Changes in Toyota's Reporting Practices - Case Study Example

Running head: Contemporary Issues in Accounting Contemporary Issues in Accounting s The contents of the paper comprise the case study of Toyota's reporting practices. It is elaborated in the paper showing how the company will undertake changes in its reporting practices in case of different scenarios. Reporting is not a simple concept; instead, it pertains to various drives, desires, needs and other forces. A Company should report to create an environment that induces the organisation stakeholders to contribute and participate in the well being of the company. The different information requirements of stakeholders are somewhat oversimplified. How clear reporting can enhance the image of the Company is also discussed. Table of Contents S.no. Introduction Pg. no. 1. Scope of the study 2. Introduction 3. Description of Stakeholders 4. Changes in the reporting practices 5. Response to Media Report on Environmental breach 6. Action on formation of strategy group on Corporate Social Responsibility by companies in the industry 7. Reporting on the social and environmental ethics 8. Reporting on improved working environment 9. Conclusion and Recommendations 10. References Brief introduction of Company: Toyota Motor Corporation, Japan's largest and the world's #4 carmaker by 2003 sales (after General Motors, Ford, and Daimler Chrysler), had a wide range of products and strong brand names with high quality image. Toyota's growing reputation for quality and the very small numbers of technical problems in its vehicles generated interesting customer loyalty and a growing demand for its products. Toyota management was managing the company's inventory, costs and capacity very successfully and was applying cost reduction programs very well. Toyota had riving ambition to become greener. The company made a hybrid-powered (gas and electric) sedan- the prius- that had already been snapped up in U.S. and European markets. Toyota also made huge investments in developing fuel-cell technology for its vehicles. Its gas-powered cars, pick-ups, minivans, and SUVs included such models as the Camry, Celica, Corolla, 4Runner, Echo, Land Cruiser, Sienna, the luxury Lexus line, and a full-sized pick-up truck, the v-8 Tundra. With its wide distribution channels, strong channel efficiency and effectiveness, Toyota was successfully competing with the world's upper three auto makers and poised to replace GM in the top spot this decade. Toyota was known world-wide for its up-to-date vehicles, strong vehicle design, comfortableness, safety, strong resistance to wind and rollover, low fuel consumption, presence of electronic and other devices in the vehicles, and strong reputation for luxury. Surveys, however, rated the attractiveness and comfort of its passenger cars as mediocre. Also rated mediocre was the off-road excellence of its SUVs. Toyota was a leader in technological improvements, such as drive, production and vehicle construction technology and had a solid ability to design and innovate new products, to differentiate its products, to innovate new vehicle lines, and to extend existing vehicle lines. Six stakeholders of Company: In the case of Toyota the stakeholders or the users of the annual reports include "present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. They use financial reports in order to satisfy some of their different needs for information" (Australian Accounting Standards Board, 2004). The improvement in public scrutiny and the controlled market discipline is largely dependent upon the meaningful and accurate disclosure of information. This not only helps the shareholders but also helps the organisation to conduct business in a safe and efficient manner by achieving their targets through improving their risk management processes. The researchers find many gaps in the appropriate disclosure of risk by the organisations. Many surveys have been conducted, a wide variety of studies and interviews from the information users and shareholders have pointed out towards gaps in the currently disclosed information. The demand for the provision of accurate and timely information is increasing. Business reporting economically affects the people directly or in directly as an effective allocation of resources strengthens an economy by promoting productivity, innovations and an efficient and liquid market. Adequate information plays an important role in reporting the risks and opportunities of investing in business venture. To make effective decisions people need accurate information. The completeness and timeliness of information enhance the probability of taking the most appropriate decisions by the investors. (AICPA, 2005) describes the following uses of the business reports. Promote a common understanding of the terms and alternatives that facilitate negotiations between users and companies about the (Murphy, 1999) sees that Financial reporting and financial statements in particular can be thought of as a lens through which one can view a business. Financial reporting provides a broader view of the business than that provided by financial statements only. In other words, financial reporting encompasses financial statements, but it is not limited to financial statements. Externally reported financial information is largely historical in nature. It looks back in time and reports the results of events and transactions that already have occurred. While historical information is very useful in assessing the future, the information itself is more about the past than it is about the future. A comparison of the historical trends with the future trends can be found to be helpful in better understanding the information by the shareholders and other related people. (Financial Economists Roundtable, 1996) With the changing business methods and environment, the values playing an important part in business have also changed. The label of assets has transformed from tangible to intangible assets. In this scenario it is difficult for the users to analyse the future performance of the company. The companies mostly practise the old traditional accounting techniques according to which intangible assets such as knowledge, brand etc are not included in the financial statements as assets. Although in today's business scenario it is important for the users to have complete knowledge of these intangible assets in order to undertake their decisions accordingly. In order to deal with the problem the company should use the value dynamics model of reporting. It emphasises the need for changing the concept of assets. It presents a whole new concept of assets as compared to those used in traditional accounting. Solution provided: The authors of the model proposed that in order to help the investors and users to evaluate the value of the company, the information provided needs to be more transparent regarding the intangible assets as compare to the past. The model suggests that all the tangible and intangible assets need to be continuously used to assess their fair values and should be reported in order to provide the clear and transparent information. The model gives three dimensions to the information 1) Assets and their configuration represented by the company. 2) Information on assets relating to external environment management process and value. 3) Time. The model suggests that the businesses reveal information about their mission, strategy, business process and risk management. The model can best serve the purpose of today's users since it provides information in many segments, which can help the user to find out the information, related to him. The model is the best way to respond to the needs of openers and transparency, which will be the most attractive value generating forces in the future. (ICEAFW Report, 2003) Reporting in response to media report: According to Erich Goode (2005) corporate environmental crime is the act of violating the environmental laws intended "to further the interests of that corporation" these wilful violations of laws are "actions taken on behalf of the corporation". All these acts of violation of environmental law are a result of specific corporate social structure having the characteristic of disregard for environmental health. The corporations without considering the fact that they can harm the environment reward some of the methods in order to save their production costs. The failure of the organisational culture is a leading cause of the violation of environmental laws by the corporations. An effective culture can make the individuals feel the corporate responsibility and practise ethical values even if they are not the policy of the corporations. Ethical behaviour is the product of reasoning skills and cultural practices. It is not possible to apply ethical policies on each and every situation. The scientific and absolute management of the ethical policies in the organisations lead to ethics conflicts, corruption, and dysfunction in the culture. Bad ethics policies can actually cause unethical behaviour to emerge in organisations. Mostly the corporations provide the individuals with the opportunity to break the laws and pressurise them in the name of performance management to cross the ethical and legal limits for the benefits of corporation. Hence the unethical culture of the corporation becomes the root cause of the problem. "Severe forms of frustration in the organisation are symptoms of ethics and culture failure. Managerial action to merely deal with symptoms of frustration, instead of preventing its root causes, usually makes the culture failure worse than if nothing had been done at all." (Ethics Quality, 2006) The Company should report the presence of a strong organisational culture based on the ethical and socially responsible principles. a) Other companies from the same industry form a strategy group on Corporate Social Responsibility. The new era of globalise businesses and increased awareness in the stakeholders have given importance to the notion of Corporate Governance. The execution of the notion will have important consequences for investors, companies, and, critically, for the stock and other financial markets of UK. With the increasing globalisation when every country can be seen as an opportunity for the investors the lack of understanding of effective corporate governance can adversely affect the investment intentions of investors. Nowadays corporate governance is seen as the key of attracting investors. Capital flow seems directed towards the companies, which practise fair and transparent ways of governing their organisations. With the changing global business scenario the need for understanding an effective practice of fair and technologically advanced corporate governance has also increased. ICAEW (2002) has explained corporate governance in a very effective and comprehensive manner as "Corporate governance is commonly referred to as a system by which organisations are directed and controlled. It is the process by which company objectives are established, achieved and monitored. Corporate governance is concerned with the relationships and responsibilities between the board, management, shareholders and other relevant stakeholders within a legal and regulatory framework." Sir Adrian Cadbury (1992) defined corporate governance as 'the whole system of controls, both financial and otherwise, by which a company is directed and controlled'. There are no hard and fast rules for corporate governance, which can be prescribed for all the countries. These rules can be different for different countries according to their needs and cultural settings. According to ICAEW (2002) all the contrasts present in the rules and regulations of different countries are given to generic corporate governance principles of responsibility, accountability, transparency and fairness. Responsibility of directors who approve the strategic direction of the organisation within a framework of prudent controls and who employ, monitor and reward management. Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company. (These are not incomplete sentences but the explanations of the bold principles mentioned above) Transparency of clear information and a meaningful analysis of a company and its actions should be made. The disclosure of financial and operational information including the internal processes of management oversight and control enables outsiders to understand the organisation. Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights. (These are not incomplete sentences but the explanations of the bold principles mentioned above). According to Meigs et al. (1999) this information meets the needs of users of the information-investors. Creditors, managers, and so on-who need many kinds of financial decision performance evaluation and capital allocation, among others. (P.07) The proper reporting can lead to cost reduction and the value improvement of a company. A framework is also provided by the model, which includes: 1. An overview of overall market. 2. Information about the strategy of the Company. 3. Information regarding the value creating activities of the Company. 4. Performance overview of all the segments of the business. b) A public opinion survey shows that a majority of citizens in the country think companies are too concerned with profits and do not care enough about the social and environmental impacts of their activities. The trend of using the cars with high levels of fuel consumption is increasing including the larger sports utility vehicles, minivans, and pickup trucks. These cars are responsible for neutralising the positive effects of the fuel efficiency and pollution reduction programs. According to an estimate by the EPA these light trucks, vans, minivans, and sports utility vehicles will account for 34% of the air pollution increases in the next decade. These vehicles produce 75% more nitrogen oxides to pollute our air as compared to the big cars. The increase in the distances we have to drive on a daily basis increases the fossil fuel burned for every mile driven. The driving miles are increasing day by day giving rise to air pollution due to increase in the amount of burned fossil fuel. The increasing demand for sport utility vehicles and trucks decreases the hope for us to live in a healthy environment and to breathe in fresh and clean air. The company is playing an important role in saving the air and reducing the hidden health costs by producing cars that are ARB-certified Low-Emission Vehicles (LEVs), since these cars produce 70% less hydrocarbons and 50% less nitrogen oxides than other new conventional models (Delphi International, 2003). The Government can encourage the carmakers to find out new solutions by attaching the production of LEVs with tax cuts and incentives to the producers. c) The company applies but is not shortlisted for an award for its Social and Environmental Reporting. Air pollution is the presence of "one or more chemicals in high enough concentrations in the air to harm humans, other animals, vegetation, or materials" (Miller, 2001). The sources of air pollution are many and varied, such as motor vehicles, industry, small businesses, farming, and everyday products like cleaning solutions, paints, thinners, and lawn and garden equipment. Cars and trucks release carbon monoxide, nitrogen oxides, particulate matter, and air toxins into the atmosphere. "Air pollution is a broad term that is applied to particulate matter and chemical compounds that are released by humans into the atmosphere and modify its composition. Natural sources that affect atmospheric chemistry include sulphur and nitrogen compounds from volcanoes and biological decay and particulate matter from dust storms and volcanoes. Plants, trees, and even grasses release volatile organic compounds (VOCs), such as methane, into the air. Of more concern, since we have the ability to control them, are anthropogenic, or man-made, air pollutants, such as carbon monoxide, sulphur dioxide, some fraction of VOCs, and nitrogen oxides. The largest source of anthropogenic pollution is the burning of fossil fuels, including coal, oil, and gas, in our homes, factories, and vehicles. Air pollution is either primary or secondary. Primary pollution is put directly to the air, such as smoke and car exhausts. Secondary pollution forms in the air when chemical reactions change primary pollutants. The formation of atmospheric ozone is an example of secondary air pollution. The atmosphere is a complex, dynamic and fragile system. Concern is growing about the global effects of air pollution, especially climate change. Stratospheric ozone depletion due to air pollution has long been recognised as a threat to human health." (Ward, 2006) There is much controversy with respect to the trade-off between economics and health. The cleaning of the environment is quite costly and employers contend that the perfectly safe environment is not possible. The need for some type of effective cancer policy was underscored in an epidemiological study showing that in several British cities with a heavy concentration of petroleum refineries, there were significantly higher rates for cancer of the lung, the nasal cavity and sinuses and the skin. With the increasing number of cases regarding the corporate environmental crime many scholars and researchers have proposed different ideas and steps in order to punish the irresponsible people. A careful analysis of the choice between liberal reform and radical social change should be done. Although corporations provide extensive benefits to the society many scholars have exaggerated the benefits without having solid evidences for these e.g., Luban, Strudler, & Wasserman, 1992; Stone, 1986; Tomkins, Victor, & Adler, 1992). There is a surge to implement a legal reform in order to deal with the limitless power of corporations in the larger capitalist economy and to make these corporations abide the environmental laws. Employees go on strike complaining about working conditions. The last decade has seen an increasing debate in the area of work life balance. The notion is gaining importance due to the increasing trend of extended working hours. The issue also became prominent due to the increase of women workers in the total work force. The care taking role of women for family and children raises the importance of the introduction of work family balance policies by the organisations in order to attract an efficient and increasing labour force. According to the ONS statistics 17% of UK women of working age devoted their time exclusively to looking after home and family; in 2001 this figure was 13% representing 600,000 fewer in just two years (ONS 2002). This extended working hour not only adversely affect the productivity of an employee but also affect the emotional and social setting of the family and community. Technical workers are in severe demand due to the increase in technology use and automation of organisations but on the other hand these workers are more in requirement of implementation of work life balance principles since their work involves more mental fatigue and psychological concentration. The increased working hours pose several external costs to the employees and employers both. They give rise to different health problems such as heart problems, high blood pressure, gastrointestinal disorders, psychological wellbeing and circadian disruption. The resulting increase in sick leave makes the organisation bear the cost of the illness of the employees. The external cost effect is thus transferred to society in the shape of increasing tax burden on taxpayers and on Government for the provision of more social care facilities. (Dawson, McCulloch and Baker, 2001). The increase in the working hours also poses a cost to the family and community of the worker, as he cannot find time for his social life. This gives rises to the conflicts in the families and community, which not only affect the health of the employee but also decrease the productivity level. Another cost which can be imposed on the company is the loss in case of accident due to increase in tension for the employee (Dawson, McCulloch and Baker, 2001). The aim of the work life policies is to provide the workers with as much flexibility as possible at their work environment in the shape of reduced working hours or by lessening the environmental pressure by providing facilities for home based jobs. The nature of the work life balance policies is also dependent upon the corporate culture. With the provision of flexible work to the employees, it is also important to mould the culture of the organisation in the similar way to build the trust and undertake effective communication with the staff; otherwise the benefits of applying flexible working schedules will fly out from the window. In order to provide the technical staff such as engineers with the flexible work environment it is important to provide them 24 hour technical support. They need to establish an office environment including everything from the correct security and technical support to suitable furniture. As Phil Cotterill explained "Their needs to be support in place, otherwise productivity goes out the window. Flexi workers should not have to deal with problems, technical or otherwise, that they would not handle in the office." (Worthington, 2004) As the implementation of the work-life balance policy is dependent upon the perceptions of the employers the cost posed on the firm of implementing the work life balance policy is also dependent on the choice of the policies undertaken by the employer. But the benefits attached to these policies will differ for different employees. We have gone through the research undertaken in order to improve the disclosure methods. Most of the studies undertaken have suggested different models and methods to bring improvement but none of them seems to determine whether the companies are adopting and updating their reporting methods according to the recommendations or the changes in the business environment. Through undertaking this case study we investigated the degree of application of these recommendations. Another cutting edge, which makes the study different from others, is that it studies the information disclosure in different scenarios which are often faced by companies while undertaking business practices. References Australian Accounting Standards Board, (2004). Framework for the Preparation and Presentation of Financial Statements [online]. Pool: Australian Accounting standards board, available at www.aasb.com.au [accessed 31 March 2008] AICPA, 2005. Introduction: Chapter 1, [online]. available at http://www.csus.edu/indiv/o/ogilbysm/course1/ch1.pdf [accessed on 29 March 2008] Cadbury Sir Adrian, (1992). Report of the Committee on the Financial Aspects of Corporate Governance, Gee & Co Ltd, UK Dawson, Drew, McCullock, Kirsty and Baker, Angela (2001) Extended Working Hours in Australia: Counting the Costs, Report Commissioned by the Department of Industrial Relations [Online], pool: Adelaide, Centre for Sleep Research, University of South Australia. 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