment to create value for the investors and positive impact on other stakeholders is encouraged, therefore, a comprehensive report which is beneficial for both inside and outside of the organizations is necessary and is the future of the current reporting system and Vietnam must face this inevitable trend. 2.2. Theoretical Framework The study applied diffusion of innovations theory of Rogers (2003) to assess factors impacting the adoption of IR. Rogers expanded studies since 1950s on how innovations diffuse in the society and introduced the concept of S-shaped curve which is a curve describing the adoption of innovations over time. Thereby, according to Rogers, five adopter categories are: (1) Innovator (accounting for 2.5%), (2) Early adopters (accounting for 13.5%), (3) Early majority (accounting for 34%), (4) Late majority (accounting for 34%) and (5) Laggards (accounting for 16%). After identifying and analysing the mechanism of diffusion and acceptance of innovations, Roger pointed out the major factors that can influence this process. Particularly, there are three main groups of factors: (1) Factors relating to leadership: leaders have a substantial impact on the acceptance of innovations in organizations through strong advocacy, capability of directing, guiding and organizing the implementation; (2) Factors relating to organizations: The characteristics of an organization play a significant role in propagating and implementing new ideas and plans. An organization with good connection, communication, and sharing among departments will be very beneficial for diffusing innovations and vice versa; (3) External factors: In addition to the internal characteristics of organizations, the external factors also have a significant impact on the acceptance of innovations of organizations. Specifically, an innovative and competitive environment can promote the adoption of innovations. Besides, pressures from 149 customers, the market, or shareholders will encourage strong product innovations as well as innovations in organizational management. 2.3. Methodology The research was conducted through two steps which are qualitative research and quantitative research. Qualitative research was based on the review of previous studies and background theories, combining with in-depth interviews with some experts, senior executives, finance directors, chief accountants or people directly participating in the preparation of FSs, SDRs. The results helped the authors develop research model, research hypotheses and factors that affect the diffusion of adopting IR in companies listed on the stock market of Vietnam. This study has been conducted since September 2010. Next, the authors revised the questionnaire before proceeding with the survey. Collected data was used to evaluate the scales, descriptive statistics. Quantitative research used data collected from the survey to test the research model of the factors influencing the diffusion of applying IR in enterprises listed on the stock market of Vietnam. The survey was conducted in 6 months (from November 2017 to April 2018). Respondents included senior executives, finance directors, chief executive officers, chief accountants, accounting managers (representatives of enterprises in terms of preparing FSs). The survey was conducted to collect data on perceptions of executives of listed companies in Vietnam. The 5-point Likert scale was used to assess the benefits of adopting IR and the challenges of applying IR. In addition, some questions used nominalization by scaling between 0 and 1 to assess the willingness to adopt IR of executives or questions asking selections of courses, or the understanding of executives towards IR. In order to analyze data, statistical method was used with the support of the software SPSS 22. 3. Results and Discussion Questionnaires were distributed to 798 respondents of 300 companies listed on the stock market of Vietnam, in which 2/3 amount of questionnaires were answered directly, the remaining questionnaires were sent by email to respondents through relationships of the authors. However, only 532 answers were received in which 369 responses of 135 listed companies were valid. 3.1. Characteristics of respondents Among 369 respondents, general directors/deputy general directors accounted for 14.9%; executive directors/deputy executive directors accounted for 27.64%; finance directors/deputy finance directors/managers accounted for 31.16%, the remaining was accountants accounting for 26.3%. These people represented companies in the fields such as manufacturing, construction, real estate, industry, finance, banking, commerce, telecommunications, services. Regarding the experience of respondents, under 5 years accounted for 4.06%; from 5 years to 10 years accounted for 27.91%; from 11 years to 20 years accounted for 38.22%; over 20 years accounted for 29.81%. 3.2. Perceptions towards IR 150 Respondents were asked about perceptions towards IR in listed companies in Vietnam. Their responses are displayed in the following table: Table 1. Perceptions towards IR Item Frequency Percentage (%) Yes 254 68,8% No 115 31,2% Total 369 100% Source: Overall result of Survey When being asked about understanding of IR, the respondents admitted that their understanding of IR is not much. Regarding the level of understanding, 28% respondents stated that they have no knowledge of IR, 62% respondents have certain understanding of IR, only 3% have in-depth knowledge of IR, 7% have good knowledge of IR. These findings are consistent with the results of qualitative research that interviewed experts and senior executives. Figure 1. Understanding of IR Source: Overall result of Survey 3.3. Benefits of adopting IR The authors pointed out that the benefits of adopting IR include transparency (LC1); Reliability (LC2); Easier to understand (LC3); Higher corporate responsibility (LC4); Minimizing fraud (LC5); Improving opportunities to access to the capital (LC6); Reducing costs of capital mobilization (LC7); Accessing to the international market (LC8); Increasing trust of shareholders (LC9); international recognition (LC10); Promoting integrated thinking (LC11); Easy comparison (LC12); Strengthening national prestige (LC13). The results showed that the variable LC1 "transparency" had the highest mean which is 4.02. Other observations also had high values of mean. 0% 10% 20% 30% 40% No knowledge Little knowledge Some knowledge Good knowledge In depth knowledge 28% 38% 24% 7% 3% 151 Figure 2. Benefits of adopting IR Source: Overall result of descriptive statistics 3.4. Challenges of adopting IR The authors pointed out that the challenges faced by enterprises when adopting IR include: High initial application costs (TT1); Language barriers (TT2); Complexity (TT3); Lack of detailed guidance on IR (TT4); Disclosure of detailed information (TT5); no regulations on preparing IR in Vietnam (TT6); no incentive policies encouraging the adoption of IR (TT7); Universities have not mentioned IR (TT8). The results showed that variable TT1 “High initial application costs” had the highest mean which is 3.95. The variable with lowest mean is TT3 “Complexity” (mean = 3.46). Other items have relatively high means. Figure 3. Challenges of adopting IR Source: Overall result of descriptive statistics 3.5. The plan of adopting IR The results showed that none of the surveyed companies adopting IR, some of which are considering adopting IR due to its benefits. Specifically, 13.55% of companies are 3 3.2 3.4 3.6 3.8 4 4.2 4.0217 3.7778 3.4634 3.4363 3.5501 3.626 3.5772 3.5854 3.5637 3.5691 3.6477 3.6938 3.7154 MEAN 3.2 3.4 3.6 3.8 4 TT1 TT2 TT3 TT4 TT5 TT6 TT7 TT8 3.9593 3.5501 3.4661 3.5041 3.6314 3.626 3.7019 3.6883 MEAN 152 considering adopting IR as their own financial reporting mechanism. 56.1% said they have no idea about the plan of their enterprises. The findings seem to be consistent with the qualitative results of the previous authors. Table 2. The plan of adopting IR Item Frequency Percentage (%) Less than 3 years 0 0 3-5 years 0 0 5-10 years 112 30,35 Considering the adoption of IR 50 13,55 No idea 207 56,1 Total 369 100% Source: Overall result of Survey When being asked about the willingness to adopt IR in listed companies in Vietnam, responses of respondents are displayed as follows: Table 3. Willingness to adopt IR Item Frequency Percentage (%) Yes 129 34,95 No 240 65,05 Total 369 100% Source: Overall result of Survey 3.5. Channels of information to learn about IR In order to evaluate the preparation of knowledge related to IR, respondents were asked whether they learn about IR from training programs, or from books/other materials or friends or from practical work. The results showed that the majority of respondents learned about IR through attending training courses which accounted for 48%; followed by 25% of respondents learned about IR by themselves through books/other materials; 13% of respondents learned from friends and 14% learned from actual work. 153 Figure 4. Channels of information to learn about IR Source: Overall result of Survey * The duration of training courses of IR To assess the preparation of knowledge of IR, respondents were asked about the duration of a training course of IR. The results showed that 2-day courses accounted for 23.8%; 3-day courses accounted for 42.8%; 1-week courses accounted for 18.2% and courses which are longer than a week accounted for 15.2%. Table 4. The duration of training courses of IR The number of days Frequency Percentage (%) Two days 88 23.8% Three days 158 42,8% One week 67 18,2% More than one week 56 15,2% Total 369 100% Source: Overall result of Survey 4. Conclusions and Policy Implications It seems that IR is relatively to the market and enterprises in Vietnam, so there has been only a few organizations concerning about IR, especially, Bao Viet is one of the sucessful enterprises in implementing IR. Although IR is quite new in Vietnam and the level of awareness and understanding is relatively low, the study showed that 13.55% of enterprises are considering adopting IR. This indicates that more enterprises are interested in applying IR. In this survey, the respondents wished that associations and the State Securities Commission would organize courses and seminars to raise awareness and understanding of IR for businesses. Joining the WTO requires listed companies in Vietnam to provide adequate and reliable information to investors, customers and creditors. Accordingly, adopting IR is a new direction and an option allowing enterprises to meet the 0% 10% 20% 30% 40% 50% Self-exploration Attending training courses Exchanging information with friends Learning from actual work 25% 48% 13% 14% 154 requirements of the economic development and the international economic integration. From the above analysis, it can be seen that a suitable direction for domestic enterprises is to adopt IR in the process of international integration. 5. References: Adams C.A. (2015), The international integrated reporting council: a call to action, Critical Perspectives on Accounting, Vol. 27(23-28). Busco C., M. L. Frigo, P. Quattrone & A. Riccaboni (2013), Redefining Corporate Accountability through Integrated Reporting, Strategic Finance, pp. 33-41. De Villiers C., L. Rinaldi & J. Unerman (2014), Integrated reporting: insights, gaps and an agenda for future research, Accounting, Auditing and Accountability Journal, Vol. 27(7), pp.1042-1067. Eccles R & M Krzus (2010), Integrated reporting for a sustainable strategy, Financial Executive, Vol. 3, pp. 29-32. Eccles R. G. và M. P. Kruzus (2010), One Report: Integrated Reporting for a Sustainable Strategy, 1th Ed, John Wiley & Sons, Inc, New Jersy. Eccles R.G. & K. Armbrester (2011), Integrated reporting in the cloud, IESE Insight Journal,Vol. 8, pp. 13-20. Eccles R.G. & D. Saltzman (2011), Achieving sustainability through integrated reporting, Stanford Social Innovation Review, pp. 56-61. Gray Robert Hugh (2012), Integrated Reporting: Integrated with what and for whom?, The Loop, Vol 5. Hampton R (2012), Brace yourself: more regulatory changes, Accountancy SA, pp. 22-23. IIRC (2013), International Intergrated Reporting Framework, available at: framework-2-1.pdf (accessed 25 January 2018). Jensen J.C.& N. Berg (2012), Determinants of traditional sustainability reporting versus integrated reporting: an institutionalist approach, Business Strategy and the Environment, Vol. 21(5), pp 299-316. Lodhia S. (2015), Exploring the Transition to Integrated Reporting Through a Practice Lens: An Australian Customer Owned Bank Perspective, Journal of Business Ethics, Vol. 129(3), pp. 585-598. Nuwan Gunarathne & Samanthi Senaratne (2017), Diffusion of integrated reporting in an emerging South Asian (SAARC) nation, Managerial Auditing Journal, Vol. 32( 4/5), pp. 524-548. Owen D. (2006), Emerging issues in sustainability reporting, Business Strategy and the Environment, Vol. 15, pp. 217-218. 155 Robertson F & M Samy (2015), Factors affecting the diffusion of integrated reporting – A UK FTSE 100 perspective, Sustainability Accounting, Management and Policy Journal, Vol. 6(2), pp.190-223. Rogers E.M. (2003), Diffusion of Innovations, 5th Ed, Free Press, New York, NY. Steyn M. (2014), Organisational benefis and implementation challenges of mandatory integrated reporting: perspectives of senior executives at South African listed companies, Sustainability Accounting, Management and Policy Journal, Vol. 5(4). Stubbs W & C Higgins (2014), Intergrated reporting and internal mechanisms of change, Accounting, Auditing & Accountability, Vol. 27(7), pp.1068-1089. 19. Zyl A. S. (2013), Sustainability and Integrated Reporting in the South African Corporate Sector, Journal of Sustainability Management, Vol. 1(1), pp. 19-42.