ACC320 Essay: Corporate Governance Concerns With Stakeholders And Sustainability Reporting.

Discuss about the ACC320 Contemporary Issues in Accounting.

This study examines the extent to which corporate governance should be concerned with the interests of stakeholders more than that of shareholders, increase in provision of sustainability reporting and believe of accountants in sustainability reporting, (Amran and Ooi,2014, pp.38-41). Due to increases in levels of public awareness on roles played by firms in terms of weather changes, companies have been forced to incorporate non-financial reporting in their financial statements. The corporate governance management is supposed to inform their stakeholders on reporting about environmental, social and economic performance.

Sustainability reporting has become a normal practice which is driven through by potential values of business and is generated by improved stakeholder reporting and statement. Stakeholders are more concerned in understanding performance and approaches used by companies while managing sustainability reporting (Deegan and Gordon, 1996, pp.187-199). There is no universally accepted description of sustainability reporting but it simply implies to a business entity reporting on economic, social and environment performance. Sustainability is the  same as corporate responsibility reporting (CSR) and reporting on triple bottom line (Hahn and Kuhnem2013, pp.5-21). Non-financial reporting is more widespread due to the fact that, its reporting affects the material performance of companies and also the stakeholders demand the disclosure of sustainability reporting in their financial statements.

Organizations produce non-financial information voluntarily. The voluntary production of these reports implies that the stakeholders might behave opportunistically and therefore not incorporate poor non-financial information in their sustainability reports. In order for organizations to produce good quality sustainability reports and reduce the behavior of opportunistic stakeholders, corporate governance of those firms should be able to come up with rules and techniques that help in monitoring the activities of the stakeholders. Sustainability reporting is done internally in organizations while corporate governance is done externally. The pressures exerted to the stakeholders by corporate governance will push the organizations to be more responsible in non-financial reporting and consequently giving high level quality of information. Higher level of concern by corporate governance on stakeholders’ increase reports on sustainability by accounts and increase its provision, (Minan, Hickox and Gimiliano,2011, np).

This research positively contributes to literature about corporate governance and voluntary non-financial reporting in numerous ways (Tirole, 2001, pp.1-35). First, a lot of literatures have been researched concerning corporate governance and sustainability reporting. Those literatures do not provide empirical evidence in unfolding the relationships that exists between, sustainability reporting of accountants and the concern of corporate governance with the stakeholders. This study ventures in explaining the interrelationships that exist between corporate governance concern with stakeholders and sustainability reporting. It also endeavors to find out if the provision for sustainability reporting has increased. Secondly, this study complements literature in that the research method employed in this research has not been used in performance of any research. The other types of research majorly involve the level of sustainability and the quality of sustainability reporting instead of focusing on the level of reporting and how it can be improved. Lastly this study contributes to literature in that in terms of valuing and determining the level of concern the managers need to put on stakeholders so as to produce sustainable report and to find out if the provision of sustainable reports have increased, different variables are used and this will help in producing quality results.

Voluntary Disclosure theory on Sustainability Reporting

According to agency theory, the stakeholders have capacity to reduce information asymmetry on non-financial reporting through producing sustainability reports. In the contrary, publishing these reports gives the stakeholders room for manipulation of these reports by avoiding to include information which may temper with the image of their organizations. According to (Friedman 2007, np), engagement of the stake holders in corporate social responsibility in terms of non-financial reporting gives rise to what is known as agency problems. The stakeholders and shareholder’s problem arise because the stakeholders always want to publish reports which will enable them develop in their careers, boost the image of the organizations and also develop in their political careers. The stakeholders do these things at the expense of shareholders who demand reliable presentation of non-financial information. In order to remove agency problems while reporting on non-financial reporting, corporate governance should be more concerned on stakeholders more than in shareholders by setting up mechanisms and exerting pressure on the stakeholders so as to be able to increase the provision of sustainability reporting and increase the believes of accountants on sustainability reporting.

Sustainability reporting is important to many companies and it also assist investors in decision making. Stakeholders now believe in nonfinancial reporting. In order to come up with good sustainable report we focus on the internal features of the reporting process. If firms want to produce good sustainable reports they should have good corporate governance who put up good mechanisms to help achieve the operational goals and control the stakeholders so as to reduce conflict of interest. Nonfinancial information is good to both the firm and the investors who read the sustainability reports. Having good quality sustainability information will mean that the firm has good corporate governance, good management and accountants who believe in sustainability reporting.

This theory suggests that there is a positive correlation between performance on sustainability and disclosure of discretionary level of sustainability. The notion behind this theory is that, organizations which perform well in sustainability reporting give much focus on their performance indictors which are hard to be imitated by non- performing firms and this helps the performing firms in improving their image, (Brammer and Pavelin,2006, pp.1168-1188). Those firms which perform well in sustainability reporting have ability to disclose high quality non-financial information and this is done in order to distinguish them from non-performing firms in terms of sustainability reporting. Those firms which disclose less information in their non-financial reports perform poorly and they are not therefore able to attract more investors.

Literature Review

The present literature on corporate governance and sustainability reporting raises concerns to different scholars. Critical analysis of corporate sustainability reporting suggests that there is significant variability in how companies and scholars view the sustainability reporting process.  (Gray, 2002, pp.687-708) provides a great synopsis of accounting literature in the field of non-financial reporting.

There are also a number of rising empirical studies concerning sustainability reporting. There is increased publication of careful content analysis on financial statements with perspectives from data economics, risk managing, stakeholder and the political economies, (Belal and Owen 2007, pp, 472-494). The most general normative topic in the academic literature is that reporting on sustainability enhances accountability, (Bebbington, Larringa and Moneva, 2008, pp,337-361). There are numerous scholars who have proposed that the legitimacy theory offers an explanatory structure, environmental, social and economic disclosures in the financial statements, (Deegan, 2002, pp,282-311).

There have been a lot of studies which have particularly looked at non-financial reporting in different firms and countries (Adams et al., 1998, 223-250). Those studies provide evidence of differences in amount of disclosure of sustainability reporting by different firms. The level of sustainability report disclosures present difficulties in measurement because of the sizes of firms and the composition in different industries.

The theory of voluntary disclosure states that firms which perform well in non-financial reports disclosures report using high quality information so as to maintain their superiority in the market and attract more investors. They therefore choose performance indicators which cannot be copied easily in order to improve their reputation. The socio-political theories on the other hand indicates that the poor performing firms may report on high quality non-financial information due to subjection of pressure from the corporate governance and other social pressures. These two theories end up providing different estimations. From the theories, we can get two hypotheses as follows,

Corporate governance is directly related to good non-financial reporting. The independence of the board members will make the firms stakeholders and accountants to report on sustainability through demanding accountability and set mechanisms which will make the stakeholders to achieve the corporate social responsibility targets. Corporate governance influences the reporting quality of firms because they put emphasis on importance of nonfinancial reporting by accountants and by so doing increase the provision of sustainability reports. The expertise of corporate governance will make them pressure the stakeholders towards performing well with regards to sustainability reporting. When the members of corporate governance are more diverse, they are able to put more concern on stakeholders and in return more attention will be given to sustainability reporting which will therefore improve the performance of non-financial reporting. The corporate governance strengths give general indications of the extent to which it will be able to govern the firm effectively in order to achieve sustainability reporting. From the above discussions we expect the following hypothesis.

References

Adams, C. (2002) A. Internal organizational factors influencing corporate social and ethical reporting: Beyond current theorizing. Accounting, Auditing & Accountability Journal, 15 (2): 223-50.

Amran, A. and Ooi, S. K. (2014). Sustainability reporting: meeting stakeholder demands. Strategic Direction, 30:7, pp. 38-41.

Bebbington, J., Larringa, C., Moneva, J. M. (2008) Corporate social reporting andreputation risk management. Accounting, Auditing & Accountability Journal, 21 (3): 337-361.

Belal, A. R., Owen, D. L(2007). The views of corporate managers on the current state of, and future prospects for, social reporting in Bangladesh. Accounting, Auditing & Accountability Journal (2007), 20 (3): 472-494.

Brammer, S. and Pavelin, S. (2006). Voluntary environmental disclosures by large UK companies. Journal of Business Finance & Accounting, 33, pp. 1168-1188.

Deegan, C. and Gordon, B. (1996). A Study of the Environmental Disclosure Practices of Australian Corporations. Accounting and Business Research, 26:3, pp. 187-199.

Deegan, C.(2002)The legitimising effect of social and environmental disclosures - a theoretical foundation.Accounting, Auditing & Accountability Journal, 15 (3): 282-311.

Friedman, M. (2007). The Social Responsibility of Business is to Increase its Profits. New York: Gray, R.(2002)The social accounting project and Accounting Organizations and Society

Hahn, R. and Kühnen, M. (2013). Determinants of sustainability reporting: a review of results, trends, theory, and opportunities in an expanding field of research. Journal of Cleaner Production, 59, pp. 5-21.

Minan, P., Hickox, J., & Gimigliano, J. (2011). Sustainability reporting--What you should know.

Amstelveen, Netherlands: Privileging engagement, imaginings, new accountings and pragmatism over critique? Accounting, Organizations and Society, 27: 687–708.

Tirole, J. (2001), "Corporate Governance," Econometrica, 69, 1, pp. 1-35