Introduction
Annual reporting is no longer a preserve of shareholders as it had been in the past. The stakeholder theory is applied in determining how businesses are managed and stakeholder theorists argue that for a business to be completely successful. Hence, the business must be managed in such a way that all the stakeholders’ interests are addressed. The reporting is no longer only about the financial performance but on the overall performance of the organization and its involvement within its environment. Thus by organizations voluntarily reporting on social and environmental issues, they are showing their credibility. Annual reports are the most relied-on reports by stakeholders who are interested in the social and environmental involvement of corporations (Burrit 1997).
The stakeholder theory requires the management of the organizations should address the business policies and corporate social responsibility (CSR). The stakeholders will want to know how the organization is participating in social and environmental issues. Some suppliers and customers are environmentally conscious and they will not do business with organizations that are not environmental conscious (Mackenzie, 2009). Some stakeholders are involved in human rights issues and they will only conduct business with organizations that are not abusive of their employees (Guthrie, 2008).
Environmental and human rights activists
Environmental and human rights activists are stakeholders in an organization. If an organization is violating human rights by unfair employment regulations; or if it is involved in activities that pollute the environment, these may raise issues with the activists which may spoil the organization’s reputation which will affect the business (Drever, 1997). To avoid these frictions, organizations are advised to include social and environmental issues in their annual reports including which should also include an action plan to improve on the situations. Reports have indicated that there is a connection between an organization’s financial performance and its environmental performance (Elijido-Ten, 2005). The social disclosures relate to corporate social responsibility (CSR). CSR includes the organization’s involvement with the community, the treatment of employees. Environmental issues will include conserving energy, safe ways of production, minimizing pollution, and safe ways of disposing of waste (Murphy, 2003).
Legitimacy Theory
Legitimacy theory bases its arguments on the assumption that the social contract binds businesses, which expects that for the businesses to gain approval and other rewards they are to carry out some socially desired actions. These actions will act as a guarantee for their survival and their continued existence. Legitimacy theory argues that organizations have to behave in ways that the society that surrounds them expects of them and that their activities are accepted and ‘legitimate’ as per these societies norms and expectations, which may be of social or environmental concerns. The voluntary social and environmental disclosures are an organization’s response to the social expectations and these disclosures act as a way of showing the organization is binding to the social contract.
Changes happening in the business world
Changes are happening every day in the business world. The accounting profession needs to accommodate for these changing trends in their reporting requirements in their standards. The accounting standard-making bodies are changing the requirements in their standards. Accountants will need to keep up with these changes even before they are legally required. These will contribute to regaining confidence that the world has lost in them as a result of the scandals in the early between in the early 2000s. They, therefore, have to come up with proactive measures in improving the reports and voluntarily report on issues that may be of relevance to the stakeholders (Khondkar & Rutledge, 2004). In line with this, the International Accounting Standards Boards (IASB) has a proposal to include a new International Accounting Standard (IAS) that will encourage CSR Reporting. The standard will require transnational corporations (TNC) to report on their contributions to society in terms of buying supplies from other TNCs, how much tax they pay to the local authorities among other things. Australia adopted the IASB in 2005 and these standards have been locally adopted by Australia’s Accounting Standards Board (AASB) to meet the legal requirements (International Financial Reporting Standards, 2007).
The collapse of Enron, Tyco International, and WorldCom has affected how the world views the accounting profession. The audit firm Arthur and Anderson had unqualified the two companies’ annual reports just before their collapse. The accounting profession was hence found to have misled the shareholders and other stakeholders who had relied on these annual reports to make any investment decisions (Deegan, 2007). The International Accounting Standards, that were used as the guide in reporting were said to be rule-based and not principle-based. The collapse of these firms resulted in the Sarbanes- Oxley Act (SOX Act) in the U.S. One of the recommendations of this act was that senior managers should take individual responsibility for the accuracy and correctness of the financial reports. Another requirement was that the financial reports should be more enhanced and should be more rounded reporting and internal controls.
Internal control reporting
Internal control reporting includes CSR reporting (Deegan & Blomquist, 2006). Though this Act is only legally applicable in the U.S., the lessons learned are applicable worldwide. Australian Companies that trade or have a link with U.S. companies have had to comply with the SOX Act. The Act also applies to U.S companies that are located in Australia. Thus though this law is not a requirement in Australian law, some companies are reporting on the internal controls, social and environmental issues voluntarily as well as adhering to the legal requirements in the parent companies in the U.S. More than a thousand Australian companies will be affected by the SOX Act requirement (Australian Project & Consulting Services, 2004).
Conclusion
The way businesses are corrected is changing very first. Voluntary disclosures will be appreciated by all the stakeholders as they show credibility. The stakeholders have confidence in such organizations. Accountants will therefore have to keep up with this trend. (IFRS Resources, 2007)
References
Australian Project & Consulting Services. 2004. Why Australians Corporate Compliances for SOX: A reliable solution. Web.
Burrit, L. (1997) Environmental Disclosures in annual reports in Australia in gold and copper mining companies with activities in Papua New Guinea and /or Indonesia. Web.
Deegan, C. (2007) Australian Financial Accounting. New York, McGraw-Hill
Deegan, C. & Blomquist, C. (2006) Stakeholder influence on corporate reporting: An exploration of the interaction between WWF-Australia and the Australian minerals industry. Accounting, Organisations & Society. 31(4), 342-372.
Drever, M., Stanton, P. & McGowan, S. (2007) Contemporary Issues in Accounting. Chichester, John Wiley
Elijido-Ten, E. (1997) Applying Stakeholder theory to Analyze Corporate Environmental Performance: Evidence from Australia’s Top 100 Listed Companies. Web.
Guthrie, J., Cuganesan, S & Ward, L. (2008) Industry specific social and environmental reporting: The Australian Food and Beverage Industry. Accounting Forum. 32(1), 1-15
International Financial Reporting Standards. (2007) New Age Skills for Accounting Professionals. Web.
Khondkar, K & Rutledge, W. (2004) Environmental Disclosures Practices and Financial Performance. Web.
Mackenzie, D. (2009) Making things the same: Gases, emissions rights and the politics of carbon markets. Accounting, Organisations & Society, 34(3), 440-455.
Murphy, R. (2003) A Proposed International Accounting Standard. Web.