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Environmental Disclosures In Malaysian Annual Reports Accounting Essay

A number of studies on environmental reporting have documented an increase in public awareness and concern on the detrimental effects of businesses on the natural environment. This research, however, has largely focused on developments in the industrialized countries such as the USA, Australia CANDA and Europe. Very few studies have been done on environmental disclosures in the developing and newly industrialized nations.

Though there have been attempts to examine social reporting as a whole in Malaysia; to date, no research has been published specifically on environmental disclosures in the annual reports of Malaysian companies. This is despite the fact that environmental issues are emerging issues of concern. It would also not be appropriate to generalize the results of studies conducted in the industrialized countries to less developed countries, as the stage of a country's economic development may be an important influential factor which shapes corporate social and environmental reporting practices (Tsang, 1998). Thus, there exists a need for a pioneering study of Malaysian companies to serve as the foundation of further research in the area. Attempts to explain social and environmental disclosures have found mixed support for legitimacy theory. Nevertheless, legitimacy theory does appear to be able to provide a better understanding of the extent and type of environmental disclosures made by organizations. In other words, there appears to be some support for the notion that organizations disclose voluntary social and environmental information to gain support from society and the general public and to portray the image of being socially and environmentally responsible companies. However, most of these studies have been done in the context of developed countries. A question arises as to whether legitimacy theory can also be applied to explain environmental disclosures in annual reports of companies in an emerging economy. For example, one may wish to know whether organizations in a developing country appear to be influenced by similar motives to gain societal acceptance, in making voluntary environmental disclosures within their annual reports. The objectives of the present study are three-fold. First, this study seeks to examine the extent and type of voluntary environmental disclosures in the annual reports of Malaysian companies in selected industries. Second, this study attempts to identify the factors, which motivate management to disclose environmental-related information in annual reports. Finally, this study aims to investigate whether legitimacy theory is an appropriate framework to explain voluntary environmental disclosure practices in the context of a developing country. Findings from a content analysis of annual reports show that very few companies in the sample have environmental disclosures in their annual reports. Additionally, even amongst the disclosing companies, disclosure is minimal and comprises largely of mere passing references, which emphasize only positive aspects of company performance. Results from the questionnaire survey show that the most important influential factor in influencing companies to disclose environmental information is related to legal compliance, whilst customer and supplier concerns are among the least important.

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The contribution of this study is important for several reasons. First, the present study will provide some descriptive data on the extent and type of environmental disclosures in Malaysian annual reports. Previous research in this area has largely neglected to examine developing countries. Second, the present study utilizes a content analysis methodology. This research methodology has been described by Matthews (1997) as useful to provide a description of the state of disclosure. To quote, Mathews (p.504), argued that ". . . continuing with the tradition of empirical research aimed at documenting and analyzing what is disclosed in the areas of social and environmental accounting . . . is valuable as a record of the current state of organizational disclosure and, therefore, of the distance that remains to be traveled along the pathto full accountability by economic actors."

Third, investigation of management motives for environmental disclosures will provide useful insights into why companies make voluntary environmental disclosures. Furthermore, these findings will be beneficial for Malaysian authorities in deciding whether to make environmental reporting mandatory.

Fourth, the study will help to further refine and develop the content analysis method in accounting and finance by reducing its subjectivity and making it capable of replication. Finally, the research will also suggest if legitimacy theory can be used to explain environmental disclosures in annual reports. Such useful insights provide a base for future research and development in the area of environmental reporting, particularly in the often neglected context of a developing country.

This paper proceeds in the following manner. The next section presents a brief description of the Malaysian context to serve as a background. The third section discusses legitimacy theory as a conceptual framework for the present paper and reviews prior studies, which have examined legitimacy theory. This is followed by a discussion of the research methodology used. The discussion on methodology is presented in two parts. First, the content analysis of annual reports is described, highlighting the measurement and key reliability issues associated with content analysis studies. This is then, followed by a discussion of the mail questionnaire survey that was undertaken as part of the study. The fifth section presents the findings. Finally, the last section offers a discussion of the findings and conclusions.


A number of prior studies on environmental disclosures have used legitimacy theory as the conceptual framework to explain the disclosures. These include studies were done by Patten (1991, 1992), Deegan and Rankin (1996, 1997) and Wilmshurst and Frost (2000). Legitimacy theory is based on the notion of an implied social contract between a social institution and society. The theory posits that institutions need to appear to have goals, which are congruent with those of society at large. According to Gray et al. (1996: 46), the basic premise underpinning the theory is that ". . . organizations can only continue to exist if the societies in which they are based perceive the organization to be operating to a value system which is commensurate with the society's own value system."

Prior studies in the area have taken two broad streams. Whilst some studies looked at organizations faced with threats to their legitimacy (for example, a pollution incident, a major oil-spill, etc.) (See for example, Patten 1992; Deegan and Rankin, 1996), others have taken the approach of examining legitimacy theory in a more general form. Gray et al. (1996), for instance, interprets this 'general form' as examining whether organizations are inclined to emphasize positive, rather than negative, information about the organization. The present paper, as an exploratory study, opts to adopt the latter approach. Gray et al. (1996) however, are of the opinion that the latter approach is equally useful and provides important insights into corporate social and environmental reporting practices.

In other words, given the anecdotal evidence o an increased societal awareness of, and concern for, the environmental impacts of businesses on society in Malaysia legitimacy theory suggests that firms will take steps to ensure that their activities and performances are acceptable IJCM to society. Consequently, these firms may then use their annual reports to portray the image of being environmentally responsible, so that they will be perceived by society as such the present paper attempts to examine whether legitimacy theory provides an explanation of the level and type of environmental disclosures within annual reports and whether legitimacy theory explains the reasons for disclosure of environmental information.

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This section is divided into two parts. The first part will describe the content analysis of the environmental disclosures in company annual reports. Following this, the second sub-section under methodology will describe the mail questionnaire survey that was undertaken to determine the reasons for disclosure of environmental information.

Sample Design and Data Collection

The annual reports for year 2000 for a sample of companies listed on the Main Board of the Kuala Lumpur Stock Exchange (KLSE) were selected for the present study. The two sectors selected for the study were construction and industrial products. Given the exploratory nature of the study and the paucity of research in environmental disclosures in Malaysia, the authors decided to limit the study sample to these two sectors. It was felt that this bias was justified since the business operations of companies in these sectors had some impact on the environment. Due to this reason, companies in these two industries are assumed to have a greater incentive for projecting a positive social image by making social and environmental disclosures within their annual reports. Accordingly, it may be expected that some of these companies may practice environmental disclosure. A similar, arbitrary approach in sampling was adopted in a number of previous studies (Andrew et al., 1989; Deegan and Gordon, 1996; Wilmshurst and Frost, 2000). Therefore, an examination of the level of environmental disclosures in these two industrial sectors would be appropriate for a preliminary study as is the case of this research. Further work in the area can only be possible when this benchmark study provides the base. By the end of May 2001, when data collection for this study commenced, a total of 140 companies were listed on the KLSE Main Board for the two sectors. Letters were sent out to the companies requesting a copy of their 2000 annual reports. Companies, which did not send their annual reports within one month of the initial mail-out, were re-contacted and again requested to provide a copy of their 2000 annual reports. In total, 99 annual reports were obtained through the mail. The remaining annual reports were obtained from the KLSE library and/or the KLSE website. Two annual reports could not be obtained. Requests to the companies were to no avail and the KLSE library did not have the year 2000 annual reports for these two companies.

Content Analysis

In line with a number of studies on social and environmental disclosures (Abbot and Monsen, 1979; Buhr, 1998; Ernst and Ernst, 1978; Guthrie and Mathews, 1985; Guthrie and Parker, 1990; Hackston and Milne, 1996; Perry and Teng, 1999; Tsang, 1998; Wilmshurst and Frost, 2000; Zeghal and Ahmed, 1990), the annual reports were analyzed using content analysis.

Krippendorf (1980:21) defines content analysis as a: ". . . method of codifying the text (or content) of a piece of writing into various groups or categories depending on selected criteria." Content analysis is selected as the most appropriate method of analysis given that the present study is an exploration of the incidence of environmental disclosures in the annual report. Following Wilmshurst and Frost (2000: 16), environmental disclosures are defined as: ". . . those disclosures that relate to the impact company activities have on the physical or natural environment in which they operate."

Following this definition, references to industrial concerns about environmental issues are excluded. Statements on changing public perceptions are, also excluded. Krippendorf (1980) in his book argues that an essential stage to any content analysis study is deciding which documents to analyze. The authors decided to use the annual report as the sole document for analysis for several reasons. First, it was felt that there is a need to be consistent with previous environmental disclosure studies. Second, the annual report is not only more accessible to researchers (Unerman, 2000) it is also the only form of corporate disclosure that is provided on a regular basis (Buhr, 1998). Third, a number of studies have shown that the annual report is considered by various user groups to be a major source of information about an organization's environmental performance (Deegan and Rankin, 1997; Epstein and Freedman, 1994; Harte et al., 1991; Tilt, 1994). Fourth, it is widely recognized that the information reported in annual reports possesses a high degree of credibility (Tilt, 1994; Neu et al., 1998; Unerman, 2000). Finally, given the fact that environmental reporting is still in its infancy in Malaysia, the authors are of the opinion that very few companies will be currently producing stand-alone environmental performance reports.

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The second stage in content analysis is determining the method of measuring each relevant disclosur (Unerman, 2000). A review of literature reveals three different methods of measurement, namely, measurement of volume in terms of words (Deegan and Gordon, 1996; Zeghal and Ahmed, 1990), measurement of volume in terms of sentences (Hackston and Milne, 1996; Milne and Adler, 1999; Tsang, 1998) and measurement of volume in terms of proportions of a page (Gray et al., 1995). Proportions of a page have been criticized as adding an element of subjectivity into the measurement process. For example, some authors question how one would treat blank parts of a page? (Gray et al.,1995). The number of words can also be problematic, as individual words do not convey any meaning without a sentence to provide the context (Milne and Adler, 1999). Measurement in terms of the number of sentences can be better justified. Hackston and Milne (1996) for instance, point out that sentences can be counted with more accuracy than words and sentences, unlike individual words, and can be used to convey meaning. Furthermore, counting sentences has been associated with fewer errors compared to counting individual words (Milne and Adler, 1999). Unerman (2000) also argues that measurement of volume in terms of sentences may be done with less use of judgment. Accordingly, the number of sentences is chosen as an appropriate measure of disclosure for the present study. Graphical diagrams, pictures and captions to pictures of environmental-related activities were excluded from the analysis, as their inclusion would involve a high level of subjectivity. The third essential stage in a content analysis study is the construction of a categorization scheme (Milne and Adler, 1999). This involves the selection and development of categories into which content units can be classified (Tilt, 2000). For the purposes of the present study, eleven content categories within four testable dimensions of environmental disclosure were developed for coding, based on the prior literature (Ernst and Ernst, 1978; Gray et al., 1995; Guthrie and Parker, 1990). These categories are as summarized below:

1. Evidence Monetary and non-monetary.

2. News type Good news, bad news and neutral. IJCM Vol. 14, No. 1, 2004 49

3. Location Chairman's statement, operations review, corporate diary and others.

4. Environmental sub-themes, environmental audit and environmental policy.

Procedure Since inter-coder reliability is an element of concern in studies which utilize content analysis, certain precautionary measures were adopted to ensure reliability. Two third year accounting undergraduate students completed the coding. Before the coding commenced, the first author thoroughly briefed the two students on the coding procedure. Then, both coders reviewed a small sample of annual reports independently and proceeded with the coding process using an interrogation instrument. The interrogation instrument was first developed by Hackston and Milne (1996), but it was adapted to suit the purposes of the present study. The first author then compared the coded data and, in cases where discrepancies existed, the annual reports were re-analyzed and the differences resolved. After this sample was reviewed, the two coders felt sufficiently confident to proceed with the content analysis. Both coders were required to meet with and report to the first author on a weekly basis. These meetings were also used to discuss any problems that the coders had.

Our analysis of the annual reports involves three steps. First, we look for the existence of any environmental disclosure item in the main sections of the annual report excluding the financial statements. As mentioned earlier, this is based on the definition of environmental disclosures used by Wilmshurst and Frost (2000). Then, we categorize the disclosure into one of the content categories and finally, count the number of sentences for each environmental disclosure item.

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