Explanation of Differences in Disclosure between Companies - Literature review Example

Running Head; Explanation of Differences in Disclosure between Companies Accounting Assessment Student’s Name Professor’s Name Subject Code and Name Date Submitted Accounting Assessment Australian companies prepare their financial statements in line with the International Accounting Standards. These are guidelines that govern disclosure and mode of disclosure. For example, they provide the procedure to be followed and items to be included when preparing a balance sheet of an income statement. According to these standards, there are certain items which must be included in the annual reports of an organization (International Accounting Standards Board 2007). These standards are also recognized by the corporate governance codes in Australia, a company which does not give satisfactory disclosure as prescribed by the standards will be prosecuted. However, there are certain aspects which a company may decide to disclose voluntarily. These items are not compulsory to disclose but the organization may decide to present due to certain reasons. For example, a company may use the voluntary disclosure part to give more information about how their funds were used during the financial period. When it comes to voluntary disclosure, different companies disclose different information since they were not involved in the same activities during the year. Even companies from the same industry may disclose different information when it comes to voluntary disclosure. It is important to understand that companies have different reasons when it comes to voluntary disclosure (International Accounting Standards Board 2007). Authentication of the source Friedman, L. &Miles, S. 2000. "Developing Stakeholder Theory". Journal of Management Studies 39 (1): 1–21. The journal has been written by qualified authors in accounting management. The journal is explains key principals of the stakeholders’ theory. It also pin points changes that have done to the theory by other authors apart from Mr. Edward Freeman. The journal ensures that it sticks to its title by providing relevant content only. The source is accurate; it uses information from authentic sources only. This makes it reliable for a research since information obtained from it is not biased. Apart from acquiring information from accurate sources, the book also uses authenticated and accurate facts and figures throughout. It also covers the content, for example, apart from explaining the theory alone. It goes further to explain other factors surrounding the theory such as the reason why companies present different information in matters of voluntary disclosures. It compares information from different authors and their views when on the stakeholders’ theory therefore giving the reader a ‘one stop source’ on voluntary disclosure. The journal also covers other important management concepts such as the effects of corporat6e governance codes and ethics and their relationship to the stakeholders’ theory. Apart good coverage and accuracy, the journal is authoritative. It gives the reader ease time when it comes to reading and absorbing the content. This gives one the ability to easily go through the journal and grasp the content with ease. Unlike other learning materials that require a very high level of understanding, this journal gives those even with minimum accounting knowledge the ability to understand the content. Another strong characteristic of the journal is that it is objective. The journal doesn’t ‘wander’ off topic instead, it tries to give the reader relevant information on the stakeholders’ theory. A good source should ensure that it addresses stays within the topic. Irrelevant material may make the reader feel like he/she is using the wrong source of information. The journal is also current, it covers information relevant to modern organizations and that affects modern business trends. For example, looks at corporate social responsibility as an aspect which every modern organization should consider. When it comes to real life, many public listed companies have dedicated much of their efforts towards giving back to the community as a way of ensuring that all stakeholders are catered for. Generally, the journal is a perfect reference material for the stakeholders’ theory. Practical application of accounting theory Stakeholder theory is a business ethics and organizational management theory that covers ethical and moral guidelines to be followed while managing an organization. The theory was first written by R. Freeman in his book strategic management. The theory tries to help management determine the type of information they should give to stakeholders (Friedman &Miles 2000, p. 17). It gives the different types of stakeholders and the type of information they are interested in. in short, it gives management information on the type of stakeholders they are dealing with and the type of information this stakeholder group expects from them at the end of ach financial year. Traditionally, the shareholder is the owner of the company and the company should put their interest first. Therefore, management should play a role of combining shareholders’ employees’ among other stakeholder inputs to come up with usable outputs at the end of a financial period (International Accounting Standards Board 2007). These usable outputs are sold to consumers so as to return the capital to owners (Friedman &Miles 2000, p. 17). However, shareholder theory disputes this fact and recognizes the presence of other parties, these parties include, the government, communities, trade associations, political bodies, prospective customers and prospective employees. At time the shareholder theory recognizes competitors as stakeholders (Sharman 2003, p. 9). The stakeholder theory views strategy differently. The theory recognizes three different levels when it comes to strategy. Apart from just looking at the resources level, it also goes down to consider the market and socio-political factors surrounding the business. This concept help determine the stakeholders of the company and how each stakeholder should be treated (Friedman &Miles 2000, p. 18). The theory believes that each stakeholder should be treated differently. When it comes to the resource view or level of stakeholders, these are individuals who have contributed their resources and are viewed as owners of the company (Phillips & Freeman 2003). Traditionally, the organization should run in line with this stakeholders’ group interest. However, there are other stakeholders groups including those in the market based view or level. This group is majorly comprised of customers, suppliers and competitors (Friedman &Miles 2000, p. 11). The company should always ensure that the interest of this group is taken care of adequately. In order for consumers to access goods and services from the organization they need to be satisfied that they are being served high quality commodities. The government and political bodies also look at organizations to ensure that it is in line (Sharman 2003, p. 9). For example trade unions try to ensure that employees are treated fairly by the company. The government also ensures that a company carries out its operation as per the set corporate governance codes. According to Donaldson and Preston (1995), the normative part of stakeholders’ theory is the most important part of the theory. They state the importance of guidelines and philosophical statements that should be followed by managers when it comes to managing the company and the way they treat stakeholders. Many authors have come up with a derivation of the theory; Mitchell (1997) established a new topology of stakeholders based on power, legitimacy, power and urgency. When this form of derivation is applied, an organization has approximately 8 types of stakeholders. Therefore it means an organization should be careful to ensure that interests from all these stakeholder groups are adequately addressed (Friedman &Miles 2000, p. 17). This can be done by balancing interests from the different stakeholder groups . However, this has received strong criticism from politician Charles Blattberg who argues that the fact that stakeholder interests can be balanced and compared against each other is just an assumption by the theory (Phillips & Freeman 2003). Blattberg further argues that the most effective way to ensure that stakeholder interests are adequately handled is through dialogue. The company should bring together all stakeholders and try to reconcile their interests (Donaldson & Preston1995, p. 71). Blattberg believes this is an effective way of ensuring that all stakeholders have the same view of the organization (Friedman &Miles 2000, p. 20). The stakeholder theory by Freeman can be applied by the organization in different scenarios. At the end of a financial period, the organization s expected to meet the interest of different stakeholder groups and the same is expected of them during the financial period. During the financial period, the company is expected to satisfy its consumers’ needs. This is done by ensuring that products are services are crafted with and with special dedication to perfection as a way of ensuring consumers value for their money. If the company fails to meet the interest of this stakeholder group then they may fail when it comes to generating revenue through sales. Low revenue means that the organization should expect a loss or very minimal profits. The company would have failed to satisfy the needs of one stakeholder groups, shareholders. Shareholders expect the organization to make money in order for them to earn a return on investment at the end of a financial period (Friedman &Miles 2000, p. 17). Therefore an organization should understand that different stakeholder groups depend on each other and for one’s interests to be met then the organization needs to ensure that the needs of other stakeholders are addressed. Differences in voluntary disclosure As stated earlier, companies must prepare their financial statement according to certain internationally accepted standards. These standards are recognized by the Australian government in their corporate governance codes. A company should ensure that all items stated in the standards are adequately addressed in the statements (Larson and Jensen 2007, p. 85). However, a company may at times disclose information by will. This is known as voluntary disclosure where an organization decides to give information to stakeholders that they are not mandated by law to give (Mitchell 1997, p. 854). An organization may decide whether or not to disclose this information to stakeholders therefore one may find out different companies disclose this type of information differently (Friedman &Miles 2000, p. 17). After presenting the information that they are required by law to present the company follows it with items of voluntary disclosure (Mitchell 1997, p. 854). This form of disclosure is largely related to other levels of stakeholders such especially the market. Rio Tinto and BHP Billiton are examples of organizations that take part in voluntary disclosure. However, despite the fact the organizations are from the same industry they present different information when it comes to their voluntary disclosure initiatives at the each of each year. Rio Tinto group presented its annual financial statements alongside other forms of corporate disclosure so did BHP Billiton (Deegan 2009, p. 36). Community health and safety At the end of 2011 financial that ended in June Rio Tinto group released their annual reports. In these reports, the company had expressed their focus when it comes to ensuring community health and safety. This will be done by coming up with projects which will help minimize activities that may put the safety of the community in danger. The company also reported how they are focused on ensuring that the health of employees and contractors is a priority. This will be attained by ensuring they work in an environmental conscious manner, improving their governance systems and economic prosperity in general (Rio Tinto 2011). The company has disclosed enough information when it comes to the number of projects that they have put up in ensuring employee safety and well being. The company measures information about employee injury using a frequency element. This information was presented to stakeholders in a whole page of their annual report (Rio Tinto 2011). However, BHP Billiton has not disclosed information about their steps in employee safety among other aspects. In their annual corporate social responsibility report, Rio Tinto showed how much they have tried to ensure health and safety over the years. Environmental consciousness and ‘zero’ harm in operating sites BHP Billiton has been struggling to answer stakeholders’ cry of environmental unconsciousness and total environmental damage in their operating sites. The company has been trying to ensure that their reputation is improved across the globe. However, the organization has been constantly accused of struggling to acquire areas that have been restricted of mining activities since such activity will have an impact on its existence. Of late the company has tried to build its reputation by coming up with a comprehensive corporate social responsibility report that addresses environmental issues (BHP Billiton 2011). In the report, the company states its success in their environment improvement targets. For example, the company states that it has managed to reduce Carbon dioxide effects by 6% over their set goal of 5%. It also boasts of decreased hazardous waste by a whooping 50% over their organizational target of 20% in 2010. However, Rio Tinto did not disclose information about their environmental projects and the impact they have had on the society and environment. While BHP Billiton has focused on reducing the level of harm in operating sites, Rio Tinto is trying its best to reduce the number of employees and contractors injured in the operating sites (Rio Tinto 2011). Quality of disclosure From the analysis of voluntary disclosure of the two companies above, it is clear that both companies disclose different information. BHP Billiton has been subject to criticism in the corporate sustainability forms from all stakeholders. However, the company has tried its best to reduce the level of harm to the environment doe by its operating activities. BHP has released a corporate social responsibility report analyzing the number of activities that they have carried out towards their initiative of giving back to the community. Among other things such as community development and safety, BHP released a report giving an overview of how much the company has done to ensure that he environment is adequately preserved (BHP Billiton 2011). The report gives an extensive analysis of their environmental conservation activities. On the other hand, Rio Tinto decided to improve the safety and health of its employees by putting up measures will reduce injuries while working (Kleiman 2011). The company has also reduced a report on the number of activities that they have carried out to help improve community health around the areas of mining activities. The company provided a whole web page and diagrams explaining their CSR activities (see the appendix for samples) Why did the tow companies present different information (voluntary disclosure)? From the analysis above both Rio Tinto and BHP Billiton presented different information in their annual financial reports (the voluntary disclosure part). Each company had a reason why it disclosed different information at the end of the financial year. According to the Stakeholders theory, a company has different types of stakeholders and it is important for it to ensure that all stakeholder needs are addressed. Traditionally, people believe that only the shareholders’ interests should be observed by the company (Mitchell 1997, p. 854). However, the stakeholders’ goes to explain the different levels of stakeholders that a company is surrounded with (Sharman 2003, p. 9). The company has to ensure that the interest of each stakeholder is adequately considered. For example, as stated earlier, in order for the company to ensure that they make high profits to satisfy stakeholders, they have to first make sure that they develop products and services that satisfy consumers so as to boost revenue which will in turn have an impact on the amount of profits (Deegan 2009, p. 108). Therefore, voluntary disclosure can be a tool used by the company to attain different objectives depending on the stakeholder group they are targeting (Donaldson & Preston1995, p. 71). The following are some of the reasons why companies take part in voluntary disclosure. Different companies seek to address stakeholder interests differently Mitchell (1997) managed to come up with new topology of stakeholders with reference to the stakeholders’ theory by Edward Freeman. She was able to come with eight different types of stakeholders surrounding an organization. Keeping in mind organizations may be faced with the urgency to address certain consumer interests at different times then there is expected to be a difference in the way they handle these interests (Friedman &Miles 2000, p. 17). When it comes to the stakeholder group at the market-based level, there is usually high competition (Mitchell 1997, p. 854). Employees and consumers are a scarce resource and are therefore there is always completion between companies for them. In order to gain a competitive advantage against other companies, an organization will always try to offer the best to the two. Three employees were injured while working under the supervision of Rio Tinto in 2010. This prompted the organization to come up with a new safety and health policy for employees and contractors. This was in a bid to ensure that they lose a connection with employees since they are stakeholders in the company (Friedman &Miles 2000, p. 17). A company has different sets of stakeholders Traditionally, an organization should look at the interest of its shareholders at all times since they are the owners of the company. However, the stakeholders’ theory by Edward Freeman disputes this fact and looks at other groups of stakeholders that a company needs to address their interests in order to succeed (Donaldson & Preston1995, p. 71). A company facing a political crisis can not decide to improve employee-organization working relationship instead; it will strive as much as possible to ensure that the problem they are facing between them and the political stakeholder group is settled. Keeping in mind that organizations do not face the same problems then it is sane to anticipate different items of voluntary disclosure at the end of the financial period (Deegan 2009, p. 97). This is the case with BHP Billiton and Rio Tinto, both companies decided to handle whatever crisis they were facing. BHP Billiton had to repair its reputation by upping its dedication towards ensuring environmental conservation while Rio Tinto on the other hand decided to improve their employee health and safety policy to avoid further injuries to employees. Leverage The theory of leverage states that a company may use certain aspects to appease stakeholders in order to avert a particular crisis. Therefore a company may decide to give more information to consumers about their activities towards the community in order to save themselves from a particular organizational crisis. For example, as stated above, BHP Billiton has been faced with many scandals with regard to environmental depletion and unconsciousness. This spoilt the face of BHP Billiton in the media among other stakeholders. However, of late the company has gone down to improve its level of environmental concern. This has been done by carrying out environmental conservation measures (Deegan 2009, p. 122). In its latest financial statements, the company disclosed how it has struggled to ensure decreased environmental effect in their operating areas. The company stated that there has been a decrease in the level of carbon dioxide by 6%. BHP has also reported a decrease in the amount of hazardous waste by 50%. On the other hand, three people were terribly injured in 2010 while working in one of Rio Tinto’s managed sites. In order to improve this, the company has rolled out a new health and safety policy with regard to employees and contractors. The health and safety policies extend to other stakeholders (Deegan 2009). According to the stakeholders’ theory, an organization should work to ensure all stakeholder interests are addressed adequately. Bibliographies BHP Billiton 2011. Annual reports 2011, Corporate Social Responsibility: Accessed on 1st September 2011 from www.bhpbilliton.com/ Donaldson, T. & Preston, E. 1995. "The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications". Academy of Management Review (Academy of Management) 20 (1): 71. Deegan, C 2009, Financial accounting theory, 3rd edn, McGraw-Hill, North Ryde. Friedman, L. &Miles, S. 2000. "Developing Stakeholder Theory". Journal of Management Studies 39 (1): 1–21. International Accounting Standards Board 2007: International Financial Reporting Standards 2007 (including International Accounting Standards (IAS(tm)) and Interpretations as at 1 January 2007), LexisNexis Kleiman, L. 2011. " MANAGEMENT AND EXECUTIVE DEVELOPMENT."Reference for Business:Encyclopedia of Business Larson and Jensen, 2007 Fundamental Accounting Principles, Twelfth Canadian Edition (Whitby, Ontario: McGraw-Hill Ryerson Ltd Mitchell, R. K.1997. "Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts". Academy of Management Review (Academy of Management) 22 (4): 853–886. Phillips, R., & Freeman, E. 2003. Stakeholder Theory and Organizational Ethics. Berrett-Koehler Publishers. Rio Tinto 2011. Sustainable development review; Social wellbeing: Accessed on 1st Sptember 2011 from http://www.riotinto.com/annualreport2010/performance/social_wellbeing.html Sharman, P. 2003. "Bring On German Cost Accounting". Strategic Finance (December): 2–9. Read More