CHAPTER 2

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presented the related literature and studies concerning the study

that the researchers deemed important and relevant.

Foreign Literature

Currently, many policymakers lack information needed to understand the

potential environmental impacts of their decisions, and the economic implications of

changes to their environment and natural resources. In contrast, a wealth of economic

information is usually available about production and income, which policymakers use to

understand the state of the economy, monitor trends, and make projections that inform

policy debates. Similarly, environmental accounts have the potential to provide key

information that policymakers can use to understand the state of the environment, how

it is changing over time, and the consequences of various policy options.

Environmental accounting provides a framework for organizing information on the

status, use, and value of natural resources and environmental assets—including

fisheries and forest accounts, among others—as well as expenditures on environmental

protection and resource management. The latest categorization of environmental

accounts by the international community include four types of accounts— natural

resource asset accounts, pollution and material physical flow accounts, monetary and

hybrid accounts, and environmentally-adjusted macroeconomic aggregates.

Importantly, environmental accounting provides a way to link environmental data with

the economic data contained in a country’s System of National Accounts (International

Organization of Supreme Audit Institutions – Working Group on Environmental Auditing

Report, 2010).

Economic development will be sustainable only if it is pursued in a manner which

protects the environment, and that there is a need to pay greater attention to the

management of water, forest and land resources. Rising pressures on the environment

and increasing environmental consciousness have generated the need to account for

the various interactions between all sectors of the economy and the environment.

Environmental accounting is the ability to provide accurate information in the financial

statements regarding the estimated social cost occasioned by the production

externalities on the environment and how much deliberate intervention cost had been

incurred to bridge the gap between the marginal social cost and the marginal private

cost by a firm. Environmental reporting has been seen as a way of increasing

accountability of organizations regarding environmental issues. Environmental

accounting is an inclusive field of accounting. It provides reports for both internal use,

generating environmental information to help make management decisions on pricing,

controlling overhead and capital budgeting, and external use, disclosing environmental

information of interest to the public and to the financial community. There are several

advantages environmental accounting brings to business, notably, the complete costs,

including environmental remediation and long term environmental consequences and

externalities can be quantified and addressed. Companies and other organizations are

required to have accountability to stakeholders, such as consumers, business partners,

investors, employees, local residents, and administration, when utilizing environmental

resources, i.e. public goods, for their business activities (Anand & Srineevasa, 2014).

In practice, environmental reports can range from a simple public relations

statement to a detailed and in-depth examination of the company's environmental

performance, policies, practices and future direction. The central objective of any

environmental report has to be to communicate the company's environmental

performance to the report reader. Based on the assumption that the vast majority of

existing environmental reports are unable to satisfy all of the information requirements

of the target groups for which they are written, it is deemed important to first define the

different audiences, or ‘target groups’, of an environmental report. It is then consulted

with key representatives of each of these target groups and identified the most

important issues that they want to see presented in an environmental report. From the

results of study of Azzone (1997) called “A Stakeholders' View of Environmental

Reporting”, the author proposed two separate reporting strategies which companies

may pursue for a more effective environmental report: (1) they can produce a ‘generic

report’ concentrating on the key points which all target groups accept as being of

primary importance; or alternatively (2) they can produce ‘specialized’ environmental

reports which address all of the requirements of a specific target group. (Azzone, 1997)

ISO 14001:2004 Environmental Management Systems specifies requirements for

an environmental management system to enable an organization to develop and

implement a policy and objectives which take into account legal requirements and other

requirements to which the organization subscribes, and information about significant

environmental aspects. It applies to those environmental aspects that the organization

identifies as those which it can control and those which it can influence. It does not itself

state specific environmental performance criteria. Using ISO 14001:2004 can provide

assurance to company management and employees as well as external stakeholders

that environmental impact is being measured and improved.

ISO 14001:2004 is applicable to any organization that wishes to establish,

implement, maintain and improve an environmental management system, to assure

itself of conformity with its stated environmental policy, and to demonstrate conformity

with the international standard.

All the requirements in ISO 14001:2004 are intended to be incorporated into any

environmental management system. The extent of the application will depend on factors

such as the environmental policy of the organization, the nature of its activities, products

and services and the location where and the conditions in which it functions.

(International Organization for Standardization, 2004)

IFRS 6 Exploration for and Evaluation of Mineral Resources, a standard that

permits an entity to develop an accounting policy for recognition of exploration and

evaluation expenditures as assets without specifically considering the requirements of

paragraphs 11 and 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates

and Errors. Thus, an entity adopting IFRS 6 may continue to use the accounting policies

applied immediately before adopting the IFRS. This includes continuing to use

recognition and measurement practices that are part of those accounting policies.

Exploration for and evaluation of mineral resources means the search for mineral

resources, including minerals, oil, natural gas and similar non-regenerative resources

after the entity has obtained legal rights to explore in a specific area, as well as the

determination of the technical feasibility and commercial viability of extracting the

mineral resource.

Exploration and evaluation expenditures are expenditures incurred in connection

with the exploration and evaluation of mineral resources before the technical feasibility

and commercial viability of extracting a mineral resource is demonstrable. An entity

treats exploration and evaluation assets as a separate class of assets and make the

disclosures required by either IAS 16 Property, Plant and Equipment or IAS 38

Intangible Assets consistent with how the assets are classified.

IFRS 6 requires disclosure of information that identifies and explains the amounts

recognised in its financial statements arising from the exploration for and evaluation of

mineral resources, including its accounting policies for exploration and evaluation

expenditures including the recognition of exploration and evaluation assets the amounts

of assets, liabilities, income and expense and operating and investing cash flows arising

from the exploration for and evaluation of mineral resources (International Accounting

Standards Board, 2004).

Local Literature

The Philippines today shares with other countries the formidable problem of

protecting the environment and restoring and preserving a damaged and depleted

earth. We are all responsible, to one extent or another, for the cutting down of forests,

polluting of waterways, causing the extinction of various species.

Among many concerned quarters, educators have for some time been fostering

environmental awareness, starting even in the elementary school levels. Business

educators should do no less, and weave into their teaching and curricula the analytical

frameworks, tools and techniques that can enhance and enlighten the business

decisions that impact on our surroundings and habitat.

For many business operations -- the use of raw materials, the processes of

production, waste by-products and effluents, packaging, the final disposition of goods

after consumption, to name a few -- have environmental consequences. And business

executives are increasingly aware of growing legal, regulatory and media pressures

arising from the citizenry’s expectations that firms and factories should not profit at the

expense of a community’s quality of life.

These pressures imply the need for new approaches, even a new mindset, for

businessmen, and business schools should respond appropriately.

One effort along these lines is the “Green Marketing” elective offered by the

Marketing Management department of De La Salle University. The course covers such

topics as green products and packaging, eco-labeling, and ISO 14000 (the

internationally recognized certification of an environmental management system). The

class project has student teams conducting an audit of the “earth-friendliness” of the

production and marketing of a specific product or service. The survey follows a format

developed by Dr. Eric Soares of the University of California at Hayward, and asks

whether materials procurement, production and packaging lead to pollution and waste;

how long the product lasts, how the product is disposed of after use, and related

questions.

Teachers and practitioners of accounting can likewise develop electives that deal

with the financial, auditing and tax implications of corporate efforts to comply with more

stringent environmental standard and contribute to sustainable development.

A course in environmental accounting will be a positive step in helping business

firms make sound, defensible decisions that make this planet more livable for present

and future generations. (Manalo, 2002)

The Philippine’s Environmental Policy is enunciated in Presidential Decree

No1151 (1977) which declares that it is the continuing policy of the State to: (1) create,

develop, maintain, and improve conditions under which man and nature can thrive in

productive and enjoyable harmony with each other; (2) fulfil the social, economic, and

other requirements of present and future generations of Filipinos; and (3) ensure the

attainment of an environmental quality that is conducive to a life of dignity and well-

being.

The Decree also established the environmental impact assessment system,

which requires private establishments and government agencies to submit

Environmental Impact Statements (EIS) for every action, project, or undertaking

planned by them, which significantly affects the quality of the environment

(https://www.academia.edu/1152876/The_Philippine_s_Environmental_Policy_is_enunc

iated_in_Presidential_Decree_No_1151_1977_ Retrieved August 21,2015).

Foreign Studies

With increasing awareness of environmental issues, there has been rising

demand for environmental-friendly business practices. Prior research has shown that

the implementation of environmental management practices is influenced by existing

and potential stakeholder groups in the form of external pressures from legislators,

environmental groups, financial institutions and suppliers, as well as internally by

employees and owner/manager attitudes and knowledge. However, it has been

reported that despite business owner/managers having strong “green” attitudes, the

level of implementation of environmental-friendly practices is low. In order to explore the

connection between pressures for improved practices and the management actions

taken, researchers in the past examined how influence from various stakeholders is

related to awareness of environmental issues, and how this awareness relates to

actions taken within the businesses to reduce the environmental impact of their

operations. The results indicate that legislation does result in general environmental

awareness, and that organizations are then willing to change their business processes

and environmental strategies. However, despite their actions they have little awareness

of the benefits that might arise from cost reductions from their environmental-friendly

practices. Those influenced by their suppliers act to reduce waste, but do not put into

place formal environmental management systems, or use environmental messages to

market their goods or services. Nevertheless, it can be argued that they have a real

commitment to environmental issues, as evidenced by a willingness to voluntarily

contribute to environmental organizations (Gadenne, 2008).

Many studies have been conducted in order to investigate the reasons behind

the differences in corporate social and environmental disclosure (CSED) practices

throughout the world. Firm’s characteristics, corporate governance, and contextual

factors are provided as influential determinants of the level and quality of CSED. The

impact of these determinants can be seen in the attitudes and behaviours of the two

main parties in the issue of CSED; information preparers and information users. The

level and the quality of CSED made by companies can be justified by investigating and

understanding what motivates their managers and stakeholders to involve in social and

environmental issues. It is widely believed that stakeholders have an ability to influence

firms’ practices in relation to social and environmental performance and disclosure

(Elsakit & Worthington, 2012).

In the study “The Attitudes of Managers andStakeholders towards Corporate

Social and Environmental Disclosure”, Elsakit & Worthington (2012) concluded that

there is a symbiotic relationship between stakeholders and social and environmental

disclosure. The former benefits from the latter in taking right decisions and, at the same

time, stakeholders put pressure on companies to produce such disclosure and enhance

it to be more credible. Lastly, it might be worth discussing next one of those

stakeholders, which is analysts, as an example of how useful social and environmental

disclosure is, and the impact of ignoring such disclosure in decisions taken by

stakeholders.

Investigating the attitudes and behaviours of companies' managers and

stakeholders towards the issue of CSED provides insights into the justification of the

level and the quality of such disclosure. Understanding the reasons behind managers’

decisions of releasing social and environmental information, and stakeholders’

perception of the importance and usefulness of this information, is an important step to

improve the practices of this kind of disclosure. (Elsakit & Worthington, 2012)

A study by Lu & Abeysekera (2014) titled “Stakeholders' power, corporate

characteristics, and social and environmental disclosure: evidence from China” presents

an up-to-date investigation into corporate social and environmental disclosure practices

within the legitimacy and stakeholder frameworks in the context of China. The empirical

results provide important insights into the influence of stakeholders’ power and

corporate characteristics on corporate social and environmental disclosure practices of

socially responsible Chinese listed firms. Corporate characteristics, such as firm size,

profitability, and industry classification, are all significant factors influencing corporate

social and environmental disclosure. Consistent with legitimacy theory, those firms that

are more likely to be subject to public scrutiny, such as larger firms and firms in high-

profile industries, disclosed more social and environmental information to meet the

expectations of the public. The pressures from various stakeholders, like government,

creditors, and auditors tested in this study, generally appear to be weak in China at

present. However, along with the increase in the stakeholders’ concerns about

corporate social responsibility behaviors, shareholders have influenced firms’ social and

environmental disclosures; and creditors have influenced firms’ disclosures related to

their environmental performance. According to stakeholder theory, those firms that seek

to gain or maintain the support of particular powerful stakeholders have begun to adopt

a disclosure strategy.

The study makes a contribution to the social and environmental accounting

literature by expanding the scope of extant research on corporate social and

environmental disclosure to the context of a developing nation, China. However,

findings of the study must be interpreted with considering the following limitations. First,

owing to the manual collection of disclosure data and a labor-intensive latent content

analysis process, a relatively small sample was used, which may limit the application of

the findings to firms outside the social responsibility ranking list. Second, despite

extensive efforts made regarding the choice of determinants and the development of

accurate proxies for various variables, subjectivity was inevitable. Third, it is also

acknowledged that the single-year data used for testing the relationships hypothesized

in this study may restrict the generalization of findings. Fourth, the study looks into the

extent of social and environmental disclosure rather than the existence of disclosure, as

the sample comprised socially responsible firms engaging in social and environmental

disclosure. (Lu & Abeysekera 2014).

The social and environmental issues and the impact of them on the decision

making process have been increasingly given attention to the financial reporting. Over

time there are many studies about Social and Environmental Accounting that have

different views and arguments on the importance to the corporate report. In developed

countries, the social and environmental accounting has joined the financial report and

annual report. The study of Lê (2011) titled “A Study on Social and Environmental

Accounting, the Corporate Social Responsibility: Awareness, Benefits and Problems

Facing by Vietnamese Companies” has an objective of assessing the understanding of

Vietnamese people on the social and environmental concept, their implementation on

companies in Hanoi. The finding uncovers that although most people understand the

importance of social and environmental activities and having corporate social

responsibility reports, few of Vietnamese companies is able to quantify the cost and

benefits of social and environmental activities as in the financial report (Lê, 2011).

The results of a research by Hieu (2011) have provided interesting findings on

two factors affecting CSR implementation and CSR reporting of enterprises in Vietnam.

For managers, a high level of awareness towards CSR may not be a factor to ensure

that enterprises will fulfill their CSR obligations and requirements. For consumers,

although they do not have a clear attitude, the research results show that the

awareness of Vietnamese consumers and their purchasing decisions influence

significantly on the CSR implementation as well as CSR disclosure of companies.

Although firms commit to provide high quality products and services at reasonable price

as important factors in being socially responsible, there are also gaps in CSR disclosure

and management belief. Due to the fact that there were lack of national standards and

requirements from investors and customers, Vietnamese companies are not willing to

report their CSR activities. Therefore, customers do not have or have very limited

information about CSR implementation and CSR achievement of companies; as a

result, they do not realize the importance and benefits of CSR. The majority of

consumers focus on the price of products rather than CSR when making purchasing

decisions. However, a large proportion of consumers mentioned that in the course of

integration Vietnamese companies would change their behaviors, undertaken actions

and show their responsibility for society. Moreover, if government pays more attention to

CSR, there will be a bright future for CSR to become general practices in Vietnam.

Those findings have challenged for companies to solve CSR issues in which how to

operate effectively to bring added-value to customers, and how to improve the attitude

and awareness of customers towards CSR to gain their loyalty.

The results of the research indicate that there is a perception gap in CSR issues

between managers and customers. The positive management awareness of CSR is

essential but not enough for the success of CSR implementation and practices.

Therefore, consumers that have ability to “influence the profits of competing firms, and

indirectly also the direction of the economy” need to pay more attention on whether

companies’ activities are responsible to society or not (Hansenand Schrader, 1997). If

the public have strong feeling and sensitive for CSR issues, the environmental and

social scandals might be prevented. Public positive awareness of CRS also encourages

firms to act and to behave responsibly and ethically (Hieu, 2011).

Local Studies

A study by Aquino (2009) titled “An Evaluation of Financial and Non-Financial

Environmental Disclosures of Ten Publicly-Listed Mining Companies in the Philippines”

revealed that there was no uniformity in the environmental disclosures of the 10 mining

companies. It was discovered as well that there was no existing environmental

disclosure is concerned. Moreover, there was no mandatory requirement for companies

to undergo environmental audit, and there are no generally-accepted standards

regulating the nature of audit work. In the absence of standards, the views of individual

practitioners will have a decisive effect on the form of the audit.

The study “The Disclosure of Social and Environmental Activities among

Selected Manufacturing Firms in the Top 500 Corporations in the Philippines” aimed to

determine the disclosure practices on social responsibility and environmental concern

among selected firms in the Top 500 Corporations in the Philippines. It also attempted

to determine as to what extent these selected firms’ level of involvement in social and

environmental activities relate to financial performance.

Disclosure of social and environmental activities engaged by the respondent

firms is more qualitative in nature rather than quantitative. Very little disclosure was

made in the annual report. The firms’ social and environmental involvements were

included in the message to stockholders or in a separate body in the annual report.

Disclosure was never found in the body of audited financial statements but in Notes to

Financial Statements and limited only to information about the employees’ retirement

benefits and employees’ stock option plan. More disclosure was shown in non-financial

reports like the company website, a separate social report, in company newsletter and

in survey to these firms. The social report was called by different names. They disclosed

ten different types of social activities and five different types of environmental activities.

The first three social activities these firms were involved in are (1) the giving of

donations and charitable contributions; (2) undertaking community development

programs; and (3) providing medical, dental and healthcare to non-employees. They

have the least involvement in providing sports and recreation program to outsiders or

non-employees. The environmental activities they frequently engaged in are (1) waste

management; (2) environmental protection, preservation, and rehabilitation; and (3)

environmental awareness campaign. They have the least involvement in energy

conservation.

The firms are very much involved in social and environmental activities but they

significantly differ in their involvement as shown in the pair observations of the two

dependent variables. Gross Revenue is the independent variable with the most

explanatory power to predict social and environmental activities. Total assets as

independent variable do not have any explanatory power and therefore do not influence

the occurrence of social and environmental activities.

In view of the research findings, discussions and conclusions, the following

recommendations are given:

Business firms should disclose and include social and environmental activities in

the audited financial statements more particularly in the Income Statement, Statement

of Cash Flows and in Notes Accompanying Financial Statements.

In the income statement, the costs of doing social and environmental activities

have to be disclosed and shown among the operating expenses. A distinctive account

title like Cost of social activities or Cost of environmental activities has to be used to

highlight that these firms are engaged in said activities. This will not only quantify the

social involvement of the firms; this may also place them in a competitive advantage

with other firms offering the same products and services.

It is also suggested to disclose the cost of doing social and environmental

activities in the Statement of Cash Flows specifically among the cash flows from

operations. As stated earlier, business firms do not only have economic and legal

responsibilities but social responsibilities, too.

These social and environmental activities should also be disclosed among the

Notes Accompanying Financial Statements in quantitative and narrative form.

Firms engaged in these activities may design a supplementary report depicting

the social and environmental activities and call the report by a common name like Social

Report. This will supplement the social and environmental activities that are shown in

the financial statements.

Since financial statements are the responsibility of management, social and

environmental activities as depicted in financial statements, should be made part and

parcel of the statement of management’s responsibility for financial statements.

Finally, it is recommended to undertake a research on social and environmental

activities using a specific type of industry to determine if findings will be the same

across industries (Bernados, 2004).

Synthesis

The literature and studies reviewed and presented by the researchers in this

chapter provided them with the background data which guided them in the formulation

of their conceptual framework, research design, and interpretation of their own findings

in the present study. The various materials provided wealth of information and better

insights on the study being conducted.

The present study is closely related to the past study presented in this chapter

titled “The Disclosure of Social and Environmental Activities among Selected

Manufacturing Firms in the Top 500 Corporations in the Philippines” which aimed to

determine how companies disclose their environmental activities or practices in financial

statements and non-financial reports.

The theories, principles and concepts presented in literature and studies

reviewed enriched the researchers’ thoughts and perspective concerning the topic.

Moreover, the findings and the insights provided by these materials gave this study the

information it needed in the realization of the analysis.