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The University of the South Pacific

AF301: Accounting Theory and Applications

Seminar Topic 5

Discuss the implications of marginalizing social and


environmental reporting and suggest how such reporting can be
strengthened.

Group Members:
Navanith Krishna Achari : S11039773
Muni Shivya Reddy : S11039830
Shamal Prakash : S11040096
Zibran Ahmed : S11041542

Tutor: Tevita Veituna


Tutorial Day & Time: Tuesday 5 – 7pm

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Acknowledgement
Our group would like to thank all those people who have helped us in providing relevant
and reliable information that helped us in compiling this research project. We would like
to give special thanks to the following people:

• Michael White for providing the suggested format of the research project;
• Tevita Veituna, Mesilina Tuisolia, Jale Samuwai and Glen Finau for helping us in
areas where we were confused on any particular research requirement and
concepts;
• And finally, but not the least, the interviewees and people who answered our
questionnaires, without them, the project would not had been successfully
completed.

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Declaration of Originality
We, as a group and individually, declare that this research project is done through our
own effort and is original and any relevant materials used for this project is properly
referenced in the body of the research, in the footnotes and also in bibliography.

Group Members:

Navanith Krishna Achari : S11039773 _____________________

Muni Shivya Reddy : S11039830 _____________________

Shamal Prakash : S11040096 _____________________

Zibran Ahmed : S11041542 _____________________

DATE:___ /___ /_______

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Table of Content

Page
Section Number(s)
Introduction 5–6

Theoretical Underpinnings 7 - 10

Literature Review 11 - 15

Research Objectives 16

Research Methods 17

Analysis & Findings 18 - 23

Limitations 24

Recommendation 25

Conclusion 26

Bibliography 27 - 28

Appendix 29 - 30

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Introduction
Social and environmental accounting is concerned with those events that are not covered
in conventional accounting practices and whose users are not much interested with the
financial aspects of the business, but rather, they are interested in knowing at their social
and environmental aspects of the business performance (Godfrey et al, 2006)1.

It is synonyms with terms such as corporate social reporting, corporate social


responsibility, non-financial reporting and sustainability reporting (Wikipedia, 2009)2.

Social and environmental accounting and reporting is important because (Godfrey et al


2006)3 :

a) We tend to know how a business is using the scarce resources to provide


sustainable outcome by not just focusing on financial success but also the state of
community and environment.
b) It implicitly helps to restricts any of the business activities that jeopardizes with
the sustainability of resources that can later cause danger of environmental
degradation or if its in conflict with the ethical values of the community.
c) Further on the explanation given on point (b) above, social and environmental
accounting and reporting helps to direct organization “to act in a socially
responsible manner” (Guthrie and Parker, 1990; as cited in Godfrey et al, 2006,
pg 631).

We now know what is social and environmental accounting and reporting and how
important it is, the question now one can ask is what are some of the things that can
become a subset of social and environmental reports. According to Godfrey et al (2006,
pg 632), some of the issue he has suggested that can come under social and
environmental reports can be regarding “employees, occupational health and safety,
minority and equity issues, community, indigenous peoples, environment, energy use and
product”. He also stated that those issues are some examples and more could be included
in the list.

The problem in this contemporary accounting standard is that, social and environmental
reporting is a voluntary disclosure and because of this reason people do not want to
disclose such information because of lack of education (Gray (1994, 1995; Mathews
1997, 1998a, 1998b; as cited in Lodhia, 1999)4.

1
Godfrey, J; Hodgson, A; Tarca, A., (2006), Accounting Theory, 6th Edition, John Wiley & Sons Australia,
Ltd, Australia, page 631.
2
Wikipedia, 2009, in ‘Social accounting’, in Wikipedia: The Free Encyclopedia, accessed 19 October
2009, from < http://en.wikipedia.org/wiki/Social_accounting>
3
The 3 importance has been sourced from : Godfrey, J; Hodgson, A; Tarca, A., (2006), Accounting Theory,
6th Edition, John Wiley & Sons Australia, Ltd, Australia, page 631.
4
Lodhia, S.K. (1999), ‘Accountants and Environmental Accounting: an initial and exploratory study into
contemporary practices in Fiji’, The Journal of Pacific Studies, vol 23 no.2, pp 323-330

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Another question is raised that is consistent with our research question, which is, what are
the impacts of marginalizing social and environmental accounting and reporting and how
can such reporting system be guided to business organization so that they instill such
reports and disclose it together with financial reports during their annual reporting period.
This paper will focus on the impacts of marginalizing social and environmental reports
by reporting entities and finding out some solutions of strengthening such reports. What
has already been done is that, organizations such as AccountAbility (AA)
(AccountAbility, 2007)5 and Global Reporting Initiative (GRI) (Global Reporting
Initiative, 2007)6 has been formed to address this issue and “there is no conceptual
framework for social and environmental reporting” (Deegan, 2007, pg 1267).

This paper will focus on some of the very important accounting theories like legitimacy
theory, stakeholder theory, risk society theory and institutional theory.

These theories might help to explain the role of business reporting, users of business’
information and the cause/effect actions of business operations, reporting, stakeholder’s
reactions and ultimate effect on community and environment.

Series of questionnaires and interviews was conducted to get insights if companies do


disclose social and environmental reporting and what response I get when asked about
how marginalizing social does and environmental reporting affects the community or
environment. Suggestions were also given by them about how we can strengthen the
current reporting system.

Our research was not limited from findings from local demography but also
internationally so that we can have a thorough understanding of the topic in this
contemporary period. Questionnaires, interviews and case study were conducted within
Fiji’s demography, but the journals and literature reviews were studied from both, from
local and overseas writers.

5
AccountAbility, 2007, ‘Who we are’, in AccountAbility: Promoting accountability innovations for
sustainable development, accessed 18 October 2009, from
<http://www.accountability21.net/default2.aspx?id=54>
6
Global Reporting Initiative, 2007, ‘What is GRI?’, in Global Reporting Initiative, accessed 18 October
2009, from < http://www.globalreporting.org/AboutGRI/WhatIsGRI/>

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Theoretical Underpinnings
A number of theories were used to explain why corporations use social and
environmental reports. The reasons obtained were used to evaluate the question for what
happens when corporations fail to report social and environmental impacts of their
business operations. Some of these theories were legitimacy theory, stakeholder theory,
institutional theory and risk society theory.

Legitimacy Theory

Legitimacy theory tries to explain that business organizations try to disclose social and
environmental reports so that they are within the society’s expectation boundary. From
this perspective, social and environmental reporting can be used by companies to attempt
to legitimize their actions to society and thus this may be a possible becomes a
motivation for producing social and environmental reports and a implicit social contract
is formed between the business organization and the society (Deegan, 2007)7.

In addition, Deegan (2007) also stated that since society’s expectation changes and is not
fixed, there is a need for business entities to continually produce social and
environmental reports if they are to stay within the society’s expectation or stay within
the social contract otherwise they will be seemed to be breaching the social contract.

For example, British American Tobacco (BAT) produces sustainability reports (British
American Tobacco, 2009)8 that tells the public that their organization is doing harm to
the environment, but also telling people how they are combating with the environment
problems (British American Tobacco, 2009)9. Thus in this way, they are actually
legitimizing their actions to people so that later on when the problems becomes too
obvious, people cannot finger point at them for their detrimental business operations and
also hard to litigate them because they are within the bounds of the society’s laws and
regulations; strong presence of a social contract with the community.

Stakeholder Theory

Stakeholder theory states that in order for a particular business to operate indefinitely and
successfully, they must provide all the demands that any stakeholder would want from

7
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 123.
8
British American Tobacco, 2009, ‘Sustainability Reporting’, in British American Tobacco, accessed 18
October 2009, from
<http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO726NTL?opendocument&SKN=2
&TMP=1>
9
British American Tobacco, 2009, ‘Environment, health and safety’, in British American Tobacco,
accessed 18 October 2009, from
<http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO52AP6B?opendocument&SKN=2
&TMP=1>

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that particular business (Deegan, 2007)10. This is as stakeholders hold all the resources
that is needed by the business entities to operate such as human resources, finance,
business licenses authorization and the like. Stakeholders include shareholders,
employees, customers, lenders, suppliers, local charities, various interest groups and
government (Deegan, 2007)11.

Interest groups The public


employees
investors

The
Industry organization
bodies suppliers

consumers media government

(Source: Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty
Limited, Australia, page 120).

As can be seen from the above diagram, the organization is responsible to all the
stakeholders who provide resources in one way or the other, thus “the organization is part
of the wider social system”(Deegan, 2007, pg 120).

There are two branches of this theory, which are, ethical branch and managerial branch
(Deegan, 2007)12.

The ethical branch of stakeholder theory states that all stakeholders, whether they want
information or not and even whether they can affect the organization’s ongoing operation
or not, has the right to be given all the information about the business’s financial, social
or environmental reports (Deegan, 2007)13.

However, in contrast to managerial branch of stakeholder theory, it focuses on specific


stakeholders, by only providing information to those user groups that can help the
business in doing its on-going operations (Deegan, 2007)14.
10
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 121.
11
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 121.
12
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 121.
13
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 121.
14
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 121.

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Institutional Theory

According to Deegan (2007, pg 126), he states that institutional theory tries to explain
“why organizations within particular ‘organizational fields’ tend to take on similar
characteristics and forms”. From his view point, we learn that this theory helps to
understand why business organizations have some similarity among each other
(businesses) so that it is within a society, which he calls ‘organizational fields’ (Deegan,
2007, pg 126).

The question then arises is how? Well, this theory “...links organizational practices (such
as accounting and corporate reporting) to, among other things, the values of the society in
which the organization operates and the need to maintain organizational legitimacy”
(Deegan, 2007, pg 127).

So we learn that organizations tries to stay within a broader institution, which is the
society, according to its norms and thus in order to stay within the norms, business
organizations tries to tell society through making a voluntary disclosure which is social
and environmental reporting.

Risk Society Theory

The risk society theory states that the risk exposed now is actually shaping the business
environment (Wikipedia, 2009)15. The external risks are those risks that are beyond the
control of humans such as natural disasters (Wikipedia, 2009)16. The manufactured risks
are those risks which are caused and can be prevented by human beings themselves and
such risk could be different types of pollution cased by business industries, diseases
caused by manufacture of chemicals, social risk like criminal activities and the like which
are all due to modern science and technology (Wikipedia, 2009)17. From the notion of
risk society theory, it can be said that a possible motivation why businesses produce
social and environmental reports is to distribute knowledge about how their businesses
produce and mitigates possible risks (Wikipedia, 2009)18. For example, in this modern
era where the use of chemicals and automation is very common, possible risk borne out
from it could be loss of jobs leading to poverty and finally settling for indulging in
criminal activities. In addition, another risks could be exposed when chemicals are used,
which can be rationally be reasoned that using chemicals to help grow fruits and
vegetables can cause diseases that are risk to humans. Due to risks borne out from
business activities, social and environmental reports are produced to aware humans of

15
Wikipedia, 2009, ‘Risk Society’, in Wikipedia: The Free Encyclopedia, accessed 18 October 2009, from
< http://en.wikipedia.org/wiki/Risk_society>
16
Wikipedia, 2009, ‘External risk’, in Wikipedia: The Free Encyclopedia, accessed 18 October 2009, from
< http://en.wikipedia.org/wiki/External_risk>
17
Wikipedia, 2009, ‘ Manufactured risk’, in Wikipedia: The Free Encyclopedia, accessed 18 October 2009,
from < http://en.wikipedia.org/wiki/Manufactured_risks>
18
Wikipedia, 2009, ‘Risk Society’, in Wikipedia: The Free Encyclopedia, accessed 18 October 2009, from
< http://en.wikipedia.org/wiki/Risk_society>

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potential risk and they also tells people some preventive measures of avoiding such risks
(Wikipedia, 2009)19.

19
Wikipedia, 2009, ‘Risk Society’, in Wikipedia: The Free Encyclopedia, accessed 18 October 2009, from
< http://en.wikipedia.org/wiki/Risk_society>

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Literature Review
Social Reporting

There is a lot of demand from various stakeholders for the provision of social and
environmental reports from business industry and the trend is increasing (Godfrey et al
2006)20.

According to Crowther (2000; as cited in Wikipedia: The Free Encyclopedia accessed on


10 October, 2009)21, he defines social accounting and thus reporting, as “an approach to
reporting a firm’s activities which stresses the need for the identification of socially
relevant behaviour, the determination of those to whom the company is accountable for
its social performance and the development of appropriate measures and reporting
techniques.”

This means that social accounting and reporting is anything which a firm could identify,
measure and report their actions that affects the social community. He also states that this
will make accountable for their social performance. The question then one can ask, what
actually makes a good or bad social performance and how significant is social accounting
and reporting.

According to Lodhia (1999, pg 325), he states that:

“…..environmental disclosures primarily as public relations exercise designed to


enhance the image / esteem of the organizations.”

Therefore it becomes rational enough to think that businesses will disclose those
information that they want to disclose so that it could enhance its reputation. For
example, giving rations to flood victims or donating money to non-government
organizations (NGOs) that focuses on helping needy people will be highly regarded by
them (FundraiserInsight, 2009)22. These sorts of things helps business’s image and so,
there becomes a highly likely chances of having increases in revenue and thus more
profit. In addition, the media also plays an important role in delivering the message to the
whole community (Green Marketing, 2009)23.

For example, a business helping needy people by giving out millions of dollars, media
speculates this in their online, audio or printed media and thus business gets marketed.

20
Godfrey, J; Hodgson, A; Tarca, A., (2006), Accounting Theory, 6th Edition, John Wiley & Sons
Australia, Ltd, Australia, page 631.
21
Wikipedia, 2009, ‘Social Accounting’, in Wikipedia : The Free Encyclopedia, accessed 19 October 2009,
from http://en.wikipedia.org/wiki/Social_accounting#cite_ref-1 >
22
FundraiserInsight, 2009, ‘Having Some Fun at the Office with a Business Fundraiser’, in Fundraiser
Insight, accessed 19 October 2009, from < http://www.fundraiserinsight.org/articles/business-
fundraiser.html>
23
Green Marketing, 2009,’6 Steps for creating a Social Media Marketing Roadmap & Plan’, in
greenmarketing 2.0, accessed 10 October 2009, from < http://lornali.com/category/online-
marketing/online-reputation-management>

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In contrast to businesses that marginalize social reporting, they do not get those benefits
because, as from Lodhia’s point of view, the community does not get a chance to know
about their social performance since they do not have social reporting. Another
questioned is raised on what disclosures business usually make so that ultimately it
benefits them.

According to Guthrie and Parker (1990, p. 165; as cited in Deegan, 2007, pg 1303), they
said that corporations make this voluntary disclosure to show good social relationships
and avoid “harmful effects on various elements of society”.

In their paper, they state:

“Such a disclosure strategy may include emphasizing the corporation’s positive


contributions to social welfare and highlighting its attempts to minimize harmful effects
on various elements of society” - Guthrie and Parker (1990, p. 165; as cited in Deegan,
2007, pg 1303).

So we know now that business community discloses social reports either to improve their
image or reduce litigation for their actions by way of legitimizing their actions in social
reporting.

Looking on the other hand, marginalizing social and environmental reporting does not
help in the same way as does to those business organizations that do incorporate social
and environmental reports in their annual reports (Deegan, 2007)24. Opposite to those
businesses that do disclose social and environmental reporting, businesses that
marginalize those types of report are in risk of increasing their contingent liabilities that
can lead to actual financial losses, from relevant authorities such as dumping toxic
chemicals on land or sea can affect people and later on when the detrimental effects
becomes substantial, the society can litigate for their harmful business activity causing
financial losses to the business / shareholders (Deegan, 2007)25.

Another question that can arise on this issue is that, if having social reporting is that
beneficial when compared to that of not reporting it, then why business community do
marginalize it.

According to Mathews (1997; as cited in Lodhia, 1999)26, he said that social accounting
and reporting is not new and has been a topic since 1970. Gray (1994, 1995; Mathews
1997, 1998a, 1998b; as cited in Lodhia, 1999)27 have reasoned why businesses have
probably been marginalizing social and environmental reporting and they stated that:

24
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 1328.
25
Deegan, G. (2007), Australian Financial Accounting, 5th Edition, McGraw Hill Australia Pty Limited,
Australia, page 1329.
26
Lodhia, S.K. (1999), ‘Accountants and Environmental Accounting: an initial and exploratory study into
contemporary practices in Fiji’, The Journal of Pacific Studies, vol 23 no.2, pp 323 -330.
27
Lodhia, S.K. (1999), ‘Accountants and Environmental Accounting: an initial and exploratory study into
contemporary practices in Fiji’, The Journal of Pacific Studies, vol 23 no.2, pp 323-330.

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o It is a voluntary disclosure and not mandatory and;
o Lack of education and awareness about its values and importance towards the
organization

Environmental Reporting

Environmental accounting is where business organizations accounts all its business


activities that is subject to and in relation to environmental impacts due to their operation
and has to report it in their annual reports (Environmental Agency, 2009)28.

The main aim is to extend the conventional accounting practices by encouraging business
communities to include environmental reports in their annual reports because business is
not only accountable to stakeholders who has financial interest in the firm, but to various
stakeholders including future generations (Bartolomeo et al., 2000)29.

When discussing the issue of whether to include environmental reports or not, we need to
see the impacts of disclosing it towards the firms daily operations and see whether it
hinders the operations or enhances it.

According to Lodhia (1999, pg 325), he says that “…..environmental disclosures


primarily as public relations exercise designed to enhance the image / esteem of the
organizations”.

This means that disclosing environmental reports helps a business enhance its reputation
and because of the increased reputation it becomes easier to recruit good employees
(ICAI, 2009)30. These employees might in turn stay longer because of the good reputation
and so, it reduces employee turnover and ultimately, the employees’ competency
increases resulting in increase in productivity and thus increases profit (ICAI, 2009)31.

“Companies that pay attention to environmental and corporate social responsibility can
reap benefits when it comes to employee recruitment and retention” (ICAI, 2009) 32

28
Environmental Agency, 2009, ‘What is Environmental Accounting’, in Environmental Agency, accessed
19 October 2009, from < http://www.environment-
agency.gov.uk/business/topics/performance/36974.aspx>
29
Bartolomeo, M., Bennett, M., Bouma, J. J., Heydkamp, P., James, P. & Wolters, T. (2000)
Environmental management accounting in Europe: current practice and future potential. European
Accounting Review, 9, 31 – 52.
30
ICAI, 2009, ‘Retaining Your Best People’, in Chartered Accountants Ireland, accessed 19 October 2009,
from < http://www.charteredaccountants.ie/Members/Careers--Placement-Service/Careers-
Advisory1/Career-Advisory-Articles/Retaining-Your-Best-People/>
31
ICAI, 2009, ‘Retaining Your Best People’, in Chartered Accountants Ireland, accessed 19 October 2009,
from < http://www.charteredaccountants.ie/Members/Careers--Placement-Service/Careers-
Advisory1/Career-Advisory-Articles/Retaining-Your-Best-People/>
32
ICAI, 2009, ‘Retaining Your Best People’, in Chartered Accountants Ireland, accessed 19 October 2009,
from < http://www.charteredaccountants.ie/Members/Careers--Placement-Service/Careers-
Advisory1/Career-Advisory-Articles/Retaining-Your-Best-People/>

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Therefore, it also becomes rational enough to come to the point that if we contrast with
businesses that marginalize environmental reports, their reputation and brand marketing,
is not that beneficial compared to those businesses that do discloses either one or both of
environmental and social reporting.

Thus, the benefits leading from one stage to another is negated and, from environmental
point of view, businesses that marginalize environmental reports tend to increase more
pollution and damage to the environment when contrasted with business organizations
that do disclose environmental reports (business organization that disclose environmental
reports “helps improve our environment, health and safety performance and ensures
better relationships and partnerships with our host communities”(WMC, 2002; as cited in
Godfrey et al, 2006, pg 633) .

Speaking of benefits of having environmental reports, Belkaoui (1976; as cited in


Deegan, 2007, pg 1325) studied the reaction between entities having some pollution
control system incorporating within their operations and disclosure of such information.
He found out that the results were in favour of the entities disclosing environmental
reports as they tend to get positive responses from “ethical investors” as their share prices
increased.

This means that those business entities who do not disclose any kind of social and
environmental reports will not enjoy as much benefits than those entities that did disclose
social and environmental reports.

Strengthening Social and Environmental Reports

By now we now know that social and environmental reporting is a voluntary disclosure.
In addition, we also came to know that due to the reason of having social and
environmental a voluntary disclosure, businesses are not disclosing social and
environmental reporting and so they are not getting the benefits that they would
otherwise get if they do disclose it.

In Fiji, Lodhia (1999) has implicitly suggested ways to strengthen such reporting system,
not only which is limited to this geographical area, but also universal wide. He stated:

a) “The research finds accountants in Fiji largely unaware of their role in


promoting environmental sensitivity within organizations” - Lodhia (1999, pg
323);
b) “..accountants are primary player in business activities, it is hoped that they will
be leaders in the environmental accounting revolution……” – Lodhia (1999, pg
324).

From the above two quotation (a) and (b), this means that if the accountants in Fiji and
also in other countries are made aware about their role in promoting social and
environmental reporting, then the pressure from these accountants might help influence
business owners to know its importance and might consider disclosing it.

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Accountants should not be only focus on the financial aspects of the business, but also
need to consider and discuss the firms’ operations towards community and environment.

c) “…environmental accounting requires organizations to forecast the potential


impacts of their activities on the environment (through mechanisms such as
environmental audits) and accordingly, to estimate contingent liabilities and
create provisions for environmental risks” – Lodhia (1999, pg 325).

This encourages entities to perform environmental audits on their operations where


external auditors checks to see if they have complied with environmental regulations and
laws (Leung et al, 2009)33. Having environmental audits allows firms to be on track with
environmental laws as they will be under the watchful eyes of the environmental auditors
and thus this encourages entities to produce social and environmental reports (Leung et
al, 2009)34.

33
Leung, P., Coram, P., Cooper, B.J., and Richardson, P., 2009, Modern Auditing & Assurance Services,
4th Edition, John Wiley & Sons Limited, Australia, pp 44.
34
Leung, P., Coram, P., Cooper, B.J., and Richardson, P., 2009, Modern Auditing & Assurance Services,
4th Edition, John Wiley & Sons Limited, Australia, pp 44.

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Research Objectives
Conventional accounting reports place more emphasis on the financial performance of
reporting entities compared to their social and environmental performance. Guidance on
social and environmental reporting is currently provided by organizations outside the
accounting profession, such as AccountAbility (AA) and the Global Reporting Initiative
(GRI).

The main objectives of this research are as follows:

• Finding out the implications of having social and environmental reports;


• Finding out what are the implications of marginalizing social and environmental
reporting;
• Find what people have to say about social and environmental reporting and;
• Finding out some of the ways to strengthen such reporting system;

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Research Methods
We used the following method(s) to conduct our analysis and findings:

• Questionnaires and Interviews

20 questionnaires was given to various organizations, but actually received 13


answered questionnaires. The questionnaires were given to public and corporate
accountants, academics, small, medium and large enterprises and also given to
people to get their views on the impacts of marginalizing social and
environmental reporting and how can we strengthen such reporting. While they
were answering, we also shared views on each question and discussed issues in
relation to real world. Views were raised and a lot of discussion was done with the
interviewees.

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Analysis and Findings

Question 1

1) Do you think social and environmental reporting, along with financial


reporting is a good thing to do? □Yes □ No

The responses received from the thirteen questionnaires given to various corporate
accountants, public accountants, academics, and business personnel where 92% (12)
of the respondents responded yes. This showed consistency with ethical branch of
stakeholder theory that all users have the right to know about how a particular
business is doing financially, in terms of how much they are considering for the
environment and community.

2) What are the impacts of disclosing social and environmental reporting to:

• Business Community,

Impacts of disclosing Social and Environmental reports

7
Number of respondents

6
5
4
3
2
1
0
Increase reputation reduced pollution competitive advantage,
increase business operation
and more profit
Outcome of disclosing

As we can see in the above diagram, it can be concluded that, there is more focus on
increasing reputation than other outcome. Implicitly, when thinking about why on
reputation, then our group figured out that increasing reputation eventually leads to grab
other outcomes as a sequence. Increased reputation attracting more customers +
reducing pollution more profit.

Page 18 of 30
• Social Community

Impacts of disclosing Social and Environmental Reports

14
Number of respondents

12
10
8
6
4
2
0
stay within society's expectation Increase employee morale
Outcome of disclosing it

In consistent with legitimacy theory, many of the respondents said that, they are better
able to stay within the exceptional boundary of the people. They make sure that their
operations are intact of what the society expects from them, so that litigation crises or any
other such problems do not arise. In addition, businesses tend to do positive things to
people such as no to racial discrimination, gender discrimination and favoritism toward
majority groups because if that happens, then there will be society unhappiness and thus
new regulations will be on making.

• Environment

Impacts of disclosing Social and Environmental reports

14
Number of respondents

12
10
8
6
4
2
0
Reduce environmental risk No response
Outcome of disclosing

As can be seen from the above diagram, more respondents opt for reducing
environmental risk. When social and environmental reports are disclosed, businesses
tends to become more environmental conscious because their performance will be looked

Page 19 of 30
at by various stakeholders and so, to get a positive from them, they would actually try to
reduce risk borne out through environment such as global warming.

3) What are the impacts of excluding social and environmental reporting to:

• Business Communities,

Impact of Excluding Social and Environmental Reports

6
Number of Respondents

3
2

1
0
No chance to improve public Financial loss Profit does not tell everything
relations
Outcome of excluding it

From our analysis, we concluded that when social and environmental reports are
marginalized, there are a lot of problems borne out as a result these are, firstly, there is no
chance of improving public relations as compared to those businesses that do incorporate
social and environmental reports. Another issue raised was of financial loss. Businesses that
marginalize social and environmental reports are in risk of litigation from society or
authorities as they had not legitimized their work prior to litigation. For example, dumping to
toxic chemicals in rivers and if society knows whose doing it and can litigate if someone
living near the river place get affected as a result. And finally, profit does not tell everything
such as number of people laid-off or amount of pollution created and dumped to sea or land.

Page 20 of 30
• Social Community

Impact of Excluding Social and Environmental Reports

14
Number of Respondents

12
10
8
6
4
2
0
Social issues are neglected No response
Outcome of excluding it

Marginalizing social and environmental reports had an impact towards socially as well. If
businesses do not disclose social and environmental reports, then social issues such as
their perception towards racial, gender and inequality discrimination will be unknown to
people and so there could be chances that businesses could be doing this since their
practices are hidden. Such issue was highly pointed out by the respondents.

• Environment

Impact of Disclosing Social and Environmental Reports

8
Number of Respondents

7
6
5
4
3
2
1
0
Unawareness of the impending Increase in pollution No response
risk
Outcome of excluding it

Many respondents said that when social and environmental reports are marginalized,
businesses increases more pollution as there is nothing that people can say about it as
they do not know how much consideration they are putting towards environment. Simply,
businesses continue as usual as had been happening conventionally and when this reports
is not there, people do not know how much harm businesses are doing to environment

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and thus the issue of pollution continues. Another issue was raised regarding the
unawareness of the impending risks exposed due to environmental degradation. When
businesses marginalize social and environmental reports, they tend to increase more
pollution according to th respondents and thus when more pollution there are risks
associated with it. The question then is, what are those risks and when will we be facing
it. Marginalizing social and environmental reports leaves us with this dilemma. If it had
been disclosed, then at least some prediction can be made.

4) Are you prepared to adopt the social and environmental reporting? □Yes □No

From our analysis, about 85% (11) said ‘yes’ that they are prepared to adopt social and
environmental reports using the guidelines set by Global Reporting Initiative or
disclosing it according to how it suits them as long as it gives the true picture of how their
organizations are considerate towards environment and community. However, the reason
some of them are not disclosing it was because it is a voluntary disclosure and they do
not want to focus on that reporting since it is time consuming and costly.

5) What is the main reason why accountants in Fiji are not disclosing social and
environmental reports together with financial reports of a business?

Reasons for not Disclosing Social and Environemntal Reports


In Fiji

7.2
Number of Respondents

7
6.8
6.6
6.4
6.2
6
5.8
5.6
5.4
Time consuming & Costly Voluntary Disclosure
Reasons

Accountants in Fiji do not disclose social and environmental reports, main reason being, is
that it is a voluntary disclosure. Another reason we got was that, accounting for all activities
that had impacted socially and environmentally is time consuming and costly as it becomes
difficult to as to which ones to include or exclude.

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6) How can we enforce accountants in Fiji to make a mandatory incorporation of
social and environmental reports with financial reports in annual reports of
businesses?
□ Strict mandatory mechanism such as mandatory standards
□ Strict environmental legislations
□ Stock exchange listing requirements
□ Education and training in this topic area
□ Other, please specify?

Suggestions on how to strenghten such reporting system


respondents agreement with
a particular suggestion

35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Strict Strict Stock exchange Education and Others
mandatory environmental lisitng training in this
mechanism legislations requirement topic area
such as
mandatory
standards
Suggestions

Choices were given to respondents to choose which suggestion is the best way of
allowing business organizations to incorporate social and environmental reports with
annual reports. In addition, the choices were not only limited to that, but also asked if
there are other ways of strengthening such reporting system. After doing the analysis, we
concluded that many respondents (about 31%) suggested that education and training in
this topic area is the most appropriate way, followed by having strict environmental
legislations, then strict mandatory mechanisms such as mandatory standards and finally,
but not the least, is having some stock exchange listing requirement. None of the
respondents gave any other suggestions apart from the choices we gave them.

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Limitations
The following points some of the limitations of our research assignment. If these
limitations had been tackled, our research would have been more credible and enhanced.

• Number of people and companies interviewed

Many people and companies interviewed and given questionnaires were not answered.
The reason they said was that, they are too busy to answer be interviewed or answer the
questionnaires.

• Geographical Location

The interviews were mainly based from people and companies from Suva and Nadi. We
were not able to interview relevant personnels from other districts in Fiji. However, we
tried to get their responses via email, but it was unsuccessful saying that they are too busy
with their work.

• Studies from other countries

Our analysis and findings were from Fiji, a developing country. The limitation here is
that our conclusion is mainly based from analysis and findings from Fiji. If the same
questionnaires and interviews were to be conducted in overseas countries such as those
developed countries in each continent, the conclusion would have been more universally
acceptable.

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Recommendation
Our group recommends that:

• If the accounting regulators and standard setters such as Fiji Institute of


Accountants (FIA) and International Accounting Standard Board (IASB) (or even
South Pacific Stock Exchange (SPSE)) makes one of the requirement for business
organization to make mandatory disclosure of social and environmental reporting,
then that will help reduce further degradation of our environment such as
pollution and might bring happiness in the society (fair treatment for all,
irrespective of race, gender and minority groups).

• Consistent with what Lodhia (1999) said that accountants have important role in
promoting social and environmental reporting, we recommend that graduate
accountants and accountants who are already in the workforce to be continually
be informed about their role. In addition, they need to be trained and encourage
them to influence business owners to disclose social and environmental reports
despite being a voluntary disclosure requirement.

• Consistent with the ethical branch of stakeholder theory, we recommend media


organizations to inform people about what practices businesses are considering to
ensure their operations are environmentally friendly or even what measures they
are taking in reducing environmental degradation. Not only limited to
environment, but also their contribution towards community. This will pressure
business organizations to report social and environmental reports and thus the
perceived benefits might be fulfilled.

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Conclusion
In conclusion, we can say that at present not much emphasis has been placed on social
and environmental reporting.

With the current rate of detonating environment, it is becoming more necessary for firms
to disclose the damage to the environment. There needs to be more firm specific
disclosure requirements in international and local standard such as International
Accounting Standards Board (IASB) and Fiji Accounting Standards (FAS) so that
impacts could be identified and impending risk is thus avoided as much as possible.

From our literature review, we have seen many writings about the positive impacts of
disclosing social and environmental reports and so if we marginalize this type of
reporting, the opposite is likely to happen, which is the detrimental effects such as more
pollution financial loss and exposure to risks. In Fiji, till date, there are no compulsory
requirements for disclosure of environmental impacts in the financial reports. Hence, all
firms that disclose are normally the ones that do it voluntarily.

Moving on, our analysis and findings show that when we compare businesses that
disclose and those that marginalize social and environmental reports, we came to
conclusion that there are more detrimental effect of marginalizing such reports and
businesses that do disclose it, they get many benefits such as increase in profits and
reputation according to respondents. Such detrimental effects were litigation crisis,
exposure to unknown risks in future and more pollution.

In addition, many firms are willing to act positively towards disclosure of social and
environmental reporting. However, due to lack of guidelines and no mandatory disclosure
requirements, many firms become unenthusiastic. Furthermore, measuring harm or
benefit to the environment becomes quite unquantifiable and therefore standards and
guidelines in this area are quite low.

Finally, we suggest that more specific disclosure requirements are put in place, education
and training in this issue should be tremendously and continuously be given to
accountants who play an important role for the business and the community at large. In
addition, public awareness is very important about how much a business impacts towards
the community and environment so that they could stand for their right on deciding what
is right and what is wrong.

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Appendix

Interview Questionnaires

Company Name: _________________________

Date: _________________________

Job Position: _________________________

1) Do you think social and environmental reporting, along with financial reporting is a good
thing to do? Yes No

2) What are the impacts of disclosing social and environmental reporting to:

Business Community

Social Community

Environment

3) What are the impacts of excluding social and environmental reporting to:

Business Communities

Page 29 of 30
Social Community

Environment

5) Are you prepared to adopt the social and environmental reporting? Yes No

What is the main reason why accountants in Fiji are not disclosing social and environmental
reports together with financial reports of a business?

6) How can we enforce accountants in Fiji to make a mandatory incorporation of social and
environmental reports with financial reports in annual reports of businesses?

Strict mandatory mechanism such as mandatory standards


Strict environmental legislations
Stock exchange listing requirements
Education and training in this topic area
Other, please specify?
__________________________________________________________________________

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