Chapter 1
Corporate Information
1.1 Corporate Accounting Information System
With the term âcorporate information,â we indicate the representation that the internal and external subjects provide of the business facts. This information is fundamental as it constitutes the premise every decisional process is based upon (Melis, 2008).
The informative system plays a fundamental role for the company, since it informs and controls the operational system, in such a way that it acts rationally in compliance with the principle of economic equilibrium.
The information flow generated varies according to the need of the various decision-making centers. Generally, correct information must possess characteristics, such as dependence â that is, not internally flawed, synthetic, and abstracted by complex phenomena â and frequent, in a well-defined and presentable time horizon, both with qualitative and quantitative contents.
The correct use of information both in terms of internal decision-making processes and external communication presupposes requirements that can be identified in selectivity, flexibility in shaping changes, reliability, acceptability, integration, timeliness, and convenience expressed in terms of costâbenefit ratio (Paolone, 2012).
Since the company is an open system, which interacts with the external environment, financial information constitutes a key point of the relationship firstly with the subjects that bring capitals who appear to be the residual claimants of the company's created value.
In the relationship with these subjects, the company places reports of different utility, in addition to the mandatory ones, concerning the relationships it has with debtors and creditors, the prices of goods and procurement policies, the asset transactions, the environmental initiatives aimed at providing a favorable image toward the community, and others.
From this point of view, information belonging to the non-financial information (NFI) disclosure is useful to communicate the relationship with the environment, with the employees, and with the community in general, to acquire the consent of third parties. It follows that the greater the willingness to communicate these objectives outside, the higher the amount of information the company will provide.
On the other hand, concerning the information process intended for internal parties, it is necessary to specify that the information is transmitted through the reporting, which is a valid means for evaluating the performances achieved and the future targets through the use of performance management system and specific indicators that have the purpose of assessing the level of competitive advantage of the company.
The company informative process flows should follow predefined phases such as (Candiotto, 2016):
- collection,
- processing, and
- transmission.
Collected data can derive from the outside, in relation to the environment, to macroeconomic forces, to socio-political, etc., variables, as well as from within, that is, strategic planning, control, and individual areas.
Once the collection phase is complete, the data are selected and classified to obtain a simplification of the reality that will constitute the starting model for the next phase, i.e., the processing phase.
Through the processing phase, the data are refined according to the various decision-making centers for which they are addressed and must possess the characteristic of usefulness, i.e., they must be able to provide useful information for the users' needs and they must be timely available.
If the information is intended for operational decision-making levels, the information must be analytical; if instead it is intended for management decision-making levels then the information must provide actual and prospective data that could be useful for long-term planning.
With the transmission of information, the recipients can access the final information. Further to this point, it is necessary to specify that the transmission is characterized by three elements: the contents, the channels, and the procedures.
The content internal to the information flows depends on the relationship established between the bodies set up to refine and process the information and the recipient centers, such that information needs will differ across different recipients.
This will also have an impact on the communication channels and the procedures that include the methods and timing of reporting among various corporate bodies.
The strategic planning system is one of the most influenced fields by the corporate information system since the choices regarding the actions to be implemented are affected by the inside information, which allows the planning activity.
Given the interaction with other disciplines related to business administration and management, over the years, the information system has undergone a deep and wide upgrade in terms of tools and methods intending to meet the evolving needs of the stakeholders. This has progressively led to extend the accounting information range to a wider extent that could encompass also qualitative elements, rather than the mere quantitative ones, to improve the quality of internal and especially external information (Salvatore, 2013).
This has led to the need to report all the events that, directly or indirectly, can be traced back to the behavior of the company and to the relationships with third parties through suitable instruments. This has also led to a regulatory evolution in the field of reporting, especially in the direction of NFI and integrated reporting as a new concept about the functions and uses of traditional reports. In this sense, we observed several pushes both from academics and practitioners toward the encouragement of companies to consider the implementation of integrated reporting systems by adding social and environmental information through providing a wider and more general view of the company.
1.2 Corporate Financial Information
In general, financial information represents the ability of the company to process and communicate information in a structured and effective way, historical and perspective, qualitative and quantitative, representative of their raison d'ĂȘtre, of their strategic orientations, of their performances, and of their economic, financial, and patrimonial balance (Bartoli, 2006).
Financial information has the purpose of assessing the propensity of the company to reach the condition of economic and financial equilibrium while respecting the strategic and social policies. This evaluation influences the judgment of the stakeholders about starting/maintaining/ceasing relationships of different nature with the company.
The subject of corporate economic-financial information has been extensively dealt with in the corporate literature, with different interpretations and approaches.
A first position attributes a division between mandatory and voluntary information.
A second interpretation highlights the distinction between economic communication and financial communication.
Economic communication has a prospective content of a patrimonial nature used for management purposes in order to obtain trust from the company interlocutors and, at the same time, a positive judgment from the market. Given the number of stakeholders, the process of economic communication must be used with caution as the loss of credibility would lead to a worsening of the performance that would affect the reduction of the corporate image.
Financial communication, on the other hand, is subject to the capital market to which the company turns to obtain capital to be reinvested in the production process or to reinvest surplus liquidity. This communication aims to inform potential investors about the risks or benefits deriving from a possible investment choice, supporting the decision-making process regarding the possible investment alternatives (Giacosa, 2015).
Although the doctrine identifies a different interpretation of economic and financial information, in practice, with economic-financial communication we mean the set of items, qualitative and quantitative, which have strategic value, internal and external, and based on principles of transparency, correctness, and truthfulness.
The economic-financial communication can have a different nature depending on the degree and nature of the information, as follows:
(1) mandatory communication: originating from the fulfillment of laws requirements and regulations having the force of law, to protect the needs of corporate stakeholders, through the financial statements, usually composed of the Balance Sheet, Income Statement, Cash flow statement, and notes.
(2) voluntary communication: of a nonmandatory nature but which falls within the primary communication as well as the mandatory one, intending to increase the quality and quantity of information to obtain consent from stakeholders. This kind of information is often considered as an intangible value since it does not derive from legal obligations and it exceeds the discretionary limit imposed by the law. Moreover, it can concern business aspects that are not detected by the mandatory disclosure, but which may have strategic relevance and a definite impact on performance.
(3) derived communication: considered as secondary information as it is generated through the control activity (auditing) on the information within the mandatory and voluntary disclosure. This auditing activity is made by subjects outside the corporate management (auditing firms, institutional investors, rating agencies, analysts, etc.) with the purpose of providing information filtered based on the cognitive need of the various categories of stakeholders (Branciari, 2004). Derived communication also has an immaterial value as, unlike the primary disclosure, it can be used as a means to compare different companies.
Basing on the characteristics of the recipients, the economic-financial information can be differentiated into:
(1) Internal reporting: intended for subjects within the company as a support to the planning and control processes to monitor economic convenience (Paolone & D'Amico, 2017).
(2) External reporting: intended for subjects external to the company, such as suppliers, customers, consumers, financiers, trade unions, and the State, transmitted to ensure greater openness of the company toward the external environment through the establishment of solid and collaborative relationships. The objective is to declare the corporate identity through periodic information, promoting commercial development to create consensus and facilitate the procurement process (Giacosa, 2015).
While internal communication is carried out through the analysis of information flows, of the organizational climate, the image that employees have of the company, and relations with colleagues and with the various management areas, external communication focuses on how the external environment perceives the corporate image, and on the communication process through which to disseminate production methods, the range offered, environmental impact, sustainability, and all those factors that can have a positive impact on the corporate image.
1.3 The Stakeholder Theory
As previously illustrated, economic-financial communication differs according to the characteristics of the recipients of information and the number and the diversification of the stakeholders.
A stakeholder is defined any individual who has an interest in the company's decisions or is able to influence its current or potential success (Fossati, Luoni, & Tettamanzi, 2009).
The term was firstly used by the Stanford Research Institute (SRI) in 1963 although the first hints were already given with Smith (1759), Berle and Means (1932), Barnard (1938), and March and Simon (1958).
Later, in the 1980s, thanks to the contribution of Freeman (1984), the concept of stakeholder led to the articulation of the stakeholder theory according to which managers that are able to understand the needs of stakeholders can use them as a strategic tool.
The assumptions of stakeholder theory can be summarized in the following four key points:
(1)the company is an agglomeration of stakeholders interacting with each other;
(2)the decisions must consider not only the shareholders that hold shares of the company but all the stakeholders;
(3)a prerequisite for sustainability with a view to creating value;
(4)achieving the economic goal presupposes ethics.
Stakeholders are all those who bring a specific interest in the company, namely: employees, collaborators, suppliers, customers, shareholders, local communities, competitors, institutions, public institutions, trade unions, and research institutions which they can influence or be influenced by company objectives (Fig. 1).
Fig. 1. Stakeholders of the Company (Freeman, 1984, p. 25).
Depending on the degree and relationships they establish with ...