Voluntary Disclosure - Essay Example

Accounting Theory: Voluntary disclosure Name Institution Date Voluntary Disclosure Voluntary disclosure means a company management voluntarily discloses its financial and non-financial information’s which the company is not bound by law to disclose. In so doing, managers make their financial reporting more credible. Voluntary disclosure also goes along way to help in managing market expectations since many a times; the management will disclose information when they believe that the market has a different expectation from theirs. Bansal & Hoffman argue that firms with good environmental performance are more likely to disclose such information in order express their superior strategy to relevant stakeholders and investors. The major disadvantage of voluntary disclosure, however, is that disclosure of such information on their strategies and the subsequent consequences may greatly damage the competitive advantage of the company over the other competitors in the market. While this disclosure is a plus in the capital market, managers have been careful on the effects on the product market. The management faces yet another constraint if it has credibility issues. A voluntary disclosure by such management is viewed with much doubt by the capital market. The following are the recommendations of a work group constituted by Financial Accounting Standards Board of the USA on voluntary disclosure: Many big companies involve in voluntarily disclosure of information which have importance to investors Due to the rapid change in the business environment, voluntary disclosure was projected to bear even more importance. Voluntary disclosure of matters related to the organization’s success are very useful Although there were disclosures about unrecognizable intangible assets, more information on these matters would be of more benefit, because of the importance of such assets to the company’s value. Voluntary disclosures are not only supposed to cover the company’s achievement, but also included should be the previous disappointments like failed plans and the effect of such disclosed plans. Companies should continue to improve their business reporting and to try out different types of disclosed information and the manner of disclosure (Bhattacharyya 2006). It is important to note that companies are encouraged to make wider disclosure of their business information since these increases the company’s ‘transparency’ which works positively for the company and the investors. Investors are able to make informed decisions because of the transparency. More effective investments and capital allocation benefits the economy. Companies therefore benefits from the reduced average cost of capital. This is because proper disclosures enhance the chances that investors will make a good investment decision. But since the cost of capital for the company will include a risk premium due to the investors’ uncertainty of the adequacy of company’s information, increased transparency will always reduce this cost (Bhattacharyya 2006). Legitimacy Theory This theory is based on the social contract. Jones & Ratnatunga argue that legitimacy theory is founded within the political economy theory and explains the struggle for companies to survive and grow using the concept of social contract. It say that the company legitimizes its operations in order to justify itself in the society. The company tries to establish itself in a manner that is congruent with the norms of the society which they are part of. Legitimacy cannot therefore be considered only in terms of economic performance. In this theory, it is believed that the society becomes more informed of the effects of the company’s activities and that pressure groups from within the surrounding society begin to put demands on the company to address some of the social issues around it. The company is therefore forced to communicate with the society in addressing these issues and in that way, the company will survive and ensure continuity within the society. Under this theory therefore, in its attempts to survive and maintain continuity, the company will voluntarily disclose its information to the public to prove itself. The company therefore by legitimizing its activities, will justify its existence (Sale 2006). The legitimacy of an organization is always variable, the variability not only being temporal, but also spatial across different cultural groups and stakeholders. The legitimacy may be established using symbols that communicate a public image which is in line with goals, operations or output of the organization. Stakeholders’ theory Sale points out that Ullmann (1995) while explaining variations in Corporate Social Disclosures (CSD), used the stakeholder theory. He came up with a conceptual framework which he used to explain how CSD is related to social/economic performance. This framework is based on the stakeholders’ theory which was advanced by Freeman. He first talks about the stakeholders’ power. He says that an organization responds to the demands of the stakeholders since the stakeholders have control over the organizations resources. If in dealing with the stakeholders the management involves in activities of social responsibility, it is expected that there will exist a positive relationship between the social disclosure and stakeholder power. His second dimension involves the organizations strategic posture while engaging in activities of social responsibility (Sale 2006). The mode could be active or passive. The organization will have an active posture if the management wants to influence its relationship with the stakeholders. In this way, the organization will have greater involvement in social activities. While the organization involves in these social responsibility activities, conflict may arise if the stakeholders do not have common interest and are split between groups with conflicting ideas. In resolving such conflicts the organization will have to reflect upon the amount of power held by each group in the organization. Stakeholders with resources that are most critical to the organization will always have their demand satisfied. Accountability theory This theory bases on the fact that it is expected that those who have power over organization resources provide an explanation and justification for the use of such powers (Sale 2006). The corporate accountability theory assist in defining the relationship between organization managers and the society in which the organization is located (Popa 2009). The theory sets out reasons why organizations should report on social, economic and environmental performance, and not only financial performance. In this context therefore, accountability justifies what has been done, the works in progress and even those that are to be done in the future. Accountability will therefore lead to more information being disclosed. The concept of accountability used as an emancipator concept assists in exposing and developing relationships and social contract by evaluation and expansion of those rights to information that are in place. It is believed that accountability is very useful as an ideological framework for analysis of accounting information transmission (sale 2006). Santos’ sustainable report justification Santos is a large company with its business operations spread all over Australia and Asia. The company has a large workforce and interacts with diverse groups and kinds of people in different countries. The scale of its operations cannot be underestimated. Given the nature of its operations, the company has a deep interaction with local communities in all its sites of operation. The communities’ participation in ensuring the success of such a company is very important. Drilling activities and gas and oil processing activities are bound to bring effects to surrounding societies in terms of pollutions and other environmental effects. Spillages may occur as well as surface damage arising from excavations and drilling. Santos’ drilling expeditions are carried out in not just on land but in the sea. A company with such scale of operation must be able to give out information about its operations, current as well as future plans. It is expected that such a company explains the reasons and justifications for its future plans any occurrences in the past the affected the surrounding community. In order to establish good relationships with the public, the company has to state benefits that the communities have continued to enjoy as well as provide information to relevant stakeholders and authorities about their plans to continue operating in a manner that is environment friendly. Santos Company must therefore prepare a sustainability report to supplement its annual report. Environmental disclosures in the Santos’ Sustainability report Environmental disclosure Page number Identified theory/theories Positive or negative Moving to a clean energy economy - the report provides an assessment of environmental impact of their activities and how the try to minimize negative effects on the environment 20 Stakeholders’ theory Negative Water resources – provides a description of the effects of formation water and the efforts towards water and waste treatment 22 Legitimacy theory Negative Lightening our footprint – a statement of the company’s effort to minimize interference with biodiversity and effects on land. Pointing out their involvement in waste treatment and recycling. 24 Stakeholder’s theory Positive Justifications for identified theories Moving to a clean energy economy disclosure as presented in the report is associated with the stakeholders’ theory. It is within the interests of the company and its stakeholders to establish a company that conforms to international standards in matters of environmental pollution and clean energy. In engaging in those activities that contribute towards achievement of a clean environment, the company shows its dedication to work within international rules. Disclosure of such information is to the benefit of the company, interested investors and other state authorities and other stakeholders. Water resources- this disclosure by the company is associated with legitimacy theory since it tries to show the company’s efforts in minimizing negative effects to the community around it. As pointed out in the report, formation water is polluted with oil and / or gas deposits. Since the company’s drilling activities is the sole reason for the contaminated water to come to the surface, the company ensures that this water does not affect the neighbours by treating it. In reporting such information to the public, the company aims at making the community aware of its efforts so as to again acceptance and appreciation. In reporting that the treated water is allowed to be used by farmers in irrigation and other activities, the company gets more liking from the public. This goes along way to ensure growth and sustainability of the company. Lightening our footprint – this disclosure is directly associated with stakeholder’s theory. The report says that care and protection of the environment is the company’s long term commitment. It is easy to believe that this is in line with the interests of the stakeholders and other interested groups. Reporting this information continues to show the company’s support of government regulations relating the protection of biodiversity and encourages other interested groups on the environmental friendliness of the company. As can be seen on the report, Santos Company is greatly involved in societal activities and offers great assistance to the betterment of the environment. Although much of their activities involve displacements and disturbances to the communities and environment, the company is dedicated to restore much of these disturbances. With its waste treatment programs, the company minimizes pollution of natural resources and thus tries to maintain a clean and sustainable environment. Environmental impacts of Santos Company while it continues to engage in its oil and gas explorations have been felt with effects of oil contamination and water pollution being the most important. While the company has taken measures to try and minimize such effects, the neighbouring communities have continued to experience the side effects of the company’s activities. As stated in the statement of Environmental objectives Geophysical Operations article, Santos is dedicated to maintain and enhance its close partnership with the Cooper Basin Community as well as strictly adhere to regulations that encourage ecologically sustainable development (ESD). The principles of ESD ensure operations that will avoid adverse negative effects on biodiversity, ground water, cultural aspects of the environment and other land uses. From a personal point of view, the efforts made by this company in minimizing environmental effects are enormous. The company has continued to operate within law and has made tremendous efforts to include the surrounding communities in its activities. The interests of the public have been given considerations and the assistance of the company has been felt by the society. References Sale, J. T. (2006). Advances in International Accounting, Volume 19. Philadelphia: Elsevier. Bhattacharyya A. K. (2006) Financial Accounting For Business Managers 3rd Ed. Delhi: PHI Learning Pvt. Ltd. Santos (2013). Statement of Environmental Objectives Geophysical Operations. Retrieved on 14 August 2013 from Jones S. & Ratnatunga J. (2012) Contemporary Issues in Sustainability Accounting, Assurance and Reporting. Bingley: Emerald Group Publishing. Popa A. (2009). Transparency and disclosure between theory and practice. A case study of Romania. Budapest: Budapest Tech Keleti Károly Faculty of Economics. Bansal P. & Hoffman A. J. (2011). The Oxford Handbook of Business and the Natural Environment. Oxford Handbooks in Business and Management, Oxford handbooks. Oxford: Oxford University Press. Read More