Corporate social responsibility reporting - Essay Example

? Accounting Theory and Accounting Theory Introduction Social and environmental reporting is also known as corporate social responsibility reporting (CSER) (Deegan, 2007). According to UNEP (2002) corporate social responsibility reporting can also be defined as an environmental management strategy applied by companies to communicate with their stakeholders about what the company is doing with regard to sustaining a good environment alongside its operations. CSER also commonly plays a central role in presenting a good picture of corporate accountability. For a long time now, CSER has been used as the best tool to encourage corporate strategies, policies and management decisions aimed at minimization of adverse environmental impacts of companies’ operations (UNEP, 1998). Since the development of the practices of corporate social environmental reporting in the early 1990s, the reporting has largely been accomplished through communications or disclosures within annual company reports. The disclosure provides information about the environmental (social) policies and practices and the impacts of the reporting company to the environment in which it operates. According to Deegan (2007), corporate social and environmental reporting has developed and become widespread over the past three decades, with these developments the disclosures by some companies have become more extensive to communicate and thus companies often publish the disclosures in a separate social and environmental report. Corporate social and environmental reporting has grown particularly because of two main factors. Both factors are borne out of the fact that businesses and companies operate within the physical environment and space that is owned by society. First, Companies produce CSER reports to enhance their corporate image as a marketing tool. The second factor that influences the growth of CSER reporting is the increasing legal requirement by governments across the world for such disclosures to be made for the good of the environment (Yip et al., 2011). This paper examines whether corporate social responsibility (CSR) reports provide shareholders and stakeholders with useful information on corporate social and environmental performance or are they merely a public relations tool to benefit the Companies. Evolution of Corporate Social Environmental Reporting (CSER) It is estimated that reporting on social and environmental issues has been done by Companies ever since financial reporting started. This is largely because environmental reporting has been required to meet regulatory obligations (Sutantoputra, 2009). Social and environmental issues, including material costs of regulatory compliance and probable losses due to litigation were disclosed since the early years of corporate annual reports for purposes of financial accountability. However, in the past three decades, there has been a significant increase in the public demand for social and environmental information from Companies. This has largely been driven by increasing public awareness, pressure from stakeholders, and social concern on environmental disasters and fair labor practices (Rahman et al., 2005). Although the demand for corporate social and environmental reporting has greatly increased in the past three decades, it is evident that public concerns about environmental issues related to production started as far back as the mid 1960s (Yip et al., 2011). At that time, claims that technological advances and rapid depletion of resources were adversely affecting the environment led to calls for increased accountability from the corporate community. It is at this time that activist groups and Non-Governmental Organizations such as Greenpeace came up to help in the public push towards more accountability by companies. In the early 1970s, companies began implementing social and environmental goals and making public their findings, CSR became introduced about this time. The two decades between 1970 and 1990 served as the first phase of CSR reporting largely characterized by eco-marketing campaigns and “green” campaigns that were largely deceptive marketing strategies with little substance (Marlin & Marlin, 2003). The trend had to change in the 1980s when the concept of stakeholders became introduced and the impact of companies had to be scrutinized beyond shareholders to other people affected by the companies, known as stakeholders. From the early 1990s, CSR started coming up strongly again because of the need for social and environmental disclosures in annual company reports to appease shareholders and other stakeholders (Cerin, 2002). From this period, CSR information had to be more verifiable and quantifiable. This led to the present phase of CSR reporting that involves a multi-stakeholder approach where both investors and other stakeholders depend on the reports for various reasons (Marlin & Marlin, 2003). CSER from the Perspective of Accounting Theories Corporate social and environmental reporting has evidently grown to be an important and increasingly prevalent source of information for organizational financial reports (Deegan, 2007). Questions are increasingly getting raised about the role and importance of CSER to company stakeholders in the modern corporate environment. The role and relevance of CSER can be discussed on the basis of various accounting theories that examine the part they play in financial and social responsibility. The Positive Accounting Theory (PAT) was developed by Watts & Zimmerman (1986) and is hinged on a belief in the rational choice theory. The latter theory holds that material self-interest is the basis of all economic activities. The PAT presents three hypotheses that explain and predict the likelihood of an organization to support or oppose an accounting method. In the first hypothesis, the bonus plan hypothesis, some researchers have established that in the case of CSR there is a positive relationship between bonus plans for managers and directors and CSER (Chan & Kent, 2003; Barako et al., 2006). For example, Zakaria (2011) indicates that firms mask their rent extraction activities by providing large volumes of low quality corporate disclosures, most of which are not very useful to the stakeholders but still present a picture of commitment to corporate social responsibility. According to PAT, Companies that provide reports of their social and environmental activities have shown greater rates of return (Zakaria, 2011). It is thus hypothesized that a company’s bonus plan is positively associated with its CSER level. This indicates that CSER is largely a public relations tool for the financial benefit of the reporting company. The debt hypothesis under the Positive Accounting Theory generally predicts that firms with high debt/equity ratios are more likely to use accounting methods to increase their income. CSER is one of the accounting methods that have come up strongly in the past two decades as strategies for increasing income (Al Arrusi et al., 2009) indicate that increasing the level of voluntary disclosure is one way of reducing monitoring problems between creditors and stockholders. This indicates that in cases where companies are under large debts, CSER may be used as a strategy to solve accounting reporting problems rather than providing information that is genuinely helpful to the stakeholders or that reflects genuine benefits to the environment. The third hypothesis under the PAT is the political cost hypothesis. This predicts that large firms are more likely to apply accounting choices that reduce profits reported so as to control the political attention they get from government regulatory bodies and competitors. According to Prior et al., (2008) companies that disclose their social and environmental activities stand a chance of getting favorable regulatory treatment, grain greater support from social activist groups, gain legitimacy in the industrial community, get positive reviews from the media, and thus maintain their corporate reputation. It can thus be hypothesized that a company’s earning management is positively associated with its CSER level. This indicates that firms seeking better political standing in the market may be using CSER to achieve this end at the expense of any important social or environmental benefits to the stakeholders and community at large (Healy & Wahlen, 2009). The second accounting theory that has bearing of corporate social and environmental reporting is the stakeholder theory. This theory implies that a business interacts with a number of actors within its environment generally referred to as stakeholders (Donaldson & Preston, 2005). The stakeholders include various groups like customers, communities, business partners, and government. The theory indicates that there is a bidirectional influence between a business and its stakeholders. The stakeholder theory identifies stakeholders as having legitimate interest in the operations of the corporation; this means that the decisions, operations, and outcome of the company have to be fair to the needs of stakeholders. As far as CSER is concerned, the company targets the interests of normative stakeholders including customers, suppliers, employees, financiers, and the community (Prior et al., 2008). This indicates that by providing the CSER, companies serve their obligation to these stakeholders in a legitimate process. The stakeholders on the other hand have their interests served through their scrutiny of the CSER by making their own conclusion and taking appropriate action. However, the this interest can only be served if the information provided in the CSER is correct and useful as opposed to a lot of unnecessary information that many companies now provide in their reports (Rahman & Widyasari, 2008). The Information Asymmetry and Principal Agent Theory is one of the accounting theories that affect corporate social and environmental reporting. According to Healy et al. (2009), company management mainly communicates with stakeholders through financial disclosure and reporting. This kind of communication supports decision makers at various levels in their roles. One form of such communication is through CSER disclosures. Thus if a company is taking part in corporate social responsibility activities in the environment in which it operates, it is important that the stakeholders get this information so as to evaluate it. This often helps companies to gain legitimacy among stakeholders (Zakaria, 2011). CSER reporting is also important for gaining legitimacy with investors as it shows awareness in the company of the different social and environmental risks involved in the business. Thus the need for financial reporting and CSER reporting comes as a result of information asymmetry and principal-agents conflicts (Company management and stakeholders). The principal-agent theory developed by Jensen & Meckling (1976) is important in balancing the information asymmetry between companies and their stakeholders and solving conflicts that arise due to the asymmetry. In the case of CSER, society (stakeholders) consists of the principal and company managers are the agents acting in the interest of the principal. The success of the company therefore relies on the ability of the managers to satisfy the various stakeholder claims (Deegan, 2007). One of the important claims of society as the stakeholder is sustainable use of the environment and social justice by the companies. This makes CSER reporting a legitimate effort on the part of the company managers to play their role as agents entrusted with the duty to maintain activities that sustain the environment and provide social justice to the stakeholders. Conclusion Corporate social responsibility (CSR) reports are supposed to provide shareholders and stakeholders with useful information on corporate social and environmental performance. However, there have been increasingly legitimate claims that these reports are merely public relations tools to benefit the Companies. From this review, the application of accounting theories indicates that this claims are largely true in most cases as companies seek to reach various aims largely informed by financial obligations and benefits. Companies will do anything to strengthen their financial positions and position themselves in politically favorable ways. However, it is also evident that companies should try as much as possible to provide useful and legitimate CSERs rather than giving out a lot of information most of which is of little benefit to the stakeholders. The conclusion is that most companies will only provide information that favors them even when such information is not very useful to stakeholders and shareholders. References Al Arussi, A. S., Selamat, M. H., & Hanefah, M. M. (2009). Determinants of financial and environmental disclosures through the internet by Malaysian companies. Asian Review of Accounting, 17(1), 59-76. Barako, D. G., Hancock, P., & Izan, H. Y. (2006). Relationship between corporate governance attributes and voluntary disclosures in annual reports: The Kenyan experience. Financial Reporting, Regulation and Governance, 5(1), 1-25. Cerin, P. (2002). Communication in corporate environmental reports. Corporate Social Responsibility and Environmental Management, 9(1), 46-66. Chan, C. & Kent, P. (2003). 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