Thursday, February 23, 2012

ENVIRONMENTAL DISCLOSURES IN COMPANY ANNUAL REPORTS

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REPORT ON THE ENVIRONMENTAL AND SOCIAL DISCLOSURES IN COMPANY ANNUAL REPORTS


1. INTRODUCTION


Although a broad topic to analyse, the disclosure of environmental and other social information by Australian companies has been criticised for its apparent lack of and reluctance of companies to account for their ‘social activities’ (Henderson & Peirson 00). To further expand on this, Henderson and Peirson (00, p.1) refer to social activities as the ‘impact of a companies activities on the welfare of society’.


It should also be recognised, that although traditionally companies were concerned with only the financial perspective of creating wealth for their shareholders, they are now extending their responsibility to a wider group of stakeholders including employees, customers and local communities (Deegan, Geddes & Staunton 16). It is therefore the contention of this report to recognise the environmental and social disclosures found in three different Australian publicly listed financial institutions’ annual reports while commenting on the effectiveness and usefulness of disclosing such information.


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. ANALYSIS


.1 THE ANNUAL REPORTS


The following information investigates the environmental and social disclosures found in three financial institutions annual reports. They include the


• Westpac Banking Corporation


• National Australia Bank


• Commonwealth Bank of Australia


.1.1 ENVIRONMENTAL DISCLOURES


As recognised by Kreuze, Newell and Newell (16, p.1), ‘environmental disclosures have become a common feature in annual reports’. When analysing the annual reports of three different banking corporations, it was evident that they varied in regards to the extent of information provided on environmental issues. ‘Westpac Banking Corporation’ supplied the most detailed and effective disclosures by publishing a ‘Social Impact Report’ (Appendix A). Although the ‘National’ and ‘Commonwealth Banks’ also provided environmental information, they did not elaborate to the extent of the ‘Westpac Bank’ and as research indicates, ‘environmental practices and policies of a corporation are becoming of increasingly higher interest to investors’ (Kreuze et al. 16, p.).


The ‘Social Impact Report’ published by ‘Westpac’ indicates clear measures of performance in the areas of social, environmental and economic dimensions and is the first to be released by a financial institution (Westpac Banking Corporation 00). Therefore this gives ‘Westpac’ a competitive edge, as companies publishing details concerning their environmental policies are generally reaping a secondary benefit of new investors (Kreuze et al. 16). Although not as informative as the ‘Westpac Bank’s’ environmental information, the ‘Commonwealth Bank’ has also taken the initiative to develop an Environmental Policy (Appendix B). Both policies outline the companies’ concerns for the environment and what actions or procedures are being adhered to in their daily operations in order to preserve and improve the environment.


As identified in all three banks annual reports is the importance to reduce paper, energy, water, waste and the purchases of other materials. All three banks also mention environmental organisations that they belong to and support. Unfortunately however, ‘The National Bank’ was not very definitive in outlining environmental policies in their published annual report and disclosed only basic information (Appendix C). This information would not be as highly regarded as that provided by the ‘Westpac Bank’, however as there is no consensus or defined way to report environmental disclosures, ‘The National’ has been productive by producing any information voluntarily (Hainsworth 16).


As discovered in a 1 analysis of one hundred and ninety-seven annual reports of different companies, seventy-one of the companies did discuss environmental issues either in the letter to the stakeholder or elsewhere in the annual reports (Deegan 15). These results would have increased over the last ten years, however, as the accounting profession has always required that financial statements disclose all information that might affect users’ decisions, any company neglecting environmental practices and policies can be simply seen as not adhering to accounting policy (Deegan 15).


The reporting of environmental liabilities is covered by Statement of Financial Accounting Standards No. 5 (SFAS 5), ‘Accounting for Contingencies’. This standard requires that a liability be recognised in the financial statements if a loss is probably and the amount of the loss can be reported reasonably. If the chance of the loss occurring is remote than it does not need to be disclosed at all (Kreuze et al. 16). This leniency in the disclosure of environmental information needs to be more definitive in terms of what needs to be reported and where. Within Australia there is a need for professional and legislative requirements for organisations to provide information within their annual accounts about their environmental performance, or about any environmental initiatives that may have undertaken (Deegan et al. 16). As identified in the three banks annual reports, they have ignored to include any disclosures which may be detrimental to the company. This implies that unless legislation in regards to disclosing environmental disclosures is applied, then the credibility of the information being provided by companies can be seen as very low.


.1. COMMUNITY RELATIONS DISCLOSURES


Wealth creation in our society at present is often based and created at the expense of something or someone else, including the environment, communities or our social health. It is necessary that banks and other corporations take into consideration that they have responsibility not only to their investors or shareholders but also to other individuals, either favourably or unfavourably by their operations (Cormier & Gordon 001). Investors, employees, lenders, suppliers, customers, governments, other agencies and the general public all have a right to know the different actions of a company that may have an overall effect on them and the right to voice their demand for a company’s policy within different areas of value to a community (Deegan et al. 16).





As with environmental disclosures, all three banking corporations have made some attempt to provide information in regards to community involvement and support, with the ‘Westpac’ being most sufficient once again with their ‘Social Impact Report’. Each bank identifies that they support many community initiatives through partnerships involving their people, in-kind support and financial contributions. They also highlight these organisations or charities that they have supported and how they have supported them (Appendix D).


As with all three banks, many disclosures are typically found within the companies’ Chairman’s Report, Managing Director’s Report or equivalent. The disclosures tended to be very self-laudatory, emphasising the positive environmental and social aspects of the company without tending to disclose any negative information (Henderson & Peirson 00). The credibility of this information, as with the environmental information, can therefore be seen as low as there is too much bias in the information being provided.


Apart from social and environmental disclosures, the ‘Westpac Bank’ as well as the ‘Commonwealth Bank’ have considered other stakeholders in the company and as a result provided information pertaining particularly to employees and customers. This information was found in the ‘Social Impact Report’ and the ‘Report to Shareholders’ respectively. Both banks have considered issues such as employee satisfaction, education and training, service and affordability levels for customers, disaster relief programs, and ensuring futures for our communities (Commonwealth Bank of Australia 00). All three banking corporations have included information regarding their strategic vision and business goals, although to different extents. This allows stakeholders and the general community to have a better understanding of the company and its different approaches.


. DISCLOSURE OF ENVIRONMENTAL AND SOCIAL INFORMATION IN AUSTRALIN COMPANY ANNUAL REPORTS.


As with any controversial issue, there are always arguments that support the issue and that are against the particular issue in question. From my research and own personal bias on the disclosure of environmental and other social information in Australian publicly listed companies’ annual reports, I have gathered useful information in order to show both perspectives on whether the information should be disclosed.


..1 ARGUMENTS FOR THE DISCLOSURE OF


ENVIRONMENTAL AND SOCIAL INFORMATION.


There are many issues that have been raised over previous years and at present in order to support the disclosure of environmental and social disclosures in annual reports. One major argument is due to this information becoming extremely important to socially conscious investors. Investors are particularly ‘appreciative of reports that describe innovative environmental programs, product improvements and waste reductions’ (Kreuze et al. 16, p.1). The ‘Westpac Bank’ successfully outlined these important issues in their ‘Social Impact Report’ which would be of extreme interest to socially responsible investors.


By disclosing environmental and social information, users of account information can determine negative disclosures that present the company as operating to the detriment of the natural environment Deegan 15). Such disclosures including the admission of causing environmental or health-related problems for residents through the companies’ environmental activities, admission of excessive polluting emissions and admission of non-compliance with government environment regulations are important to society and therefore it should be mandatory to disclose this type of information (Henderson & Peirson 00). As identified in the three financial institutions annual reports, they failed to disclose any environmental or social information that was negative in nature, and therefore did not provide a true indication to how the company is performing in these areas.


Another argument for disclosing environmental and other social information in annual reports is so stakeholders in the company can determine whether the organisation is socially responsibility and adheres to the need of employees, communities, governments, suppliers, customers, trade creditors and the public (Milne & Alder 1). An example could be if a company was creating a gas from the production of their merchandise which is hazardous to humans’ health, then communities are entitled to be informed about this and stakeholders need to be aware of the possible liability it places on the company. The financial community considers ‘clean’ producers good investments because they demonstrate market awareness and avoid costly inefficiency. Environmental and social information should be disclosed to act as a constraint upon socially irresponsible behaviour, give a positive motivation for the corporation to act in a socially responsible manner and to give a comprehensive view of the organisation and its results (Deegan et al. 16).


.. ARGUMENTS AGAINST THE DISCLOSURE OF


ENVIRONMENTAL AND SOCIAL INFORMATION.


At the other end of the spectrum, there are also many reasons that can justify why the disclosure of environmental and social disclosures in annual reports may be argued against. Firstly it should be pointed out that within Australia there are no professional or legislative requirements to provide environmental and social disclosures within company annual reports (Henderson & Peirson 00). Based on this statement, companies argue that providing information that is not required may prove to be time-consuming and as the saying goes ‘time is money’. Some companies believe that you only need to report what is necessary while others consider environmental and social disclosures to be just as important as the financial information itself. Although research indicates controversial results in regards to this subject, some companies do not believe that environmental and social information is of importance to account users and that they are predominately concerned only with financial issues such as the profitability of the firm (Cormier & Gordon 001).


Another argument against the disclosure of this information is that companies may only tend to produce positive environmental and social disclosures or information which presents the company as operating in harmony with the environment (Milne & Alder 1). Disclosing this information can therefore not be justified if a company only reports its positive disclosures and neglects to mention any negative social and environmental disclosures in their annual reports. Unless adequate legislation is introduced to produce both positive and negative information, than any information currently being printed in company annual reports can be seen simply as bias in order to benefit the company (Deegan et al. 16). The three company annual reports previously analysed were a victim to this notion. In all three reports there were mentioning’s of positive environmental and social information relating to the company, however they did not mention any negative or sceptical information which may have damaged the company’s image.


Additional arguments that are against the inclusion of environmental and other social disclosures in annual reports include that


• the inclusion of information pertaining to the environment would cause confusion to readers when they are reviewing and interpreting annual reports.


• the responsibility of providing information pertaining to the environment is not one which belongs to accountants or the accounting function.


• accountants do not have the expertise to provide information pertaining to the environment.


• the current disclosures are superficial and inadequate in their coverage (Deegan et al. 16).


. THE USEFULNESS OF THE REGULATION OF SOCIAL AND


ENVIRONMENTAL DISCLOSURES IN ANNUAL REPORTS TO COMPANY STAKEHOLDERS.


There are many arguments that support the usefulness of the regulation of social and environmental disclosures in annual reports to a broad range of company stakeholders and many arguments that are against it. The following explores some of the advantages and disadvantages of environmental and social regulation for both the company and its stakeholders.


..1 ARGUMENTS FOR THE USEFULNESS OF THE REGULATION OF DISCLOSURES TO A BROAD RANGE OF STAKEHOLDERS.


As identified by Henderson and Peirson (00), in Australia there are many advantages of the regulation of environmental and social disclosures for both the company and the stakeholders. Firstly, internal decision making, which assists management in judging the effectiveness of specific initiatives in meeting the company’s social objectives can be conducted and costs can be compared to the perceived benefits of the company. Secondly, product differentiation can occur which refers to the responsibility of socially responsible companies to differentiate themselves from their competitors that are not conducted environmentally and socially responsibility operations. Finally is enlightened self-interest. Companies are widening their responsibility to include stakeholders from employees through to governments and socially responsible behaviour is seen as being consistent with the economic and survival goals of corporate Australia (Henderson & Peirson 00).


Another possible advantage of regulating the disclosure of environmental and social information is the right of stakeholders to be able to demand for such information if the activities of the organisation are having an overall effect on a community (Hainsworth 16). This enables consumers to be able to evaluate operations and if they do not accord with community desires and expectations than they may elect to transact with alternative entities. As stakeholders are becoming more aware of socially responsible companies, it is possible to make the connection of bad environmental practice with an increase in liabilities and risks which overall diminishes profits (Cormier & Gordon 001). This is important investor information so that at the end of the day, the company is not profiting from consumers based on the company’s lack to disclose necessary and important information.


A list of arguments for the usefulness of the regulation of the disclosures in Australian company annual reports includes that


• employees can determine if they are working for a clean, safe and innovative company.


• customers can establish if the company is enduring to make improvements from year to year in order to have a more environmentally and social respectable company.


• Customers and other stakeholders can ensure that the company is looking out for the future of our communities.


• Consciously environmentally safe consumers can determine if the company is keeping our corporate conscience green.


.. ARGUMENTS AGAINST THE USEFULNESS OF THE


REGULATION OF DISCLOSURES TO A BROAD RANGE OF STAKEHOLDERS.


As recognised by Deegan et al (16, p.) it may be ‘argued by those opposed to increased regulation of environmental and social disclosures in annual reports that the ‘market’ will demand such disclosures and hence given the potential penalties that may be disclosed on non-disclosers there is no need to regulate’. Companies may find that such disclosures are disadvantageous for a number of reasons, one being when trying to recruit new staff. However, informing and involving employees in environmental policy will help encourage and attract good staff, suppliers and contractors.


In relation to social and environmental reporting there is currently little consensus with regard to objectives, measuring methods and reporting frameworks and therefore each company is reporting disclosures differently and users have no base to conduct analysis or compare findings on (Deegan et al. 16). The disclosures are decided on upon choices made by the company rather than a policy set out for companies to follow. Environmental and social disclosures in annual reports are often incomplete and inadequate and often provide only general accounts of environmental performance by corporation. It is generally considered that where environmental disclosures are made, the practices are typically different (Henderson & Peirson 00).


Overall it has been discovered that although results indicate that users on average consider financial information to be material to their decisions it is also indicated that environmental and other social information is typically not considered being as important as financial information such as profits, net assets, cash flows and dividend payments.





. CONCLUSION


Overall, the mention of environmental and social disclosures in Australian company annual reports can bring upon some controversial debates, as the issue as it stands at this point in time has no viable foundations. After investigating the annual reports of three different financial companies and analysing textbooks and journal articles it was discovered that although each company contended to disclose at least some information on environmental and social information, at present there is no guidance in relation to accounting and the environment and there is a distinct lack of consensus on numerous issues relating to the environment. Therefore companies tend to neglect the importance to include negative disclosures as well.


Environmental and social reporting in annual reports will constitute as a fundamental challenge for businesses and accountants in future years. There is definitely room for improvement involving environmental and social accounting practices in company annual reports and accountants need to become aware of the importance of disclosing such information.


REFERENCE LIST


Commonwealth Bank of Australia 00, online, About us, viewed 15 August 00, http//about.commbank.com.au/group_display/0,1,CH04,00.html.


Commonwealth Bank of Australia 00, online, Report to shareholders 00, viewed 15 August 00, http//shareholders.commbank.com.au/GAC_File_Metafile/0,16


87,7%55Fcba%55Fconcisear%55F00,00.pdf.


Cormier, D & Gordon, I 001, database, ‘An examination of social and environmental reporting strategies’, Accounting, Auditing & Accountability Journal, MCB University Press, vol.14, no.5, pp. 587-616, viewed 15 August 00. Available Emerald, http//fernando.emeraldinsight.com/vl=17061/cl=/nw=1/rpsv/~1106


/v14n5/s/p587


Deegan, C 15, ‘The environment What’s it got to do with accounting’, National Accountant, April, pp. -5, in ACCT106 Contemporary issues in accounting resource materials, Central Queensland University, Rockhampton.


Deegan, C, Geddes, S & Staunton J 16, ‘A survey of Australian accountants’ attitudes on environmental reporting’, Accounting Forum, vol.1, no.4, pp. -41, in ACCT106 Contemporary issues in accounting resources materials, Central Queensland University, Rockhampton.


Hainsworth, A 16, ‘The green gap’, Charter, vol.67, no.10, pp. 16-18/1, in ACCT106 Contemporary issues in accounting resource materials, Central Queensland University, Rockhampton.


Henderson, S & Peirson, G 00, Issues in financial accounting, 10th edn, Prentice Hall, Sydney.


Kreuze, J, Newell, G & Newell S 16, database, ‘What companies are reporting (environmental disclosures)’, Institute of Management Accountants, vol.78, no.1, pp.7-4, viewed 15 August 00. Available InfoTrac, http//web7.infotrac.


galegroup.com/itw/infomark/7/708/567870w7/purl=rcl_EAIM


Milne, M & Adler, R 1, database, ‘Exploring the reliability of social and environmental disclosures content analysis’, Accounting, Auditing & Accountability Journal, MCB University Press, vol.1, no., pp. 7-56, viewed 15 August 00. Available Emerald, http//taddeo.emeraldinsight.com/vl=684588/cl=7/nw=1/


rpsv/~1106/v1n/s6/p7


National Australia Bank 00, online, Concise Annual Report 00, viewed 15 August 00, http//www.national.com.au/About_Us/0,,47,00.html.


Westpac Banking Corporation 00, online, Concise Annual Report 00, viewed 15 August 00, http//www.westpac.com.au/internet/publish.nsf/58E8014EAE6DC


6F1CA56C78001C8FC7/$File/00_Concise_Annual_Report.pdf.


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