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Financial reporting involves the presentation of quantitative factors and information that depicts a company's overall operational performance. It is the art of recording, classifying and summarizing financial data in a significant manner in terms of quantity or value of money, transactions and events which are in part at least of a financial character and interpreting as well as analysing the results thereof. It is to be noted that financial reporting is, for the most part, financial in nature and concretely presents information that are of quantitative characters. It shows the company's financial performance and financial standing or position in terms of its operational status.
What are environment reports?
Environmental policies have been enacted in relation to the worsening situation of our environment. Certain companies and industries contribute tremendously on the emission of harmful gases and pollution in the environment. Government agencies and other administrative offices concerned have helped in implementing an efficient and economically beneficial way of preserving the environment.
It is therefore advised by the government and other regulatory boards that an environment reporting is undergone by companies to conceal factors which may significantly affect the society. This further promotes the main goal of annual reporting which is to be as transparent to the external and internal users as possible (Guthrie, 2006).
Should environmental and social issues be included in the annual financial report?
Based on the definition of financial reporting presented above, financial reporting and annual reporting of a business involves operational and financial aspects. Environmental and social issues are therefore not within the bounds of such details. However, it is to be noted that financial reporting is also undergone for the very purpose of providing transparency of the company's operation and standing to the public or the external users. The main goal of producing and presenting financial statements is to provide external users and the public with equal amounts of clarity (Ahsen, 2004). It is therefore logical to say that financial statements should include information that are both financial and non financial in nature to permit enhanced transparency in order to allow informed judgment for both external and internal users of the information. Environmental and social issues undergone by the company should therefore be included as part of the financial report or annual report presented by a company by the very argument mentioned.
As part of an organization's corporate social responsibility, environmental and social issues dealt with under the operation of the business are needed to be disclosed and reported. These issues must be disclosed whether directly or indirectly related to the business, as long as the organization affects outside parties. According to bized.com, social accounting is a method by which a business seeks to place a value on the impact on society of its operations. This might include the following impacts on the environment: waste; the effect on society of the packaging it produces; and how much fuel it uses in its company cars. It can also include the effect on the local community who might have to live in the shadow of its premises, and how it engages with the community, its customers and workforce (bized.com, 2010). From this definition, it is clear that social accounting invariably includes more of qualitative information rather than quantitative ones. Social and environmental reporting involves exhaustive data pertaining to the effect of the businesses on the environment and the society; whereas the financial reporting involves substantial information concerning quantitative data appertaining to the operational aspect of the business and managerial concerns. Social reporting is clearly beyond the bounds of financial reporting. In this regard, it is logical to question whether social and environmental performance would arguably be fit as an inclusion in the annual report. Considering that it is a significant requirement of the government that businesses engage into corporate social responsibilities and are encouraged to attend to matters that affect both the business or operation and the society to which such belongs.
Over the years, environmental performance and social responsibilities have been significantly considered in assessing financial performance through the financial risks associated with such factor. Disclosure of environmental performance of a company is seen as an important aspect in the financial reporting in order to satisfy the needs of both the internal management and shareholders as well as the external users of the information. Disclosure requirements relating to the environmental performance disclosure depends upon the complexities of the rules and regulations per industry and as per country (Adamson, and Dilts, 1999). Current practices have indicated the need to provide environmental performance analysis as part of a company's comprehensive annual report for certain industries. Example of such industries includes the chemical and oil production or usage industry.
Financial statements are concretely required to be presented and reported by companies to promote transparency and provide useful information to allow users of such information to produce optimal decisions and informed judgments. IN this regard, including social and environmental performance assessment in the presentation and reporting of a company's financial or annual report further support the enhanced transparency and accountability of a company. With the enhanced disclosure pertaining to such environmental aspects, companies are encouraged to integrate all the aspects of a business in one comprehensive overview. It may be argued that environmental information is clearly related to the overall aspect of a business, but it mostly points out to the qualitative responsibility of a company in the society and the environment. However, aside from qualitative perspectives, operational quantitative information and data are also highly influenced by such information (Mason, 1980). These environmental performance disclosures support the determination of the correct value of certain accounts of the company and the overall value of the company in terms of how the society and the environment affect the operation and performance as well as the position of the company. Included in the influences is the governmental interference in the operation of certain industries. With these, it is important to note that such environmental factors significantly affect the operation of the company and such degree of influence should be disclosed as well. Furthermore, the inclusion of such environmental and social information regarding the particular dealings and activities of the company helps promote strategic information, risk assessment, analysis of the value determinants and the indicators of social performance. All of these are essential in providing meaningful information on the matter and quantitative data that may significantly influence and change certain balances in the report.
Through the years, investors and creditors have looked at the environmental performance of companies in evaluating the viability of their investment. Nowadays, investors are keener in investing their money and resources to a company that could provide substantial environmental activity and assents. This is due to the ever pressing materiality of the information produced by such an undertaking as well as the importance of reputation in every business's operational endeavours thereby proving that such information will generate financial adaptation. The measurement and management of the report pertaining to a company's impact on social and environmental stances will help support a company's need for change as it relates to the functionality of its operational endeavours (Nelson, 1993). IN undertaking such an endeavour, not only is the environment and the society benefited, the company is also widely benefited in terms of the comprehensiveness of the data presented in the annual report and the ability of the company to produce wide ranging and applicable set of amendments in the structure of the company both managerial wise and operational to produce optimal business decisions.
Environmental issues as they relate to financial performance
Various environmental issues have been directly and significantly linked to financial performances. This holds true especially to companies within industries that are directly affected by environmental policies and laws enacted against environmental protection and safety regulations. For example, companies in the field or industry of chemical production and oil production and usage are bombarded with strict rules and regulations regarding the limitations on the levels of their outputs. They are also bombarded by strict limitations that restrict them from their efficient operational performances and endeavours. Companies under this industries are often directed towards numerous environmental law suits and liabilities. It is highly important for companies to report environmental and social issues as integral parts of their financial reporting endeavours as it clearly and directly influences their operational and financial performance throughout their existence.
The Institute of Chartered Accountants for England and Wales, together with the Environment Agency has administered new guide in financial and annual reporting. The guide aims to answer the requirement of the government and laws concerning the position of environmental activities and performances for many large enterprises. This serves as a guide to organizations that are aimed at reporting substantial environmental practices as part of their annual financial statements (ICAEW 2010).
Certain companies which are not directly affected by stringent environmental and social regulations may find extensive environmental reporting to be incoherent. These companies tend to replace environmental reporting statements with other environmental reporting that suits the needs and extent to which environmental and social factors affect them. In this regard, environmental reporting must consecutively be developed and integrated to the financial reporting world. Developments concerning the need to provide standards for each businesses and industries must be sought.