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Jaffar and Buniamin (2005) Environmental Reporting

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Malaysian Accounting Review Vol. 3 No. 1, 43-60, Oct 2004


 Accounting Department Faculty of Business Management National University of Malaysia  Sharifah Buniamin

Department of Accounting & Finance College of Business Management University Tenaga Nasional (UNITEN) Abstract This This stud study y exam examine iness the the issue issue of envir environ onme ment ntal al repor reporti ting ng from from the the persp perspect ective ive of the the manage manageme ment nt of corpo corporat ration ion in Malay Malaysia sia.. Specia Specially lly,, this this study study investig investigate atess whethe whetherr the managers’ awareness of the environmental issue, managers’ perception on the awareness of the communities on the environmental issue, building of corporate good image and type of industry influence managers to report environmental information. This study also examines the type of media preferred by managers to report environmental information. The results of the study support the legitimacy theory that companies used environmental reporting as a tool to legitim legitimate ate their existe existence nce in the society society.. The main purpo purpose se of report reporting ing is to build build a good good corporate image. Managers’ awareness of the issues, managers’ perception of the awareness of the public on the issues and types of industry are however not strong enough to justify the reporting reporting of the information. information. Addition Additional al analyses analyses,, based on an open-ended open-ended question question reveal reveal quite the same finding that the main reason managers provide environmental information is to shape good corporate image. The most preferred to report the information is in the Special Environmental Report.

INTRODUCTION Topics of environmental accounting and reporting have received substantial interest from academic researchers for the past three decades (see for examples: Deegan & Gordon 1996; Freedman & Jaggi 1988; Gray & Owen 1988; Lessem 1977; O’Donovan & Gibson 2000). It is argued that all parties should play an active role to preserve and maintain the environment. Corporations especially are expected to play the most active role since their activities have caused most harm to the environment. Moreover, corporations also have more resources to undertake preservation activities. Past research on environmental management accounting issues, normally use normative approach, looking into on how environmental issue can be incorporated in the overall accounting system of a corporation. In the environmental costing aspect, Hansen (2000) suggested that environmental related cost should be assigned to products and processes, since they most probably produce residuals that are harmful to the environment. So far, accounting academicians have not reached a consensus on how to tackle this issue. There are many methods or ways suggested in the literature on how to incorporate these costs into the product or services. On the corporate strategic aspect, the overall goal in tackling this issue is to have a continuous improvement framework to improve environment performance. Meanwhile, past research on the environmental financial accounting perspective, used positive accounting theory approach i n investigating the environmental reporting practice and the perceived usefulness of the environmental information. Past studies on the environmental reporting practice, relate certain corporation characteristics, such as size (Freedman & Jaggi 1988; Choi 1998), financial performance (Stanwick & Stanwick 1998; Freedman & Jaggi 1988; Teoh et al. 1998), and market performance (Freedman & Stagliano 1991; Blacconiere & Nortcutt 1997), with level of environmental disclosure. Meanwhile studies on usefulness of environmental information identify certain groups of users and asked them whether the need environmental information to make social and economic decisions (Tilt 1994; Deegan & Rankin 1996). Most of the respondents mentioned that environmental information is one of the information they seek to make decisions. As mentioned earlier, the majority of past studies used the positivist approach in investigating the environmental reporting issue. Mangos and Lewis (1995) commented on the limitation of using this approach as it emphasizes on using economic variables as factors that determined the reporting practice. They suggested that future research should also consider the socialeconomic paradigm that combines the social and economic variables to analyze managers’ selection of accounting practice, in this case, the reporting practice of environmental information. The new social-economic paradigm can provide a richer, more inclusive explanation of factors i nfluencing information supplied to the capital market Neu (1992) in what he called a ‘social constructionist perspective’ suggested the inclusion of societal variables in the future environmental accounting research. Past studies have concluded that certain company characteristics such as size, financial performance, market performance and type of industry explain the environmental reporting practice of publicly listed companies. However, factors that determine environmental reporting practice from the management’s perspective are almost nonexistent. This study extends previous studies by examining factors that influence managers to report environmental information to the public. Specifically, this study will investigate whether  managers’ awareness of the environmental issue, managers’ perception on the awareness of the communities on the environmental issue, building of corporate good image and type of industry influence managers to report environmental information.

LITERATURE REVIEW Corporate Environmental Reporting Around the World The last three decades have witnessed an explosion of interest in the study of environmental reporting around the world (see for examples, Robert 1991, Tsang 1998, William 1999, Holland & Foo 2003). Studies on environmental reporting during these periods attempted to investigate trends of environmental disclosure; factors that determine companies to report environmental information; the association between environmental disclosure and financial performance. Studies on trends of environmental reporting, especially during 1970’s and 1980’s, have shown that the percentage of companies reporting this information is increasing (O'Donovan & Gibson 2000, Gray et al. 1995, Tsang 1998). These studies measured the level of reporting by developing a disclosure or score index of environmental information in annual reports. The frequently used methods to measure the level of disclosure are based on number of pages (Patten 1992), sentences (Gray et al. 1995), words (Deegan & Gordon 1996), and themes of disclosure (Fekrat et al. 1996). All of these studies used content analysis to collect data. Longitudinal studies of three separate research in three different continents, Australia, United Kingdom, and Singapore have also shown an i ncreasing trend of environmental disclosure (O'Donovan & Gibson 2000, Gray et al. 1995, Tsang 1998). The implementation of more stringent environmental regulation and legislation and the occurrence of environmentally related accidents have provided the impetus for the increase in environmental reporting (Lemon & Cahan 1997; Patten 1992; Gamble et al. 1996). Studies on factors that determine companies to report environmental information indicate that there are mixed results on the association between levels of environmental disclosure with financial performance. Studies for examples by Russo and Fouts (1997), Konar and Cohen (1997), Teoh et al. (1998) shows a positive relationship between environmental disclosure and financial performance. Meanwhile studies by Stanwick and Stanwick (1998a) and Stanwick  and Stanwick (1998b) indicate a negative relationship. However, studies on relationship between size and environmental disclosure have consistently produced positive results. Big companies were shown to have higher level of environmental disclosure in their annual reports (Lemon & Cahan 1997; Choi 1998). Environmental reporting is however, negatively correlated with actual environmental performance. Companies that performed badly in term of environmental performance have shown to have a higher level of disclosure (Jaggi & Zhao 1996; Ingram & Frazier 1980; Deegan & Rankin 1996, Romlah et. al 2002, Patten 2002). These studies provide evidence that companies use environmental disclosure to offset negative environmental performance (Patten & Trompeter, 2003). Study by Patten and Trompeter (2003) has also documented evidence that companies use environmental disclosure as a proactive measure to reduce pressure from the public. Past studies also indicate that there are differences, in term of amount and level of environmental reporting, across countries. The reporting practice of companies in developing countries such as Malaysia, Indonesia and Thailand is lower compare to reporting practice in more developed countries (Gamble et al. 1996; Fekrat et al. 1996). These differences are due to culture, political and civil systems variations across countries (William 1999; Archambaults & Archambaults 2003). Corporate Environmental Reporting in Malaysia Currently, there is no statutory requirement in Malaysia that requires public listed companies to disclose environmental information to the public. This would explain the small percentage of Malaysian listed companies that provide environmental information in the annual reports (Thompson 2002; Romlah et. al 2002). In the study done for the year of 1999, Romlah et. al (2002) shows that only 74 out of 362 companies (20.44%) in environmentally sensitive industries and listed on the First Board of the KLSE, provide environmental information in their annual report. The industries involved are

construction, plantation, industrial products, consumer products, trading and services, property, and mining. Level of reporting is measured based on quality, quantity and type of reporting. The results of the study show that the environmental performance variable is significant in influencing companies to report this information. Companies that have problems related to the environment provide detailed environmental information in annual reports, compared to companies that do not have problems relate to the environment. The study also indicates that company size can influence the quantity of environmental information but cannot influence the quality of reporting. A recent survey by ACCA on the corporate environmental reporting practice of Malaysian companies shows that the number of reporting companies grew from 25 in 1999 to 40 companies in 2001. These represent 5.3% and 7.7% of the KLSE First Board listed companies in 1999 and 2001 respectively. The Industrial Products sector (which include oil and gas, metals manufacturing, cement manufacturing, chemical, etc) is the largest sector engaged in environmental reporting (comprising 23% of reporting companies in 1999, and reaching 28% by 2001). The Plantation sector was the second largest (18% - 13%), followed by Consumer Product sector (15% - 19%), Trading and Services (8% - 13%), Construction (8% - 10%), Infrastructure and properties (5% - 8%) and Finance (4% - 6%). All reporting companies used their annual report to communicate environmental information to their stakeholders. However, the majority of reporting companies (95%) devoted less than a page to report the information. Environmental management and achievement were the two most commonly reported. Study by Nik Nazli and Maliah (2002) on environmental reporting practice of 96 companies from nine (9) industries for the year of 2001 indicate that the disclosing practice is very low. Only 32 companies disclose the information. The majority comes from the plantation sector (8 companies out of 13 companies in the sample). They conclude that, ‘….voluntary environmental disclosure in the annual reports of Malaysian companies are not only very low in volume, but are also very general and ad-hoc in nature, have no specific format and tends to have a public relations bias’. The latest study by Thompson (2002) of 2001/2002 annual and stand-alone environmental reports reveals that seven (7) of the top ten (10) largest in Malaysia companies provide information on environmental issues. Unfortunately, the largest company in the list, Malayan Banking Berhad, did not provide any environmental information. Moreover, most of the reporting companies used less than half a page of the annual report for the information. The content of the reports were very general, mentioned for example, “ Company X has taken a proactive stance in pursuing a policy of environmental management at several level”. The results on the low level of environmental disclosures suggests some support for the contention made by Williams (1999: 225),   “…that in the Asia-Pacific region management may not consider environmental and social accounting disclosure to be of importance to suppliers of finance, such as investors, when making investment decisions and therefore, do not feel any pressure to supply these details”. CONCEPTUAL FRAMEWORK This study use legitimacy theory in order to explain environmental reporting behavior among Malaysia companies. Gray et al (1995) define legitimacy as, ‘….a condition or status, which exists when an entity’s value system is congruent with the value system of the larger society of which the entity is a part. When a disparity, actual or  potential, exists between the two value systems, there is a threat to the entity’s legitimacy’. This theory stipulates that the way companies manage and report their operation and policies to the public is influenced by the norms and values existed in the society at that time. A company must appear to consider the rights of the society. If a company does not appear to operate within the bounds and norms, which are considered appropriate by society, then

society may act to remove the organization’s rights to continue its operation (Deegan & Rankin 1997). These norms and values are not static, but keep on changing (Patten 1992). Therefore, companies have to continually make sure that the values and norms of the two parties are in congruence. In the past decades, companies seek to legitimize their existence by showing good economics performance (Patten 1992). The purpose of a business is said, to maximize the wealth of the shareholders. As economic concern was the main priority during the earlier decades, these economic performance measures were considered appropriate to legitimize the operation of a business. Now, economics performance measures are not the only indicators that society depends on in order to evaluate the legitimacy of companies. Companies need to demonstrate that they are also socially responsible. Since there is an increase in the society awareness on the environmental issue, companies must also take measure to ensure their activities are not to the detriment of the environment. When their activities have an adverse impact upon the environment, companies may therefore seek to reestablish its credibility through the disclosure of additional information (Wilmshurst & Frost 2000). As mentioned by Tinker and Niemark (1987), business must also ‘make outlays to repair and prevent damage to the physical environment, to ensure health and safety of consumers, employees, and who reside in the communities where products are manufactured and wastes are dumped ’. Companies with poor social and environmental performance may find it difficult to obtain the necessary resources and support to continue operation within the society ((Wilmshurst & Frost 2000). Moreover, the government, as an elected body, who could be responsive to the concern of society, may introduce more stringent environmental regulations and requirements that may add additional cost to companies. Companies may react to this situation by reporting more environmental information to the public. CONSTRUCTION OF HYPOTHESIS Managers’ awareness of the environmental issue The management of corporations is vital in the day to day running of the organization and in the determination of long-term strategy of the organization. They are also involved in the setting of corporate mission, vision and policies. Managers that are aware of the importance of the environment are also expected to incorporate this awareness in the policy making and operation of their companies. For example, the company would have a specific and formal environmental policy in place, instill environmental protection awareness among its employees, train and educate their employees about environment, and use environmentally friendly materials and processes. Therefore, it is expected that these managers would disclose their environmental related activities to the public. The hypothesis is stated as follows. H1:

Managers’ awareness of the environmental issue is positively associated with the possibilities that companies will disclose environmental information

Managers’ perception on the awareness of the communities on the environmental issue The economy of Malaysia has developed quite rapidly since it gained its independence in 1957. Malaysia citizens have been enjoying an increasing trend of higher income per capita and expected to enjoy more of these economic benefits in the future. Currently, economic prosperity is not the only concern of the citizens as they are also expecting to enjoy a healthy living condition. As mentioned by William (1999), as the level of economic development increases, demand for better living conditions, education, work safety, and training would also become greater. The emergence of many Non Government Organizations (NGO) to help in the protection of the environment, such as Environmental Protection Society Malaysia and Society of Occupational and Environmental Medicine (SOME), provide evidence that Malaysian citizens are also taking into account other priorities beside economic priority. Malaysian citizen, for example, are showing more concern towards the preservation and maintenance of the environment. They are also more aware of the impact of companies’ activities on the environment. Faced with pressure groups that are better organized, financed,

Appendix A 1. List of questions in the questionnaire to measure managers’ awareness of the environmental issue a. Company should have a specific and formal environmental policy. b. Company should disclose environmental information even though it is not required in any accounting standard. c. Company should consider views of non-governmental organization (NGO) such as environmental groups before implementing projects in a location. d. Company should instill environmental care culture among employees (For example 3R culture Reduce, Recycle and Reuse). e. Company should train and educate their employees about environment. f. Global warming can be caused by irresponsible business activities affecting the environment. g. Company should make special investment for environmental care. h. Company should have systematic waste management control. i. Company should focus on Research and Development (R&D) program for the environment.  j. Company should always be sensitive to the government’s projects on environmental care. k. Company’s activities should take into consideration the effect of the activities on the environment. l. Company is responsible for supporting the society in preserving the environment. m. Company should get involved in environmental activities organized by government and local community. n. Company should stop a project if there is protest from the public. o. Company will try to ensure that company’s products are environmental friendly. 2. List of questions in the questionnaire to measure managers’ perception on the awareness of the communities on the environmental issue a. The public is more sensitive to environmental pollution issues (water, air, soil). b. The public community is more sensitive to the dangers of smoking. c. The public is beginning to be more concerned about their health quality. d. The public gives encouraging response to “adopt a river” program. e. The public supports the use of unleaded petrol. f. The public supports recycle program, which organised by the government. g. The public will oppose to the projects that threaten their lives. h. The public is more interested in environmental friendly products. i. Public community will support companies that protect environment. 2.   List of questions in the questionnaire to measure the motive of corporate disclosure as building of corporate good image a. Every activity related to environment will be disclosed in annual report. b. Company’s environmental policy should be disclosed in the annual report. c. Company’s Environmental Management System (EMS) should be disclosed in its annual report. d. Information about company’s achievement related to the environment such as certification of ISO 14000 should be disclosed in the annual report. e. Environmental information reporting can enhance a company’s corporate image. f. Company should disclose any environmental information to gain support from the public. g. Company is confident that environmental information reporting gives positive effects to company and stakeholders relationship h. Absence of environmental information in annual report can jeopardize a company’s  reputation. i. Company should disclose environmental information that gives good reputation to the company.  j. Company should not disclose the environmental information that gives bad reputation to the company.

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