Expectation Gap in Corporate Environmental Reporting: the UK Evidence - Essay Example

A Study on Expectation Gap in Corporate Environmental Reporting: Evidence from UK The much debated Environmental Reporting has attracted the attention of corporate people all over the world recently on another issue. There has not been any uniformity either in the preparation or presentation of environmental reports among the preparers. The lack of the set of standards/guidelines in this regard compounded the intensity of the issue much better than ever before. . Big corporations prepare environmental reports on their own way as a ritual rather than a necessity. There have been also differences in the usage of reports by various stakeholders. The stakeholders have been under utter confusion with regard to the information contained in the reports. Naturally, an expectation gap exists between the users (stakeholders) and preparers of environmental reports. At this juncture, a study is relevant as to examine whether there is any such expectation gap is present or not. The present study, therefore, attempts to examine the difference in the perception of preparers and users of environmental reports in the U.K. The study is carried out as an exploratory research by suing sample survey. An extensive preliminary research has been undertaken so as to acquire a basic knowledge of the unexplored area. The study heavily relies on primary data and data are collected directly from the respondents using two sets of well structured questionnaire. An interview schedule is also prepared to collect data. The population for the study comprises of two sets of professionals, namely chartered accountants and chief accounting officials of 200 manufacturing firms in the U.K. Naturally, the sample size of the survey comes to 400 put together. The data collected are edited, coded and analyzed to arrive at meaningful conclusions and generalizations. Introduction Because of the increased emphasis on Corporate Social Responsibility (CSR) the world over, corporations are obliged to present the information about the fulfillment of their duties towards various stakeholders including society in the form of formal reports. A business organization's obligation towards the society is as equal as that to its shareholders. It is a universally acknowledged fact that no business organisation can survive and succeed in a society for which it is doing nothing. Corporations across the globe have accepted CSR as an effective tool for sustainable development and high financial performance. To communicate and share the information about what the corporations have done in respect of CSR is made possible through what is popularly known as Environmental Reporting (ER). In a broad sense, environmental reporting is known by various nomenclatures such as Corporate Social Reporting, Triple Bottom Line Reporting etc. The World Business Council for Sustainable Development (WBCSD) defines Environmental Reporting as "public reports by companies to provide internal and external stakeholders with a picture of the corporate position and activities on economic, environmental and social dimensions". It is taken as a means to publicly demonstrate organizations' commitment to environmental obligations and to disseminate information on their environmental performance and initiatives. In most of the countries, environmental reporting has not been made mandatory, but corporations take it as obligation on their part to fulfill the information needs of the various stakeholders by preparing various reports in an appropriate manner. In the developed countries like the U.K and the U.S., it is being widely established and applied by big as well as small organizations. As per the Global Reporting Initiative (GRI) guidelines, following are the principles of environmental reporting. - Transparency; - Accuracy; - Clarity; - Inclusiveness and completeness; - Verifiability and auditability; - Timeliness; - Relevance to the concerns of stakeholders; - Comparability (to facilitate comparison over time and between organizations); and, - Neutrality Since the emergence of Environmental Reporting, corporations have been facing the problem of lack of uniformity in the practice of preparing and presenting environmental reports. Organizations prepare environmental reports in a way convenient to them. But, the stakeholders are not able to get a true and fair view of the environmental performance of their organisation. The reason is that ER is a voluntary phenomenon for which there exist no standards/rules. Organizations follow the rules which have been used by their counterparts in the initial stages of ER. The United Nations has taken an initiative in this regard, which includes the development of Global Report Initiative (GRI) in 1999 (and updated in 2002) (Sustainability report in Asia 1) that issue guidelines to enable corporations to develop ERs. However, there are large diversities among organizations even in the same country in the preparation and presentation of ERs. In fact, recent researches of environmental reporting have shown that ER is deficient in many countries and not of a standard to satisfy the information needs of the various classes of report users. At this juncture, the present study examines the deviation from the expectations of report users from that of report preparers. Background Environmental Reporting means and includes the incorporation of environmental information in the annual financial report or other statements of corporate entities. It covers the preparation and presentation of reports that exhibit the environmental activities and performance of a company for the use of various stakeholders. Environmental Reports are supposed to exhibit firm's environmental policies, costs, liabilities and impacts and the firm's overall performance in environmental issues. Environmental reports may be prepared along with annual financial reports; stand-alone reports; an environmental statement or some other media like video, internet, or staff news letter (United Nations, 1997). As the need for full disclosure of environmental performance is increasingly felt by companies all over the world, they are under pressure to prepare full-fledged reports to satisfy the information needs of various stakeholders. The stock market investors are now more informed and privileged to ask for information about the companies, which necessitated the companies to disclose full information on anything done by the company for its own and stakeholders' interest. Companies have also started taking care of this issue very seriously. But, lack of consistency and uniformity in environmental reports slow down the move towards a full fledged environmental reporting system. In spite of the developments in financial accounting and the growth of professional accountants the world over, companies and their stakeholders are facing a serious problem in dealing with the issue of environmental reports preparation and presentation. Though, only a few big firms are preparing environmental reports, there is no uniformity in their preparation. This is a serious problem from the view point of the stakeholders for whom the reports are ultimately prepared. Stakeholders take their financial and non-financial decisions in line with what is available to them in the form of financial reports. Environmental reports portray the performance of the company in respect of environmental issues and their role in tackling such issues. If two companies in the same industry prepare their reports own their own, the readers cannot get an exact view of what is meant and presented by the companies through their reports. Therefore, there exists a gap in the perception of two entities (preparers and users) as to the meaning and significance of details to be shown in the reports. The preparers, corporations use their own standards and rules for the preparation and presentation as opposed to the expectations of users, stakeholders. This results in a wide gap between the expectations of prepares and users, which will result in confusion and misinterpretations. Purpose of the study Any research paper has some specific objectives, the detailed description of which can help positively the smooth flow of research processes. It serves as an end point towards which all the efforts of research are directed. The main purpose of the present study is to find whether there is any significant difference between the expectations of prepares (business organisations) and users (stakeholders) of environmental reports. Because of the absence of generally accepted standards/rules/guidelines in the preparation and presentation of Environmental Reports, business organizations prepare these social reports in their own way. This resulted in inconsistent, non-recurring and non-standardized reports, which exhibit and convey confused and irrelevant information to users. Environment reports are neither mandatory nor capable of conveying meaningful information to stakeholders. This resulted in non-acceptance of reports prepared by big organisation, which in turn may affect the preparer's reputation and authenticity of reports. As of now, a number of guidelines are available in connection with the ER preparation. But many of them specify 'what' should be reported rather than 'how' to be reported, which is vital from readers' point of view. In contrast to this, when there are a set of standards/rules/guidelines for the preparation and presentation of environmental reports, the organisation and the users will be benefited in a number of ways. "If corporate environmental reporting has to achieve the same degree of public acceptance as financial reporting, more attention needs to be paid to the various qualitative characteristics" (FEE, 1999). There are also emerging mandatory national regulations (or standards) concerning environmental reporting (for example, like in Denmark, Australia and the Netherlands). However, no accounting body (except FEE) has yet formally issued a conceptual framework for environmental reporting. Hence, there is a need for a conceptual framework and subsequently some guidelines on the issue. In this context, the study attempts to find the difference in the perceptions of users and prepares of reports with reference to the U.K. The specific objectives can be expressed as below: 1. To know whether there are any standards/rules/guidelines as to the preparation and presentation of environmental reports in the U.K 2. To know how corporations in the U.K see the present scenario of environmental reports 3. To know the perceptions of users in the U.K about environmental reports 4. To measure the discrepancies in the expectations of preparers and users of environmental reports Thus, the study is relevant in the sense that if there is expectation gap because of the absence of uniformity in environmental reports, the so-called reports will turn to be useless and utter waste. The stakeholders (users) need reports to enable themselves making decisions on various aspects of the organisation. But, when they do not adhere to the standards, the reports lack uniformity which leads to confusion among the users of same reports prepared by two entities. Hypothesis Any study begins with a problem and finding a solution to the problem is the end result of study. In the course of answering the research question by the researcher, it is always better to have a supposition about the solution to his problem to lead him in the right direction. This supposition or assumption about the solution to the research problem is called hypothesis in research parlance. But this assumption is not valid until the research is completed. The validity of hypothesis is yet to be tested and generalized. Hypothesis is usually formulated from the strategic question of study. The present study tries to find out answer to the following question, which is considered as the strategic issue behind the study. "Is there any expectation gap between the preparers and users as to the preparation of environmental reports" The null hypothesis, which is derived from the above strategic question, can be expressed as below: The present study states its hypothesis as below. "There are significant differences in the expectations of preparers and users of environmental reports" It is a common practice among the researchers that any study begins with two hypotheses. One is expressed in the beginning itself and is called null hypothesis, the validity of which is yet to be tested as a solution throughout the study. If the null hypothesis turns to be wrong, the other one is accepted and it is called alternative hypothesis. Thus, alternative hypothesis is expressed and starts working only after the non-acceptance of null hypothesis. In other words, the rejection of null hypothesis results in acceptance of alternative hypothesis and vice versa. Alternative hypothesis is the exact opposite of null hypothesis, which for the present study can be stated as below: "The difference in the expectation of preparers and users of environmental reports is not significant" Literature Review During the past one and a half decades, a number of attempts have been made all over the world, specifically evaluating environmental disclosure practices of companies. Ingram and Frazier (1989), Eresi (1996) and Guthrie and Parker (1989) conducted surveys, which showed that there were little environmental disclosures before 1990. In 1991, the United Nations intergovernmental working group of experts on International Standards of Accounting and Reporting (ISAR) surveyed 222 Transnational Corporations (TNCs) to assess the extent to which they were disclosing information on environmental issues. The survey revealed that the disclosure of environmental information by TNCs remained qualitative, descriptive, partial and difficult to compare (United Nations, 1992a). The 1990s saw a dramatic increase in the practice of environmental reporting, particularly in Europe and North America. It was tracked in a number of national and international surveys (e.g., Sustainability, 1993; Sustainability: UNEP, 1997; KPMG, 1993, 1996, 1999, 2002; Kolk, 2001; Bebbington, 1999). These surveys have identified growth not just in the number of companies reporting on environment, but also in sectoral coverage of such reporting particularly in developed countries like USA, Canada and the UK. In a comprehensive study reported by Kathryn Jones in 2000 (conducted for Commission of the European communities, DG Environment), a survey of annual/ financial reports of 88 companies (mainly EU companies or companies that operate in the EU and produce an environmental report) was made. Eighteen expert organizations and 11 report user organizations, which used annual/financial reports as part of their daily business also participated in the survey. It was found that 91% of the companies disclosed environmental information in the annual report. But, many report users and expert organizations considered environmental disclosure in these annual reports only as a green wash' and found that it was difficult to obtain useful and reliable information. They were of the view that environmental disclosures were difficult to compare across companies as they all disclosed on different topics and presented these topics in a different way. Frost (1998) has reported a study on the Environmental Reporting Practices (ERPs) of 44 Australian companies operating in the extractive industries for the years 1991 and 1994. He investigated the possible casual variables motivating differential levels of environmental reporting. Using content analysis of the corporate annual reports, the ERP of the sample companies were observed. The ERPs were then analyzed against the individual entity's public exposure, which was represented by the influence of stakeholders on corporate management and the extent of the entity's interaction with the social environment. Utilizing multiple regression, it was found that the public expectation of the entity provided explanatory power at significant levels, for ERP of the sample entities. The results, therefore, suggested that when disturbances such as industry and country of control were held constant, then the level of public exposure was significant in the decision to report environmental information. In an attempt to explore whether an environmental reporting expectation gap exists within Australia, Deegan and Rankin (1999) (in a study sponsored by the Institute of Chartered Accountants in Australia) surveyed the attitudes of senior executives of 462 large companies in Australia (the preparers group) as well as the attitudes of 474 individuals from various categories of annual report users. By comparing the responses, significant differences were found to exist between the views of users and the preparers, in relation to various issues associated with corporate environmental performance reporting. The study found evidence showing the existence of an environmental reporting expectation gap within Australia. Surveys in developing countries indicated that though there is an overall increase in environmental reporting in the annual reports, the quality of reporting is still poor (see, for example, Eresi, 1996, Roy, 2000 in India; Jaffar, 2005 et al. in Malaysia; Niskala and Pretes, 1995 in Finland; Imam, 1999 in Bangladesh). In India, there are only a few reported attempts on the issue. Eresi (1996) in his study of annual reports of 68 companies for the years 1991-92 and 1992-93 found the disclosure of information on energy conservation by all the companies, as it was a statutory requirement. But for other items, the annual reports gave only positive information that too did not exceed even one-fourth page in the annual reports. It was found that companies generally adopted qualitative (descriptive) form of disclosure except some companies (20%), which used pictorial presentation. A review of works on environmental reporting shows that though some of the international studies (e.g., by Sustainability and KPMG at different points of time) examined environmental disclosure practices of the companies from various countries, most of the country-specific surveys concentrated on the green reporting practices of the companies in the developed countries. There are only a few attempts from the developing countries (including India). Most of the existing studies (e.g., Guthrie and Parker, 1989; Borghini, 1998) examined the extent to which the companies disclosed environmental information in the annual reports. Some studies (e.g., Stratos, 2001; Buhr and Freedman, 1996 and Tilt, 2005) also evaluated environmental information disclosure by other mediums like environmental policies, separate corporate environmental reports and websites. A preponderance of these works was based on secondary data and lacked insight into various conceptual and theoretical considerations involved in reporting on environment. Very few studies tried to examine the existence of an environmental reporting expectation gap. The present study is an attempt to bridge these research gaps. It is based on primary data collected from 200 Chartered Accountants selected from across the country and 200 large manufacturing companies in the U.K. with the help of two structured questionnaires. The questionnaires cover various theoretical and conceptual considerations involved in reporting on environment. Research Methodology Every research has a unique way of exploring the solution to its problem. This distinct steps or way of doing a particular research is known as research methodology. It involves the selection of a particular research design, sampling design and procedure, method and tools of data collection, and methods of data analysis. Research Design This is fundamentally an exploratory study which deals with unearthing a novel phenomenon emerged in the area of corporate accounting. An exploratory design is suggested because it is undertaken when not much is known about the situation at hand or no information is available on how similar problem/research issues have been solved in the past. In an exploratory research, extensive preliminary exercises are carried out in order to be acquainted with the problem in the situation. The present research problem has not been explored much by researchers across the globe in general and in the U.K. in particular. Therefore, an extensive ground work is warranted to better comprehend the nature of the problem since very few studies have been done in the area. In addition to that, extensive interviews with many people would have to be undertaken to have a sound knowledge and understanding about the problem. Research Methods An exploratory research primarily relies on qualitative data. The data sources are primary and secondary. Data are collected through survey, observation and interviews with people who are in the field of corporate accounting. A survey among 200 chartered accountants to represent users and chief accounting officers of 200 manufacturing companies as preparers in the U.K. is conducted to collect a set of primary data. An observation method is also suggested to gather primary data, which the respondents reluctant to give for the completion of the work. Interviews with officials and others who are connected with environmental reports are done to have more data apart from those collected through a closed questionnaire. Population The entire units in a study are called its population/universe. The present study has two sets of population from where samples are to be selected, comprising of accounting officials of all manufacturing companies and all chartered accountants dealing with matters of environmental reports in the U.K. The population is finite and it is easy to collect the data base of the population from the official records or any other reliable sources of the companies. The population data regarding chartered accountants can be had from the selected 200 manufacturing companies since the research needs to explore how far the expectations of chartered accountants (users) differ from that of their companies which prepare environmental reports. Sample Design The study heavily depends upon survey research. A survey research can be carried out in two ways. First, a complete enumeration survey wherein all the units in the population/universe are studied to arrive at the conclusion. The result of complete enumeration method is always reliable and the researcher need not worry about the accuracy of the result. But it is impossible in many cases as it is time consuming, expensive, and non-operational. Sample survey is the alternative method wherein a selected number of units from the population are taken for a detailed study and the conclusions derived there from are generalized for the entire population. This is a superior method from the view point of cost, time and effort. Accuracy can also be ensured, provided the method chosen for the selection of sample units from population is free from respondents' and researcher's personal bias and prejudices. An appropriate sampling method ensures that the sample units can represent population wherefrom sample is framed. Such sample units are most likely to exhibit the characteristics of population exactly. Sample Frame Sample frame refers to the number of sample units included in the sample for a study. In determining the size of sample, care must be taken to ensure that the selected sample can exactly represent the characteristics of population. The present study has two sets of population and hence will have two sets of sample as well. As many as 200 respondents are fixed conveniently as sample size from each segment to form a sample of 400 units put together. Sampling Procedure Sampling procedure is the process of drawing sample units from population to infer about the population. The selection of sampling procedure is important because the one selected must be appropriate to the situation. As there are a number of sampling methods, the researcher has to select the apt one which ensures high accuracy, low personal bias and other considerations like time, cost etc. Random Sampling/ Probability Sampling method is the most commonly used method as it ensures the presence of above parameters and simple to operationalise. The method used for the present study is Simple Random Sampling Method as it is highly trustworthy from the view point of accuracy, reliability and less personal bias. The samples are taken from the population by using lot method, which gives equal chance for each and every item of the population to be included in sample. This reduces the personal bias of both the researcher and employees in the population. Altogether, the study has 400 sample units representing two different set of population. Sample units are selected using Simple Random Sampling Method since it is the most reliable and hence the superior method for a research of this kind. Data Editing, Coding and Analysis The primary data collected from the respondents are immediately sorted out and made to undergo an editing and coding work. The data collected from primary source always need editing. Editing is the process of eliminating the errors and mistakes in the raw data so as to make them usable for further analysis. Editing is done for eliminating mistakes, completing an incomplete data, omitting errors etc. The secondary data need not be edited as they are in processed form and they have been collected by somebody for some other purpose. The quantitative and non-quantitative data which have been edited are now converted in to another form, namely codes for easy and convenient analysis. Codes are used to convert data which are lengthy and cumbersome for analysis. The coded data are then sent for a detailed analysis to arrive at the findings of the study. Analysis is performed using simple statistical methods like percentage and measures of central tendencies. Limitations Although utmost care has been put to avoid mistakes, errors and personal bias, the present study cannot claim as a complete error-free work. The likely sources of limitations of the study can be as below: 1. Heavy dependence on sample survey as sample method is never free from errors. 2. 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