Accounting Theory: Social Audit Limited - Essay Example

Accounting Theory Word Count: 1520 The main motivation for corporate [social and environmental] reporting ... is to enhance corporate image and credibility with stakeholders (Adams, 2002: 244-245). According to Wood (1991), business and society are interdependent and cannot exist separately. It is true that the primary role of organisation is to fulfill the needs of people either by producing goods or services; however, at the same time, the organization needs to be socially responsible to its stakeholders that include primary as well as secondary stakeholders. Corporate social reporting in the UK began to take shape during 1970s when social Audit Limited was formed to conduct external audits to assess firm’s social effects. In early 1990s, social reporting became a norm with large public and private corporations across Europe and the Americas. Laan (2009) argues that the two theories namely Stakeholder and Legitimacy, derived from the broader political economy perspective, broadly explain motivations for social disclosures. The paper aims at exploring whether the main motivation to corporations for social and environmental reporting is to enhance their corporate image and credibility with stakeholders. While a few decades back, corporations sole aim remained enhancing shareholder value in financial terms and report them as per the statutory norms, organisations have now moved beyond traditional financial reporting of their performance to its stakeholders. Currently, stakeholders group not merely constitute shareholders, employees, suppliers, creditors, customers but they also include society, community and all those who are affected by the operations of the organization. Corporate social reporting thus, has occupied a wider perspective. Stakeholder theory prescribes that all stakeholders including primary and secondary have the right to expect fair treatment from an organisation. That is to say management needs to manage the corporation such that interests of all stakeholders are secured. Community or Society at large may not be directly engaged in transactions with the corporation yet they are influenced and affected by the activities of corporations such as emission levels, waste water creation and its treatment, impact on ecology or surroundings and so on. Ethical branch of stakeholder theory also necessitates that community and society not only have a right to know how they are affected or impacted in the long run from the activities of corporations but also they expect that they must be treated fairly by corporation. At the same time, managerial branch of stakeholder theory explains that organisations prefer to provide social and environmental reporting when they believe that it is in their interests to manage relations with secondary stakeholders (Deegan & Rankin (1996). In an empirical research done by Thorne et al. (2014) on Canadian firms regarding the matter related to social and environmental reporting, 66.7 percent corporations agreed that they would issue standalone CSR reports in future to enhance their reputation with stakeholders that they are good corporate citizens. Major motivation to Manpowers social and sustainability reporting are strategic considerations because they perceive that such report is more visible in Europe than in the US. They do not publish CSR reports in the US because operations are more driven by legislation but planning to produce one for Europe so that their expansion programmme in Europe is not affected. Stakeholder theory very well explains Manpowers motive in publishing social and environmental report at one place but not the other. These finding endorse Adams’ argument that corporations issue social and environmental reports to enhance their image and credibility with stakeholders (Rubbens et al., 2002). In 2002, CSR Europe and AccountAbility, the leading professional institute collaborated to explore the impacts of CSR reporting by involving 11 companies and testing 6 hypotheses. One of the most common findings was that companies issue social and environmental reports to change internal and external perceptions. Nike asserted that the purpose of its issuing CSR report was essentially to remove misconceptions about its industry and not necessarily for the purpose of changing company perceptions. Nevertheless, purpose is still the same – removing negativity and infusing positivity to enhancing company image and credibility with stakeholders (Rubbens et al., 2002). Legitimacy Theory According to legitimacy theory, corporations perennially make efforts ensuring that they function within the norms of their societies (Deegan, 2000). As per Breton and Cote (2006), "legitimacy resides in peoples mind" (512); they tend to grant legitimacy to the firm when they (stakeholders) perceive its activities in line with the established social norms, values and rules. Firms harness this perspective and engage in social and environmental reporting to enhance their credentials. Mitchell et al. (1997) argue that organizations in their efforts to legitimate their existence will respond to those stakeholders who are the most powerful. While organisational legitimacy is variable across all stakeholder and cultural groups, they employ legitimating process to create a public image aligning with their primary goals and objectives. Deegan and Rankin (1996) argue that in the absence of environmental reporting provisions, companies prefer to disclose information that can work in their favor or "They only tend to present information which is favorable to their corporate image" (51). Discussing one Australian study that involved 197 companies from 50 different industries, it was found that the firms operating in environmentally sensitive areas provided greater positive environmental disclosures supporting the validity of legitimacy theory. Out of this, only 14 companies provided anything on negative disclosures. On word counts, positive disclosures contained, on average, 180.7 words while negative disclosures just 5.7 words. One may argue that it could be because they had only positive news to make but then there were the companies in Australia which were prosecuted by the regulatory authority for violation of environmental laws. Out of 20 prosecuted firms, 18 firms provided environmental information but they were found to suppress negative information significantly. Negative disclosures, on average, had only 5.5 words to describe their misdemeanours but on positive reporting they devoted, on average, 269.64 words (Deegan & Rankin, 1996 p.57). It is quite evident from the study that firms attempt to legitimate their operations. This sufficiently supports Adams’ argument that corporations issue social and environmental reports to enhance their image and credibility with stakeholders. Companies in different industries take different approach while making social and environmental reporting to their stakeholders. In one of the study done pertaining to Swedish companies, it was found that the companies from an environmentally sensitive industry group are the most motivated lot to communicate about CSR issues to their key stakeholders. Sweden being an environmentally sensitive country, CSR reporting enhances reputation management and shareholder value of such companies. The study also concludes that small size organizations undertake CSR reporting when they want to enhance their credibility with stakeholders. The study outcome imparts credence to stakeholder theory and endorses Adams’ argument that corporations issue social and environmental reports to enhance their image and credibility with stakeholders (Kim, 2011). Institutional Theory "Impression management is used to establish, maintain, and restore image, reputation, and legitimacy" (Brennan and Merkl-Davies, 2013 p.10). Organisations engage in impression management for different causes for attracting support and gain social and material resources. While attribution theory explains psychological motives, institutional theory explains sociological motives behind impression management to gain social acceptance and enhance organizational credibility among society and stakeholders. Henriques and Richardson (2004) argue that public trust in corporations and businesses is constantly falling. Companies are forced to resort to social environmental reporting to enhance their reputation. Morley Fund Management, UKS largest insurance and pension fund managers announced that the fund will vote against the final accounts of any of those top 100 companies who fail to provide an environment report. The fund also pronounced that it "will abstain from voting on the accounts of any top 250 UK firm that does not produce a report" (Henriques and Richardson, 2004 p. 147). Authors also state that companies are assessed on the basis of information they provide regarding their management policies and structure of reporting pertaining to environment and social issues. From the stakeholder theory perspective, this has resulted into a surge in social and environmental reporting by companies. But the moot question is whether this reporting has any reliability? European Commission has already declared, “Environmental information disclosed by companies is often inadequate and unreliable” (Henriques & Richardson, 2004 p.147). Henriques & Richardson (2004) assert that those who want to produce balanced CSR report will not hesitate in engaging an independent surveyor as has been found in case of the Co-operative Bank of the UK. Banks ethical and ecological brand positioning has helped bank to retain customers, staff resulting into an overall performance improvement. However, the case of the Co-operative Bank in the UK is a rarity. As per the researchers, "Companies are traditionally geared to hype the good news and kill the bad news" (Henriques & Richardson, 2004 p.149). They do so because they do not want to put their image and reputation at stake. They perceive that bad reporting will affect them considerably meaning they take CSR reporting as a means to enhance their reputation and image among stakeholders. Concluding from the above discussion, it can be said that Adams’s contention is correct that the main motivation for CSR reporting by corporations is to enhance their credibility and image with stakeholders. References Breton, G. and Cote, L. (2006). Profit and the legitimacy of the Canadian banking industry, Accounting, Auditing & Accountability Journal. 19(2): 512–539. Brennan, N., Merkl-Davis, D. M. (2013). Accounting Narrative and Impression management. The Routledge Companion to Communication in Accounting. Routledge, London. 109-132. Deegan, C. and Rankin, M. (1996), An analysis of environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority, Accounting, Auditing, and Accountability Journal, Vol. 9 No. 2, pp. 50-67. Henriques, A., Richardson, J. (2004). The Triple Bottom Line. Does it All Add Up. Amazon. Kim, M (2011). Motivations for Engaging in Corporate Social Responsibility Reporting. Stockholm Resilience Center. Stockholm University. Laan, S. V. (2009). The Role of Theory in Explaining Motivation for Corporate Social Disclosures: Voluntary Disclosures vs. Solicited Disclosures. The Australasian Accounting, Business and Finance Journal. 3(4). 15-29. Mitchell, R. K., Agle, B. R., and Wood, D.J. (1997), “Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts”, Academy of Management Review. 22(4): 853-886 Moir, L. (2001). What Do We Mean By Corporate Social Responsibility? Corporate Governance. 1(2).16-22 Rubbens, C., Monaghan, P., Bongfiglioli, E., and Zadek, S. (2002). Impacts of Reporting. CSR Europe and AccountAbility. European Commission. Thorne, L., Mahoney, L.S. and Manetti, G. (2014), Motivations for issuing standalone CSR reports: a survey of Canadian firms, Accounting, Auditing, and Accountability Journal, Vol. 27 No. 4, pp. 686-714. Wood, D. J. (1991). Corporate Social Performance Revisited. Academy of Management Review .16, 691-718. Read More