This chapter will discuss previous academic and professional literature relating to assurance statement practices in corporate social reporting. Academic literature related to corporate social responsibility (CSR), corporate social disclosure (CSD), CS reporting, assurance statements, different features of assurance statements, guidelines related to assurance statements and their impact on the stakeholders will be presented in detail in this chapter. Recent years have witness a significant increase in the research regarding corporate social reporting, social disclosure and is gaining attention of researchers for over twenty years (Khan, 2010). Researchers across the globe have been trying to identify the trends and issues related to CSD and one very important aspect of it i.e. assurance statement. Recently CSR has been on the rise (Sutantoputra, 2009).
Corporate Social Responsibility (CSR)
(Gamerschlag et al., 2010, p. 1) defined CSR as "company's voluntary contribution to sustainable development which goes beyond legal requirements", they further argued that CSR practices are on the rise in recent years and this trend is evident from the increasing CSR disclosure and sustainability reports. According to (Perrini, 2005) CSR is a concept in which companies communicate with their stakeholders by including social and environmental issues into daily business operations voluntarily, are accountable to their stakeholders and is a source of competitive advantage (Sutantoputra, 2009).
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For years companies have been utilizing financial reports to disseminate information regarding their actions and impact of those actions on both shareholders and stakeholders. Basic purpose of those financial reports has been to serve mainly the needs of shareholders. This behavior of corporate management has been encouraged by legal and remuneration structure of companies especially in Anglo-Saxon countries such as US and UK where managerial perks are usually linked with shareholder wealth maximization via share price of the company, which promotes limited shareholder focus mentality rather than wider stakeholder oriented approach (Adams and Whelan, 2009).
This trend is changing as companies are trying to be more socially responsible towards wider community and is developing into an important aspect of business communication (Perrini, 2005). Modern business environment requires companies to be sensitive to the needs of all its stakeholders. Companies are expected to engage with wider stakeholders in more effective manner by distributing information about their actions not just by financial reports but by more effective and easily accessible means and this comes under the domain of CSR (Khan, 2010). Constant demand by stakeholders to be more socially responsible has forced management to be more socially and environmentally responsible (Elijido-Ten et al., 2010).
Businesses operate in a society and thus become part of the overall system which is interlinked i.e. every entity in that system has some direct and indirect impact on eachother. This interrelationship among entities in a social system creates certain prospects for companies to act ethically, so they take up some CSR tools to present their positive image to society of which corporate social disclosure is one (Preuss, 2010, p. 336), and by reporting about the consequences of their actions on society could gain stakeholders support, positive reputation, and long-term survival (Perrini, 2005; Khan, 2010). Infect reputation building is the main reason behind companies undertaking CSR activities (Cooper and Owen, 2007, p. 649).
Corporate Social Disclosure (CSD)
Corporate social responsibility leads companies to disclose impact of their actions on stakeholders, society and environment. Companies engage in CSD when they disclose information about the impact of their actions on society and it is usually considered voluntary rather than mandatory. CSD is defined as "the information that a company discloses about its environmental impact and its relationship with its stakeholders by means of relevant communication channels" (Gamerschlag et al., 2010, p. 2-3), CSD is provision of information by company relating to the issues regarding environment, community, employee, consumer issues and makes companies accountable to wider stakeholders rather than addressing the needs of only shareholders and creditors as is the case in financial reporting (Smith et al., 2005, p. 124-125) and is considered as a communication channel between company and stakeholders. CSD is becoming important aspect of modern business environment as companies have increased the disclosure of environmental information in both financial and non-financial reports (Elijido-Ten et al., 2010; Brown and Deegan, 1998).
Motives behind CSD
There is an increasing shift in the managerial preference as far as CSD is concerned; companies are no longer relying on only financial reports to address stakeholders. In the recent decades corporate social and environmental reporting has been emerged as a complement to financial reporting to tackle social and environmental issues being faced by companies (Baker, 2010, p. 847). There could be numerous reasons behind this trend; (Adams and Whelan, 2009, p. 122) suggested that voluntary information disclosure depends upon the company belief that it is ethical to inform public about the environmental impact of the company's actions or to hide the harmful actions that might affect company's status or it is assumed that social disclosure is vital to keep the job and to carry on earning high salaries especially in the case of top management. Public pressure after corporate collapses and disagreements has made companies to respond to public demands by disclosing information about their impact on wider society (Benn et al., 2009). Similarly, (Smith et al., 2005) argued corporate collapses of large firms such as Enron, WorldCom and Global Crossing have showed that corporate influence is not restricted to shareholders only, it affects larger society. (Darnell et al., 2009, p. 171) argued that over the past two decades companies have acted according to the stakeholder demands by becoming more environmentally responsible.
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Despite its positive aspects CSD could be used as a manipulative tool by the companies as (Branco and Rodriguez, 2007) argued that motivation behind the decision by companies to go down CSR path due the realization that CSR could be beneficial for the company in the long run and it could help the company gain competitive advantage over its competitors or it could be used to shape perception of stakeholders regarding company by portraying positive image of the company. (Chiang, 2010) suggested that company and its reporting practices do get affected by environmental issues, environmental disclosure could be treated as contribution to society by companies (Sun et al., 2010, p. 679). Societal issues have become so important recently that social and environmental disclosure not only affects company's relationship with stakeholders but it could affect investors' confidence in the company as well. This fact has made investors cautious about company practices especially in their dealings with environment and society resulting in an increase in social and environmental disclosure by companies to satisfy both investors and stakeholders (Beets and Souther, 1999).
Unlike in the past companies are disclosing their social and environmental information in separate reports apart from annual reports.
Corporate Social and Environmental Reporting
CS reporting has been defined by (Unerman and O'Dwyer, 2007, p. 333) as a practice in which companies communicate with stakeholders about their CSR policies, practices. Companies used financial reports to report on their social and environmental activities particularly in countries like Australia, UK and US (Brown and Deegan, 1998) but this trend has been shifting towards stand-alone CS reporting due to increased attention being given to the issue by both academic and professional researchers (Kuruppu and Milne, 2010) who are putting pressure on corporate managers to address their social and environmental actions in separate CS reports (Porter, 2009).
Corporate social and environmental reporting although a new phenomenon (Adams and Evans, 2004, p. 99) has emerged as main instrument of CSD by organizations in recent years (Darnell et al., 2009) to communicate with their stakeholders (Park and Brorson, 2005). Companies have taken different routes such as web based environmental, social and recently sustainability reports to disclose about their intentions regarding social issues (Cooper and Owen, 2007. P. 649) and it is up to companies to choose which communication channel would be more effective in reaching appropriate audience (Sutantoputra, 2009). Separate environmental reports are becoming increasingly common practice among companies to report on their actions in last few decades (Deegan et al., 2006), being adopted by companies across the globe (Edgley et al., 2010; Jones and Solomon, 2010; Moneva et al., 2007; O'Dwyer and Owen, 2005; Owen and O'Dwyer, 2004) to fulfill their obligation regarding corporate responsibility (Perego, 2009; Perrini, 2005).
Large companies around the world are realizing the importance of addressing stakeholder issues in a more responsible manner and this is evident from KPMG (2005) survey that between 2004 and 2005 more than half of G250 and almost third of N100 communicated their social, environmental and sustainability performance via corporate responsibility report (Manetti and Becatii, 2008, p. 289), CS reporting practices are becoming increasingly prevalent among multi-nationals (Unerman and O'Dwyer, 2007). Similarly, (O'Dwyer and Owen, 2005, p. 206; Owen and O'Dwyer, 2004, p. 1; Park and Brorson, 2005) mentioned that according to KPMG (2002) survey 45% of the top 250 companies of the Global Fortune 500 (GFT250) issue an environmental, social or sustainability reports compared to 35% in 1999. Number of companies issuing environmental reports has increased from 12% in 1993 to 28% in 2002 (Park and Brorson, 2005, p. 1095).
CS reporting although is in its early stages but has made a rapid improvement recently, social concerns have made companies to increase their interaction with stakeholders (Sun et al., 2010). Different communication channels are being used by the companies to report about their corporate social responsibilities. Sustainability reports have emerged as one of the most prominent and widely used medium by the companies to show their social responsibility credentials. Sustainability reports become common practice after 2000 with the introduction of GRI standard which provides directions for the companies to follow in their social, environmental and economical issues (Baxi and Ray, 2009), and is considered to be an indicator of corporate accountability and stakeholder acceptance of company's policies (Villiers and Staden, 2010). Corporations are starting to take CSR disclosure seriously which is evident from increase use of social, environmental and sustainability reports (Perrini, 2005; Sutantoputra, 2009; Porter 2009).
Main rational behind sustainability reporting is that organizations are accountable to all its stakeholders' not just shareholders and through sustainability reports companies express their accountability towards stakeholders (Boele and Kemp, 2005). In academic literature accountability has been defined as "the duty to provide an account, by no means necessarily a financial account, or reckoning of those actions for which one is held responsible" (Cooper and Owen, 2007, p. 651), to give an account of one's action and being punished for nor performing duties satisfactorily (Porter, 2009), duty of accountor to report to accountee in case of relationship between both and accountee has the power to hold accountor responsible for his/her decision or actions (Crofts and Bisman, 2010), user of resources must be answerable about how resources have been consumed and what impact that consumption of resources could have on society (Naser et al., 2006) and there appears to be a need of greater corporate accountability in business environment (Kuruppu and Milne, 2010) and disclosing more information (Naser et al., 2006, p. 5).
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Sustainability reporting unlike environmental reporting which covers only environmental impact of organizational activities has much broader focus including social and financial dimensions of corporate activities (Monvea et al., 2007), although lately companies have been including social and economic issues in their environmental reports thus changing them into sustainability reports (Park and Brorson, 2005). This is why it is also considered as triple bottom line reporting that includes economic, social and environment performance of the company (O'Connor and Spangenberg, 2009; Porter, 2009), defined as "publically released document addressing social, environmental and economic performance of the reporting organization" (Deegan et al., 2006).
Sustainability reporting is on the increase but not without its issues and concerns. Researchers have been constantly trying to disclose issues relevant to sustainability or social reporting. There could be various factors involve that cast doubt on the usefulness and reliability of the sustainability or social reporting. One such issue is completeness of the report which is linked with the amount of relevant information being disclosed in the report by the company (Adams and Evans, 2004). Management could use social reporting for personal gains, (Baker, 2010) argued that mangers think that the objective of stakeholder engagement could be served through proper use of sustainability reporting which in turn could make managers look responsible in front of stakeholders, stakeholder involvement is minimum in social reporting indicating that accountability to stakeholders is not the primary concern of management (O'Dwyer and Owen, 2005). Interaction with all stakeholders especially those who are affected most by the action of the company is needed if the objective of enhanced accountability is to be achieved which is certainly not the case in real corporate world at the moment (Cooper and Owen, 2007). Despite the growing trend in corporate social and environmental reporting there is still a lick of confidence by public on corporate performance regarding social disclosure so in order to gain that public trust companies must constantly learn and improve their interaction with stakeholders and reporting processes (Dando and Swift, 2003). This lack of public trust on the content of sustainability reports creates credibility gap and makes sustainability reports less useful for traditional stakeholders i.e. shareholders, lenders, customers, employees and local communities (Manetti and Becatii, 2008, p. 289). Similarly, (O'Dwyer et al., 2011) suggested that sustainability reports are being criticized in a sense that they put a veil on corporate environmental activities instead of making them more transparent. Hiding all the negative aspects of company decisions and actions regarding social issues in sustainability reports becomes easier as companies are not required by law to produce sustainability reports as opposed to financial reports (Park and Brorson, 2005).
If sustainability reports are to be reliable and credibility gap which might have adverse affect on organization's reputation (Kim et al., 2010) to be reduced, there has to be a mechanism to ensure that the information provided in sustainability reports could be trusted upon. Independent assurance or verification of sustainability or social reports helps enhance corporate accountability and increase stakeholder confidence on reported information (Beets and Souther, 1999).
Aoording to the International Federation of Accountants (IFAC) assurance statement can be defined as " a process in which a practitioner expresses a conclusion designed to enhance the degree of confidence that intended users can have about the evaluation or measurement of a subject matter that is the responsibility of a party, other than the intended users or practitioner, against criteria" (Park and Brorson, 2005, p. 1096). With the increase in CS reporting around the world there is also accompanying increase in external assurance (Kuruppu and Milne, 2010; O'Dwyer et al., 2011; Owen and O'Dwyer, 2004). Main rational behind credibility is trust and assurance guarantees that the information presented by companies in their social and sustainability reports is true and fair (Dando and Swift, 2003; Edgley et al., 2010), this widening credibility gap between company and stakeholders contributed to the upward trend in sustainability assurance (Owen and O'Dwyer, 2004). Assurance means stakeholders have more confidence on those sustainability reports that are externally or independently verified and is relatively recent phenomenon (Deegan et al., 2006, p. 332).
Sustainability reports are expected to serve the accountability perspective and reduce the credibility gap (Dando and Swift, 2003). Credibility of the reported information that companies use in their sustainability reports is greatly enhanced if they are verified externally since the whole point of sustainability reporting is to gain stakeholder trust (Adams and Evans, 2004; Jones and Solomon, 2010), and assurance practice should be devised in such ways that complement that wider stakeholder accountability perspective by including stakeholders concerns in assurance process (Dando and Swift, 2003, p. 198). Assurance statements enhance the quality of sustainability reports is evident from the fact that 68% of the world's best sustainability reports have assurance statements according to SustianAbility's (2002) analysis (O'Dywer and Owen, 2005, p. 206; Owen and O'Dwyer, 2004, p. 1), they further argued that stakeholders want assurance from managers regarding their management of social and environmental issues in a true and fair manner. Similarly, (Park and Brorson, 2005) argued that in order to counter stakeholders demands of true and fair representation of the company's activities assurance statements are being used as a tool.
Recent Trends in Assurance Practices
External third-party assurance was not a common practice in CS reporting, it was only until recently that it has gained popularity in modern business environment. In 2002, 29% of GFT250 companies included verification in their reports compared to 19% in 1999 and 27% of 440 companies from the top 100 in 19 countries had report verification in 1999 (Deegan et al., 2006, p. 333; O'Dwyer and Owen, 2005; Owen and O'Dwyer, 2004), similarly (Kuruppu and Milne, 2010, p. 4) stated that KPMG survey shows increase in assurance provision to 30% in 2005 from 20% in 1996, but this increased trend is not uniform everywhere as they further argued that assurance practices in UK and Italy are more predominant compared to US, Canada and Germany. Wide spread acceptance of triple bottom line or sustainability reporting added to assurance statement practices specially in environmentally sensitive industries (Deegan et al., 2006)because of their direct impact on environment and society. Similarly, (O'Dwyer and Owen, 2007, p. 78) mentioned that 40% of sustainability reports included external assurance in 2003 up from 17% ten years ago, has come to the attention of business community recently after constant demands of social lobbying groups, communities and stakeholders, and is increasing internationally (Edgley et al., 2010, p. 532; Jones and Solomon, 2010). Recently, (O'Dwyer et al., 2011, p. 1-2) argued that KPMG's (2008) survey mentioned that upward trend in assurance practices is evident as 40% of G250 companies included assurance statements in their CS reports compared to 30% in 2005 survey and corporateregister.com (2008) showed average 20% increase of assurance practices among companies per year from 1997 to 2007.
Corporate activities significantly improve if there is proper check and balance on them. (Darnell et al., 2009, p. 185) suggested that social and environmental audits lead to better operational performance by companies which in turn lead to better overall company performance, so assurance statements in social reporting might have implications not only on non-financial aspects but also on the financial performance of the company.
Assurance statements like CS reporting is voluntary in nature which might hinder the wide spread acceptance of assurance practices. (Jones and Solomon, 2010) stated that assurance practices being voluntary in nature is not developed much in the past however recently there is although limited but growing body of literature trying to explore the issues related to assurance practices to make it a more common practice among companies. Financial reports are still trusted more as compared to sustainability reports by stakeholders specially shareholders when it comes to presenting true picture of organizational activities, but inclusion of assurance statements or verification of sustainability reports has potential to the tackle the criticism of CS reporting (Jones and Solomon, 2010), just like financial audits increase the reliability of financial reports third party assurance adds social reporting (Park and Brorson, 2005). Assurance statement practice being relatively new area needs more in-depth analysis by researchers so that it could be understood and widely accepted around the world. As (O'Dwyer et al., 2011) argued that assurance statements in sustainability reporting is usually studied in relation to its content most of the times which makes the analysis of its actual practice in business environment a bit left behind and there is room for further research in this area.