emphasis on the financial performance of reporting entities


Conventional accounting reports place more emphasis on the financial performance of reporting entities compared to their social and environmental performance. Guidance on social and environmental reporting is currently provided by organizations outside the accounting profession, such as AccountAbility (AA) and the Global Reporting Initiative (GRI).

Discuss the implications of marginalizing social and environmental reporting and suggest how such reporting can be strengthened.


The issue of social and environmental reporting was highlighted by a report from United Nations World Commission on Environment and Development, Our Common Future (known as Brundtland Report) [1] . In this report, it stated that business operations have an impact on our community and environment and a lot of stakeholders are demanding to inform them of those impacts.

The problem in this contemporary accounting standard is that, social and environmental reporting is a voluntary disclosure [2] and because of this reason people do not want to disclose such information because of lack of education. The issue now is that, we must consider their action of not disclosing it on people and environment.

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This paper will focus on the impacts of marginalizing the social and environmental reports by reporting entities and finding out some solutions of strengthening such reports. What has already been done is that, organizations such as AccountAbility (AA) and Global Reporting Initiative (GRI) has been formed to address this issue and the reporting of this information to users is made voluntarily.

This paper will focus on some of the very important accounting theories like legitimacy theory, stakeholder theory, risk society theory and enterprise theory. These theories might help to explain the role of business reporting, users of business' information and the cause/effect actions of business operations, reporting, stakeholder's reactions and ultimate effect on community and environment.

Series of interviews was conducted with company employees to see how they respond towards marginalizing the social and environmental reports. Specifically, we aimed to discover:

The impacts of marginalizing the social and environmental reports ;

Some solutions to come up with some idea of improving the information reporting.

The interview was done locally in Fiji, however, international case studies, journals and articles were used to enhance the credibility of my research.

Theoretical Underpinnings

A number of theories were used to explain why corporations use social and environmental reports. The reasons obtained were used to evaluate the question for what happens when corporations fail to report social and environmental impacts of their business operations. Some of these theories were legitimacy theory, stakeholder theory, risk society theory and enterprise theory.

Legitimacy theory arises from the concept of a social contract being established between companies and society (Mathews, 1993). From this perspective, social and environmental reporting can be used by companies to attempt to legitimize their actions to society.

This links in with the stakeholder theory of the firm. Legitimacy theory has been proffered as an explanation for why companies disclose social and environmental reports (Harte and Owen, 1992; Deegan and Rankin, 1996). Indeed, Deegan and Rankin (1997) provided questionnaire evidence to support the theory that environmental disclosure practices are driven by companies' attempts to legitimize their actions.

Beck's (1992) risk society theory built upon the characteristics associated with the contemporary period of late modernity (Giddens, 1990; 1991), identifying risk as a primary factor shaping society, institutions, politics and individual life choices. He considered that society was now concerned with the distribution of risk whereas earlier generations were preoccupied with the distribution of wealth (Beck, 1992). One of his main focuses was the ecological dimension of the risk society, as he perceived that humans' impact on the natural environmental degradation.

Enterprise theory suggests that there are many stakeholders that are interested in the performance of the business and such includes their operations' impacts towards community and environment (Waino Suojanen, 1954) [3] . "This theory views the enterprise as a social institution where decisions are made that affect a number of interested parties: shareholders, employees, creditors, customers, various government agencies and the public" [4] . This theory suggests that companies should disclose triple-bottom line reports which focuses on financial, social and environmental reports.

Literature Review

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Social and environmental reporting is about disclosing social and environmental reports together with financial reports of the business [5] . This means that we should not only focus on the financial aspect of the business, but we also have to see the impact of a business operation towards our community and environment.

According to legitimacy theory, businesses report these reports to establish relationship with a wider range of stakeholders. The reason they do this extra effort of disclosing more information is to ultimate increase business profit by having good public reputation.

As Sumit K Lodhia (1999) states on his theses [6] that:

"…environmental disclosures primarily as public relations exercise designed to enhance the image/esteem of the organization."

CEO of BHP Billiton Ltd says that:

"…corporate social responsibility is in the best interests of our shareholders and is fundamental to profit creation and sustainability" [7] .

The above-mentioned people makes an important point about the contribution of social and environmental reporting to the entities. They are used to build good public relationship with the society and to get perceived benefits from them.

To further my point, that means that marginalizing social and environmental reports will not enhance good public relations which can consequently lead to an increase in future "legal restrictions on its operations, limited provision of resources such as financial capital and labour, and reduced demand for its products [8] " if compared to those companies that practice disclosure of social and environmental reports.

Shocker and Sethi (1974, p: 67) states that:

"Any social institution - and business is no exception - operates in society via a social contract, expresses or implied, whereby its survival and growth are based on:

the delivery of some socially desirable ends to society in general; and

the distribution of economic, social or political benefits to groups from which it derives its power."

In the above excerpt, they stated that social reporting is an ultimate beneficial to businesses. If social reports are marginalized, then business industry would have a detrimental effect to its ongoing existence because no such "social contracts" are present that people can judge the conduct of the business. Social contracts are such that business gets the benefits from anything that people has provided "license" to them so that in the eyes of the public, the rewards from the business are collectively for the people at large including future generations.

Further on legitimacy theory, it proposes that organizations to continue to exist only if the society in which they operate perceives those organizations to be operating according to a value system consistent with the society's own (Gray et al. 1996). It tells that business does not have to focus on providing reports to investors, but to many stakeholders who may want to see other aspect of the business such as business contribution towards community and environment.

One of the functions of accounting, and consequently reporting, is to legitimize the existence of the corporation (Hurst, 1970). These way stakeholders can have confidence in business operations that can subsequently provide more capital. Marginalizing social and environmental reporting does not tell people everything for example a profit made by a particular business does not tell many employees were laid off. This way, expectation gap arises, which is a misunderstanding between what the business is doing and what the stakeholders perceives it to be doing [9] .

Like legitimacy theory that focuses on community, stakeholder theory focuses on the information need of various stakeholders [10] . This theory affects the business operations and disclosure requirements as many different stakeholders will want different information about the business such as their financial performance, social and environmental impacts from their operations. Marginalizing social and environmental reporting in this case will tend to focus on few stakeholders, namely those who are interested in the financial aspect of the business such as shareholders and creditors.

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Stakeholders with the greatest power are given more importance by business firms and thus their information needs are utmost priority (Freeman, 1984). This impacts the business culture of focusing on those stakeholders who provide finance or increase capital of the business and those stakeholders such as non-government organizations are given least importance. This results in marginalizing the social and environmental reporting because they are the center of attention of the NGOs. Shareholders and creditors will focus on financial aspects and business in turn will provide them with their performance results in financial terms.

Islam and Deegan (2007) studied a case of Bangladesh Garment Manufacturers and Exporters Associations (BGMEA) to see the relationship between powerful stakeholders and the business disclosure practices. It showed that, as previously stated by Freeman in 1984, that stakeholders with greatest power are given greatest importance to the information needs of them and thus affects the way a business discloses information. The business only provides that information that is in the best interest to those powerful stakeholders. Islam and Deegan (2007) reports:

"Our results indicate that in a developing country such as Bangladesh, an organization will embrace social responsibilities, inclusive of related reporting, to the extent that powerful stakeholders expect them to do so, and the related economic imperative to do so. Without pressure from powerful stakeholders, and the related economic incentives, it would appear that organizations operating in developing countries will be slow to embrace the social practices and related accountabilities that are expected by Western societies".

Therefore, organizations that are not pressurized by powerful stakeholders will marginalize social and environmental reporting. So that is one of the motivations for organizations that are not interested in disclosing social and environmental reports.

Businesses disclose social and environmental reports to increase profit. This point comes from the positive accounting theory which states that people are driven by self-interest [11] and so managers tries to disclose such information so that they could increase entities' wealth and ultimately increase their wealth, like profit-based bonuses. One of the impact of marginalizing could be determined from such theory is that if we try not to disclose such information, then businesses will enjoy lesser profit than they could if they did disclose such information.

In relation to the impact of the disclosure of such information with stock market, efficient market hypothesis states that if any new information is announced and that which has an impact with the share prices, then that means that such information are affecting the reactions of the investors [12] .

Belkaoui (1976) studied the reactions between business entities having some pollution control system incorporating within their operations and disclosure of such information did have a positive response from "ethical investors" as their share prices increased. This means that those business entities who do not disclose any kind of social and environmental report will not enjoy as much benefits than those entities that did disclose social and environmental reports.

Research Objectives

Conventional accounting reports place more emphasis on the financial performance of reporting entities compared to their social and environmental performance. Guidance on social and environmental reporting is currently provided by organizations outside the accounting profession, such as AccountAbility (AA) and the Global Reporting Initiative (GRI).

The main objectives of this research are as follows:

Finding out the implications of having social and environmental reports;

Finding out what are the implications of marginalizing social and environmental reporting;

Find what accountants have to say about social and environmental reporting and;

Finding out some of the ways to strengthen such reporting system;

Corporate industry should not only focus on making profit but also engage in "actions that appear to further some social good beyond the interests of the firm and that which is required by law" (McWilliams et.al.,2006, p1) [13] .

Although it is not a new concept, CSR remains an emerging and elusive idea for academics,

and a contested issue for business managers and their stakeholders. Owing to the range of

contrasting definitions, and often convoluted by varying use of terminology, the notion of

CSR has lead to the emergence of a variety of practices (Freeman 1984; Crane and Matten

2004; Welford 2004; Habisch and Jonker 2005; Fairbrass et al 2005). In brief, the concept of

CSR has evolved considerably since it first emerged in the 1950s (Carroll 1999; Freeman

1984:38; Carroll and Beiler 1977; Sturdivant 1977). As a result there appears to be

disagreement about what the term means, whether it should be implemented, how it should be

implemented, or why it should be implemented (Welford 2004; Stigson 2002).

In short, definitions of the term CSR may depend on individual perceptions of

responsibility/obligation that in turn addresses the broader topic of the role of the organisation

in society (Deresky 2000; Stigson 2002; Woodward et al 2001; Maignan et al. 2002; Maignan and Ferrell 2003; Epstein and Roy 2001; Haugh 2003; Crane and Matten 2004:439). In brief,

the concept of CSR encompasses many dimensions of business activity ranging from the

social (e.g.. community programmes), to economic (e.g. employment) to the environmental

(e.g. waste reduction).