Critically evaluate the role of accounting and financial reporting ...

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There has been intense pressure on the business community over the past few years encouraging them to act in an ethically responsible manner towards the society and the environment. The previous record of businesses in the context of environmental care has been doubtful as they have caused substantial harm to the environment. However, the recent times have witnessed increasing concern for environment due to the mounting social pressure and growing awareness regarding environment in the mind of the modern consumer. The consumers have the ability to enforce change into the business practices by purchasing products that are environmentally friendly and those that facilitate a healthier impact of the business on its surroundings. The explanation is available through the idea that businesses that are environmentally conscious gain substantial competitive advantage over their competitors and are more likely to succeed in the long-term.

Role of accounting and financial reporting in encouraging and improving awareness of environmental issues

Sharma and Vredenburg (1998) consider the repercussions linked with increasing environmental responsiveness and propose that the environmental strategy assumed by businesses can prove to be a competitive advantage for firms in the long-term. The growing competitive nature of business in the recent years and the tightening gap between a firm and its competitors has resulted in several businesses reconsidering their environmental strategy and integrating the policy into their strategic plans for long-term growth. A firm can attain competitive advantage by means of the apposite tools such as reaching investors concerning the environmental endeavours undertaken by the business or by establishing a greater deal of intelligibility in a company's financial statements as presented to the public. The enormous benefits connected to an improvement in the financial reporting framework of an organisation after integrating the reporting measures with the ecological aspects of the business leads to a prescribed strategy for a futuristic public policy that is intended to create greater environmental transparency in terms of financial reporting to facilitate a steady increase in the environmental standards adopted by the industry and economy as a whole.

Redermacher (1999) advances the subject of sustainable growth through green accounting and statistics pertaining to the environmental impact of businesses. This study plans to compute the environmental impact of commerce on the social order and means to emphasise the characteristics that are required to be administered in sustainability studies. The suggestion is to employ green accounting to convey responsibility to the business and to launch processes to compel businesses to scale the environmental outlays with sustainable strategies in the upcoming years. The ecological strategy is mainly dedicated towards generating a sustainable production framework for firms particularly those that manoeuvre in industries that have the principal impact on the surroundings counting the oil, gas, transportation and other industries.

Rosthorn (2000) states, that there has been commendable progress in the field of auditing and social responsibility accounting in the current years. The improvement in the environmental accounting field is partly owed to the changes in the internal auditing framework of the modern firms. Businesses aim to reduce their environmental and social risks by conducting thorough internal auditing of their production processes especially screening for the environmental costs attached to the concerned processes. Such internal auditing practices have proved to have benefits in terms of improvement in the brand positioning of the company, increased employee motivation and reduction in the costs of production.

King (1996) uses a laboratory experiment to analyse the behaviour of the senders and receivers of information revealed through the financial reporting process in order to estimate the impact of changing financial reporting attitudes on the value of the business over the long-term. The senders of information in this scenario include the company management and its accountants, while the receivers of information include the investors and financial analysts. The management is more interested in adding value to the organisation and it only responds with greater transparency in financial reporting when it leads to higher benefits in terms of honest reporting and lower costs associated with greater transparency. Therefore, it is suggested that the management only responds in terms of value creation as perceives by them instead of aiming directly for greater ethical responsiveness. This implies that most companies have developed patterns that can be studies and discovered in terms of their market values and the level of transparency in financial reporting observed through them over the years.

Klassen and McLaughlin (1996) have developed a theoretical interpretation that connects the financial performance of a business and the management's responsiveness towards the environmental practices adopted by a business. The study found that businesses determine their environmental strategy in the light of the changes observed in its market valuation as reflected by the stock market in response to a particular event. These events such as the oil spill in the gulf coast reflect either positive or negative news for the company through the stock market. The recent environmental hazard as reflected by the oil spill was a negative event for the British Petroleum and resulted in a drastic fall in its share prices. Similarly, positive events can be reflected in terms of a high rating in the environmental and social responsibility index or an award, confirming the exemplary social performance of a firm. This study finds that such events have a definite impact on the market value of the firm in both the short and long-term.

Klassen and McLaughlin (1996) endeavour to approximate the importance of alphas in returns that might be correlated to particular environmental events. The efficient market hypothesis is also used to propose that the downbeat ecological events must swiftly mirror in the firms' performance on the stock market valuation. This acknowledged route of the outcome could result in businesses aiming at dishonestly reporting the impact of a downbeat occurrence on their financial accounts. Businesses might favour reporting momentous environmental achievements in the terms of the benefits accruing from a scheme even if the payback was actually much less important than reported due to the identified encouraging effects of the information on the firm's market value and the partisanship involved in measuring the factual level of environmental profit accrued in the course of a venture. The mounting intensity of standardisation in the green reporting of the financial statements should partly resolve this predicament and more suitably promote the honest treatment of capital gains and savings accomplished throughout the process of efficient environmental management. This study also point towards dropping emission levels and escalating conformity in terms of disclosures in the financial records as they have had a noteworthy impact on the market price of the shares of the companies that are transparent in reporting these ratios. It is also recommended that the market impact of an optimistic environmental award is one-third of the impact of a pessimistic ecological event.

Adams et al. (2001) is of the view that even the mere presence of a system that details the code of ethics that need to be followed by the employees and management of a company in relation to its environmental policy is a strategy that can facilitate the adoption of environmentally friendly policies as it empowers the employees and is highly suggestive of the true goals of the company. This strategy may even work in the absence of any other strategic plan by the management to improve the responsiveness of the business towards the environment. This also concludes that a greater degree of transparency in the environmental disclosures by a firm results in an increase in the stakeholder and investor confidence in the management and its future actions, thereby adding value to the firm. Therefore, accounting and reporting standards can be used as a successful instrument in encouraging ethical actions towards the surroundings.

Joshi et al. (2001) argues that the costs of environmental regulation should be considered before adopting any major changes in the current policies; they suggest that firms are faced with both hidden and obvious costs associated with the introduction of environmental regulation and the composition of such costs is an important indicator of the success or failure of a regulatory measure. The research evaluates the hidden costs associated with the environmental regulation in the steel industry and estimates that such costs are as high as nine times that of the obvious costs induced by the environmental regulation. This assertion must be studies in the context of a much wider group of industries to determine the social impact of environmental regulation in its aggregation; however, it is recommended that until a complete analysis of the hidden and obvious costs of environmental regulation is conducted by the regulatory authorities such measures should be avoided. The study also reveals that businesses are well aware of the hidden costs and their magnitude but are often unable confirm these costs as they do not have the sophisticated accounting systems and technology to measure these costs most effectively. The costs associated with producing such environmental information are also considered to be high enough that it is not under the capability of the individual firms to invest in such measures.

Hess (2001) disagrees to the assertion by many businesses that they can voluntarily act as responsible citizens and argues that businesses are not expected to change their attitude unless corrective action is taken through the use of environmental regulation. The process of accountability and the use of social accounting practices in the business environment can be encouraged by the introduction of a pliable system that is straightforward to implement and has room for the variety of environments in which businesses operate. The introduction of environmental regulation can result in a significant change in the behaviour of firms either in a race to maintain their competitive position or to protect themselves against severe environmental penalties. The businesses should be asked to reverse the damage that they accrue on the environment going forward and the regulators should keep a strong check on the business activities in regard to the society and the environment if they need to promote ethical behaviour and environmental friendly practices.

McDaniel et al., (2002) research regarding the optimal methodologies that can be implemented to improve the environmental accounting and auditing procedures and suggest that the recent changes have implied the use of specialists to facilitate improvements in efficiency in all kinds of business operations; however, the internal auditing committees of major businesses lack the presence of an environmental accountant or an environmental specialist to monitor and steer the activities of the business. They recommend that it should be mandated that the internal audit team should be composed of the relevant experts that can provide an independent opinion regarding the environmental behaviour of impact of a company. This characteristic of an audit committee can considerably augment the superiority of environmental reporting by a corporation and may also have sizeable upbeat spill over effects on the company operations in the long-term represented by an improvement in the reputation of the company brands and more effective integration with the society.

Mosley (2003) addresses the likelihood of developing global principles in terms of environmental reporting and proposes that such standards only do well by means of the express participation of the private sector businesses. The private sector is known to accept global standards that are easy to comprehend and offer a comparable approach in the direction of measuring company performance pertaining to a specific purpose. Recent attempts to improve international environmental reporting standards have mainly focused on offering guidelines to the business in approaching applicable issues and the encouraging deliberate acceptance of certain minimum codes of standards related to improving social and environmental stance of businesses. The international standard setting bodies have been involved in intense efforts concerning the development of an international framework that can successfully address the environmental standards; however, no significant attempts have been made by most economies to commence a genuine and unambiguous policy acceptable to the global business community. The standardisation of environmental principles around the world can facilitate in improving a firms performance but this cannot be achieved owing to a deficiency in the interest of the governments to initiate a suitable legislation to support the execution of the intended minimum code of environmental standards.

Staubus (2005) argues that the management and the auditing firms tend to have strong ties and the audit firms are often unable to act in the best interests of the shareholders due to a conflict of business interest as the management is responsible for selecting the audit firms in the subsequent years. This conflict of interest must be addressed and a direct involvement of the shareholders in the selection of the company auditors along with the frequent rotation of audit firms for the business could be a solution as it should provide more independence to the auditors' opinions. The close ties between the management and the auditors and the subjective nature of the estimation of environmental impact of a business provides substantial room for misstating the environmental impact of a firm on the society. This manoeuvring of financial results is proven by the fact that many firms have restated their financial results and it is thereby an ethical challenge for the accountants and the management. It is difficult to anticipate ethical reporting in terms of the environmental impact of these organisations and it leads us to consider that there is a greater need to initiate steps to advance the interests of financial and environmental reporting. It must also be implicit that scrawny corporate governance arrangements result in pitiable environmental reporting by firms; it is recommended that management must assist a change in the corporate governance practices of firms if it genuinely intends to diminish the damage to the environment.

DeTienne and Lewis (2005) study the case of Nike sports and its resistance during the crisis that occurred due to its weak public relations when tackling the issue regarding social and environmental reporting procedures utilised by the company. The company initially went through a range of complications while adjusting to the consumer demands regarding greater disclosures but it decided that there was no other way to appease the critics prepared extensive reports regarding the global environment and the company's impact on the society. As the consumers gained a greater sense of awareness regarding the environmental policy changes adopted by the company similar actions were followed by other multinationals in the developing world to maintain their competitiveness. Nike was successful in terms of responding aggressively to the censure that had gained influence against its activities in the developing world over the past decade and contested its stance of ethical behaviour through an active social disclosure program and by strengthening its public relations. The laws concerning moral accounting practices have not been formed by the international community as yet but Nike has adopted certain practices and code of conducts regarding disclosure of its actions and has endeavoured to become visible regarding its environmental concerns. This should have a constructive impact on the productivity of the business as a growing number of financiers and investors have started screening companies for the ethical standards adopted by firms prior to making an assessment about investing in a company.

Carpenter and Reimers (2005) attempt to use the theory of planned behaviour to predict the behaviour of business managers with regards to ethical decision making practices. The three main factors influencing the delayed recording of an expense by managers include the perceived control of the manager over the firm, his attitude and skewed norms. It is found that behavioural attitude has the most significant impact on the behavioural intent of a manager. Therefore, management attitude is a major determinant of unethical behaviour in terms of misreporting of financial statements. This is used to imply that the manager's intent to care for and disclose environmental concerns in the financial reports is also a behavioural intent based on the management's attitude towards environment and ethical values. There is a correlation between ethical reporting by management and there concern for environmental reporting; since it is difficult to measure the ethical component of reporting it is often used as a gauge for good business ethics within a business to report full disclosure on environmental impacts of a concern.

Cho et al. (2006) study the willingness and ability of the business community in terms of advancing the environmental accounting policy. The research found that businesses that operate in industries that have a significant impact on the environment are more likely to spend on political causes and to contribute generously in the elections in order to gain adequate support from the ruling party. This corporate influence over the political activities is regarded as being a tactic that facilitates a delay in the environmental policy and often permits disclosures that are not based on factual information. However, such behaviour is unethical and must be checked by the regulating authorities; the role of business in the political activities should be minimised and penalised as it is not justified to spend shareholders resources in other to harm the environmental and the long-term interests of the shareholders. Moreover, it is seen that businesses that tend to spend more on political activities are more likely to be negligent towards the environment as they have lass to fear about when they have support from the government. However, the research suggests that firms that are ethically more responsible and operate in the same industry tend to have a greater degree of competitive advantage over the firms that use their political influence to hide the impact of business activity on the environment.

Llodra (2006) demonstrates that there are multiple techniques that can be applied to arrive at a solution for achieving compliance of businesses to greater environmental standards instead of using an inflexible form of environmental regulation to address the issue. It is instead argued that a wide-ranging environmental management framework can be developed for corporations to permit the up-gradation of environmental conditions and standards with the passage of time using a step by step approach. This should be an encouragement for industry as the companies will not have to undergo harsh reprisal and extended regulation but they would be required to generate concrete results to advance a positive impact on the society and the surrounding environment. The most suitable way to manage such a system is to a public-private partnership through the creation of an external independent environmental organisation to make available continuous improvements in environmental practices and to manage the legitimacy of company disclosures. This method of implementing environmental compliance can be seen in the light of the efforts made through the global compact as established by the United Nations. The global compact is a perfect example of such a framework that can promote healthier attitude towards the environment; the only significant change that is required would be a compulsory signing into the network for all businesses that operate at a certain scale and the inclusion of certain timelines to move towards improvement in environmental standards.

Llodra (2006) also extends a realistic approach to reveal the benefits connected with the execution of green accounting framework for businesses. This approach developed on the understanding that such a framework is ideal for modern businesses that aim to develop a competitive advantage that extends beyond the benefits achieved in the course of straightforward disclosure of environmental standards. As the environmental management framework should provide a greater deal of stability and consistency to the disclosures. This also serves the rationale of extending the environmental disclosures in a manner as to incorporate them directly into the annual financial reports and notes to the financial statements. Satava et al. (2006) advocates the use of a principles based approach by the auditors to improve their ethical conduct instead of the rules based approach that is currently being utilised by most companies and auditing firms.


The unease of the consumers and their environmental concerns are intensely entrenched in the immoral behaviour of firms during the recent past. The environmental accounting initially emerged as a tactic that was often used by major companies and institutions to appease the disgruntled public regarding the increasing impact of the business community on the society. The increasing awareness regarding the tactics utilised by businesses in the pasts and the growing social campaigns have resulted in a substantial change in the responsiveness of the business community towards the environment. The industry is faced with sizeable risk in terms of unethical financial auditing and management reporting and such tendency has resulted in the disintegration of many unethical businesses. The business community should focus on truly being compassionate towards the needs and requirements of the society if they aim to endure and uphold a competitive edge over the long-run. The policy and regulation should only be used to harmonize the progress and enhancement of environmental management framework which is better able to focus on constant improvement in environmental performance of a business rather than effortless disclosure of the operations.