Recent Accounting And Ethical Scandals In Firms Such As Enron Accounting Essay


Following recent accounting and ethical scandals in firms such as Enron, WorldCom and Parmalat, corporate governance is being regarded as an important issue in the business world due to the fact that rules and regulations have become stricter with regard to societal expectations. In this respect the concept of corporate governance has start to cover some part of CSR. Previous researches has tended to study CG and CSR issues separately and not as combined manifestation in the fast developing business world where CG issues may also have impact on CSR disclosure and firms performance. Examples of studies that have directly or indirectly link CSR and CG are those that talk about the influence of CG reforms on business ethics most often in a particular region( mainly Rossouw 2005; Kimber and Lipton,2005; Ryan 2005); the role of socially responsible investors and shareholder activism (Aguilera et al., 2006; McLaren, 2004; Monks et al., 2004; Guay et al., 2004; Sjöström, 2008) and of employee relations (Deakin and Whittaker, 2007; Jones et al., 2007); and, perhaps most remotely, those that critically examine the stakeholder approach, frequently referring to an agency perspective (Hill and Jones, 1992; Jensen, 2001; Sternberg, 1997; cf. Kolk and Pinkse, 2006).

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There is several corporate governance practice which helps to find out whether corporate social responsibility should be disclosed or not, for example the Global Reporting Initiative (GRI) comes across several indicators such as independence and expertise of directors which help to identify economic, environmental and social risks and opportunities and find out whether the financial and non financial goal have been achieved and hence based on this firms will decide whether CSR should be disclosed or not.

Corporate governance and corporate social responsibility is therefore expected to be more integrated in the field of business disclosure practices. Nowadays companies are required to disclose other types of information, like what the business has done for the welfare of the society, and not only financial information. For this reason the number of firms which publish voluntary reports has increased. According to the triple bottom line, a business reports strategy and operational performance within three primary dimensions and these are financial, stakeholder and environmental performance. Thus these reports shows that there is proper planning in the business as the latter selects the most important issues to be included in the triple bottom line plan and report. This report is usually included in the annual report which shows that the corporate governance structure does indeed have an impact on CSR disclosure.

According to Tricker (1984), CSR disclosure can be viewed as a strategy which leads to towards closing a perceived legitimacy gap between management and shareholders, especially foreign shareholders. Non executive directors are seem as a mechanism which not only acts in the best interest of the owner but also in the interest of other stakeholders and they advise about the presentation of the the companies' activities. Zahra and Stanton(1988) said that members in the corporate governance team are more likely to concers about honour and obligations and they would make disclosures which would improve their social prestige and honour.

Board Size and CSR Disclosure

One important element of corporate governance mechanism is the board of directors as they see whether the business is properly managed by their agents. Previous studies have proposed that bigger board size can increase communication and coordination problem and decrease the ability of the board to control management and on the other hand small board can decrease agency conflicts between managers and shareholders (Lipton and Lorsh, 1992; Eisenberg et al., 1998; Raheja, 2003). Jensen (1993) found that large board size result in less effective coordination, communication and decision making is more likely to be controlled by the CEO. Thus it can be forecasted that ineffective coordination in communication and decision making will result in low quality financial disclosure due to the fact that managers have not been able to perform their roles efficiently. Hence it can be hypothesized that:

H1: The greater the board size, the lower the level of CSR disclosure.

Independent Non Executive Directors and CSR disclosure

Previous empirical governance literature that board independence will foster board effectiveness. The difference between socially responsible firms' and non socially responsible firms' board structures was stuied by Webb (2004) and she found that socially responsible firms had more independent directors than non socially responsible firms. Independent directors has the objective to safeguard shareholders interest and they also play an important role in enhancing the corporate image. They are seen as an important tool to keep an eye on management behavior (Rosenstein and Wyatt, 1990) and hence this results in more voluntary disclosure. Forker (1992) found out that the higher number of independent directors supervise the quality of financial disclosure. Hence with these findings, it can be hypothesized that:

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H2: There is a positive relationship between proportion of independent directors and the level of CSR disclosure.

CEO Duality and CSR disclosure

When a person hold the position of CEO and boar chairman, CEO duality occurs (Rechner and Dalton, 1989). This combination reflects leadership and corporate governance issues. However vesting these two powers in only one person gives that latter a strong base which can erode the board's ability to exercise effective control (Tsui and Gul, 2000). Therefore, companies with the CEO duality offer greater power to a person, which enable him to make decisions that do not maximize the shareholders wealth and will help improved monitoring quality and reduce benefits from withholding information that may consequently result in enhancing quality of reporting. Therefore, it is hypothesized that:

H3: Companies which having CEO Duality are more likely to have a lower extent of CSR disclosure.

Audit Committee and CSR disclosure

Prior researches have proven that audit committee plays an effective role in enhancing the corporate governance standards. Wright (1996) found that audit committee composition is strongly related to financial reporting. McMullen and Raghunandan (1996) provide support for the association between the presence of an audit and more reliable financial reporting.

The existence of an audit committee was significantly and positively related to the extent of voluntary disclosure (Ho and Wong, 2001; Bliss and Balachandran, 2003).

Audit committee roles is providing a mean for review of the company's processes for producing financial data and its internal control, thus its existence is in producing high quality financial reporting. According to Mauritian Code of Corporate Governance (First Edition,Revise April 2004), the board should establish an audit committee with majority of independent directors. The existence of audit committee with a higher proportion of independent directors should reduce the agency cost and improve the internal control that will lead to greater quality of disclosures (Forker, 1992).

Hence, it is hypothesized that:

H4: There is a positive relationship between proportion of independent non-executive directors sit in audit committee and the level of CSR disclosure ownership concentration and corporate social disclosure.

Managerial ownership

The agency theory predicts that the principal-agent problem between managers and shareholders arises when managers hold little equity in the corporation. This will lead to managers to engage in an opportunistic behavior (Jensen and Meckling, 1976). Past studies had showed that an increase in management ownership will reduce the agency problems and improved managers' incentive to provide more disclosure. Mohd Nasir and Abdullah (2004) investigated the influence of ownership structure in explaining the level of voluntary disclosures among the financially distressed firms and found that management shareholding levels have a significant and positive association with the level of voluntary disclosures. Coffey and Wang (1998) found that managerial control (percentage of stock owned by insiders) is positively related to charitable giving.

The above findings were in contrast to Guan Yeik (2006) and Eng and Mak (2003). In his study, he examined the relationship between managerial ownership and corporate social responsibility and he found that managerial ownership was significantly negatively related to corporate social disclosure. In his study, he found that managerial ownership level of 45 percent above will influence the corporate to have lower social disclosure. Eng and Mak (2003) found that lower managerial ownership is associated with increased voluntary disclosures.

Hence, it is hypothesized that:

H5: There is a negative relationship between the proportions of shares held by executives' directors with the extent of corporate social disclosure.

Foreign ownership

Previous studies revealed that corporate social disclosures in Mauritius is still generally low. Ramasamy and Ting (2004) examined a comparative analysis of corporate social responsibility awareness by using levels of corporate social disclosure as a measurement of corporate social responsibility (CSR) awareness. In their study, they used employee perception towards CSR awareness. The respondents were questioned on their management of CSR within the company, such as awareness of corporate social responsibility, attitudes to CSR in the company, the types of CSR activity and the respondent involvement in CSR. The results show a low level of awareness in both countries, although companies tend to exhibit a relatively higher level of awareness.

Chambers et al. (2003) investigated CSR reporting in seven countries through analysis of websites of the top 50 companies in Asia. This study investigated the penetration of CSR reporting within countries; the extent of CSR reporting within companies and the waves of CSR engaged in. The findings in Chambers et al. (2003) showed that, there are fewer CSR companies in the seven selected Asian countries compared with UK and Japan companies.

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The mean for the seven countries studied, show a score of 41 percent which is under half the score for the UK (98 percent) and Japan companies (96 percent). Thus by involvement of foreign shareholders in Mauritian Listed companies will enhance the extent of corporate social disclosure in Mauritius.

Haniffa and Cooke (2005) found a significant relationship between corporate social disclosure and foreign shareholders indicated that companies use corporate social disclosure as a proactive legitimating strategy to obtain continued inflows of capital and to please ethical investors. Foreign shareholdings in Mauritian listed companies have considerably increased. Thus, it is hypothesized that:

H7. There is a positive relationship between the proportions of shares held by foreign ownership with the extent of corporate social disclosure.