CORPORATE SOCIAL REPORTING

A COOK’S TOUR

By Matt Tilling

School of Commerce

Flinders University

South Australia

School of CommerceResearch Paper Series: 01-9

ISSN: 1441-3906

“the worship of money (the ultimate external reward) has become our secular religion... we do live in an age where money talks and where many people listen. We must resist this kind of commoditisation of human subjectivity to realise virtue in all our human practices, not just accounting. Accounting is more than a mere conduit for economic reward. Accounting, if it is to be virtuous, must celebrate itself as the unique creation of human labour and moral agency that it is” (Francis, 1990, p. 15).

POWER AND THE DISCOURSE OF ACCOUNTING

The act of accounting, that is the production of reports purporting to represent the activities undertaken by an organisation, is a human practice that holds itself out as providing authoritative information upon which a variety of people can make decisions. Thus it has the ability to arbitrate the way people view the world, to affect their understanding, and influence their decision-making (Hines,

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1988). This conveys to the practice of accounting a certain power. In a moral society this power must be carefully considered and moderated and used with responsibility. This gives light to an important role for academics, to continually question the domain of accounting practice, and how its power is exercised. Careful consideration must be given to the effects that accounting information has on society and, perhaps more importantly, empowering society to interpret accounting for the tool it is.

Francis (1990) has pointed out that accounting as a practice is so much more than a mere reporting of the facts. Accounting is a discourse, where the accountant chooses what to say, who to say it to, and how to say it. The accountant is empowered to highlight or emphasise certain issues, minimise or eliminate others, and in the process, affect people’s decisions and behaviour. “Explicit recognition of accounting's status as a discursive practice (as opposed to the view that accountants just report the facts) is profoundly important because it forces accountants to acknowledge their own personal involvement, their own moral agency and rhetorical role, in the production and creation of accounting reports” (Francis, 1990, p. 5).

At the same time, however, just as accountants make choices about reports, so society as a whole makes choices about which discourses it will acknowledge. Lehman and Tinker (1987, p. 509) discuss the fact that “the amplitude of an accounting theme depends on its capacity to enlist, echo, harmonize with, and resonate with other themes prevailing in the discursive environment”. In other words, accounting can influence the decisions that people in society make, but it cannot necessarily set the social agenda. Within society there is a growing awareness that the ‘bottom line’ and other purely economic issues, so favoured historically by accounting, may not be enough upon which to judge a firm’s performance, or base a decision.

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Issues associated with ‘quality of life’ are also an important consideration (Harte, Lewis and Owen, 1991).

There must be a continual dialogue between accounting researchers, accounting practitioners and society. In this way the practice of accounting can be moderated between the desires of various groups. Unfortunately there is strong evidence of a large divide between each of these three participants (Bricker, 1990), particularly in their understanding and expectations of accounting information. There are however, researchers in a few areas of accounting research that do seem to be making an effort to work at the interface, at least with society, at this point in time. One of the movements in this direction has been labelled Corporate Social Reporting (CSR) (also sometimes known as Corporate Social Disclosure). It should be noted that in this paper CSR is deemed to include disclosures of an environmental nature.

INCIDENCE OF CORPORATE SOCIAL REPORTING

CSR is an area of accounting research that covers both voluntary and mandatory disclosures made by firms regarding issues considered important to the community at large and of more than just an economic nature. CSR has been considered off and on in the accounting literature since the early 1970s but always on the fringe of accounting academic research (see for example, Seidler and Seidler, 1975). Corporate social reporting has been defined (Parker 1986, p. 72) as having the following roles:

1. Assessing the social (and environmental) impact of corporate activities;

2. Measuring effectiveness of corporate social (and environmental) programmes;

3. Reporting upon a corporation’s discharging of its social (and environmental) responsibilities; and

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4. External and internal information systems allowing comprehensive assessment of all corporate resources and impacts (social, environmental and economic).

A series of studies have shown that CSR by companies is increasing. Deegan and Gordon (1996), focussing on environmental disclosure practices, have conducted one of the most detailed studies in Australia. They concluded that the “amount of voluntary environmental disclosures in Australia is typically low” but that a “general increase in environmental disclosures occurred” (p. 198) over the 11 year period 1980 to 1991. In a UK based study, Gray et al. (1995) found that for various categories of social disclosure (including Environmental, Community and Health and Safety) the average amount of disclosure had steadily increased from 1979 to 1991. However they note “The rise in social disclosure from a little over one page to nearly four-and-a-half pages, it could be argued, may not be something we should get too excited about” (Gray et al., 1995, p. 68). They do go on to argue that although CSR may be considered a marginal activity, it is one that is worth studying, both in its own right, and because it provides opportunities to consider the underlying theory of accounting.

There has been a growing amount of research into CSR outside of Australia, the UK and US. In recent literature, particular attention has been paid to CSR in Europe and South East Asia. One study conducted by Gamble et al. (1996) of 276 companies from 27 countries (and again limited to environmental disclosures) concluded that over the relatively short period of 1989 to 1990 there was a significant increase in individual and overall disclosures across all countries (see also: Tsang, 1998 (Singapore); Andrew et al., 1989 (Malaysia and Singapore); Adams et al., 1998 (six Western European countries)). It can be concluded that CSR is a global phenomenon, and that increases reported in the UK, US and Australia are indicative of

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the increasing importance of these issues to accounting internationally.

Two interesting points that have important ramifications for those considering the CSR of companies have been noted by a number of researchers. First, there is almost a total absence of any “negative” information, and second, some of the information reported may in fact be misleading.

In a study of 71 Australian firms, who were identified as voluntarily producing environmental information, Deegan and Gordon (1996) found that only 14 companies provided information that could be classed as negative, and even then this disclosure was minimal. They conclude that “The environmental disclosures are typically self-laudatory, with little or no negative disclosures being made by all firms in the study” (p. 198). This study supported earlier findings by Guthrie and Parker (1990), who found in a study of Australian, UK and US firms that absolutely no ‘bad news’ was disclosed. In another study Deegan and Rankin (1996) went as far as looking at firms who were subject to successful prosecution by the Environmental Protection Agency. These firms presumably had some bad news to disclose, yet it was found that “firms elected to promote positive environmental attributes… In most cases they failed to disclose any negative environmental information” (p. 6). This contrasts markedly with research conducted within the ‘mainstream’ (that is traditional, economically focussed) financial accounting literature. Skinner (1994) indicates that although companies face an asymmetric response to negative disclosures (that is a disproportionately large drop in share price), they are still likely to disclose to avoid legal suites. He also notes that negative disclosures are much more likely to be made qualitatively. It has been argued that this biasing of CSR should come as no surprise. As has already been identified, accounting disclosure is about control, and positive CSR disclosure may be just a deliberate

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effort to influence decision making. Just “like other ideological materials (party political statements, advertising, public relations “fluff”, religious dogma) it is the repetition of the mundane and particularly the censoring of other points of view that make these reports most effective” (Tinker et al., 1991, p. 39).

Some authors have gone even further. Not just suggesting that the information provided by CSR is biased, but that it may in fact misrepresent the actual situation. Harte and Owen (1991, p. 59) indicate that “social information provided within annual reports tends not to be directly related to quality of actual performance and can indeed be positively misleading”. This concern was echoed by Wiseman (1982) who concluded that voluntary environmental disclosures could misrepresent a company’s environmental performance (also see Ingram and Frazier, 1980).

This situation may have significant ramifications for the long-term viability of CSR. If questions of validity are raised often enough it would seem logical to conclude that users may become reticent in their use of such information. Such concerns have led to calls for “improving reporting and enhancing credibility via the introduction of specific auditable information in the spirit of promoting public accountability” (Harte and Owen, 1991, p. 59).

THE THEORY OF CORPORATE SOCIAL REPORTING

Academics are not content to just sit back and measure the incidence of CSR. Having established that it is a growing phenomenon, attention has been turned to the underlying driving factors. At it’s simplest, to disclose additional information in the Annual Report costs additional money. The firm will not incur this extra cost unless it reasonably expects some kind of return. The role of theory is to place these expectations in some kind of reasonable framework and then assess them.

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From the outset it needs to be appreciated that there is not a single accepted approach to research in accounting (Chua, 1986). One of the major problems for accounting theorists is the sheer complexity of dealing with so many ‘users’ who want an almost infinite variety of data from accountants with which to undertake a variety of tasks. This point has been highlighted by Aitken (1990, p. 224) who notes:

It is quite conceivable that thousands of events are likely to be significant to different users and equally conceivable that information needs are likely to be contradictory given the fact that users are permitted (by a conscious policy of the researcher not to become involved) to favour particular information sets which condition events in a way which is favourable to them (the users).

The accounting researcher is left in a position where they must

favour certain claims and ignore others. This is the basis upon which accounting research is undertaken, and theories of accounting are based. Gray et al. (1988) argue that traditional accounting has suppressed this conflict of needs by taking on a passive role and implicitly ‘preferencing’ the rights of investors. However, CSR by its very nature addresses the question: for whom should we be accounting and how best should we account for them? It opens up dialogue with a far broader range of ‘users’ than just the investor. Gray et al. (1988, p. 7) go further and point out that, “when the traditional intellectual baggage of accounting is hauled across to try and articulate the issues of CSR, it is exposed for the flaccid paraphernalia that it is”.

The choice and explanation of a theoretical perspective can be a very difficult task, particularly in the relatively young area of CSR where no dominant theory has yet been established. Having spent many years examining the area Gray et al (1995, p. 67) comment that

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“CSR practice is a complex activity that cannot fully be explained by a single theoretical perspective or from a single level of resolution”. Gray et al. (1995, p. 67) go on to note however, with regard to research based on specific theories, that:

if such observations augment the attention given to an increasingly widespread and complex activity and thereby recognize the legitimacy of a wider range of voices in corporate activity, then positive and worthy steps have been taken to attempt to challenge the current corporate hegemony and to expand the perspective of conventional accounting.

Tinker (1988, p. 174) also comments on the difficulty in the area

of theory as “'facts' have a meaning, credibility and significance that depends on their linguistic and theoretical context. If facts are 'theory relative' in the sense that the same fact takes on different meanings within different theoretical frames, then 'facts' cannot be an independent source for adjudicating the validity of theories”. He also notes however, that the fact that accounting theories have implicit biases is not in itself bad, but that we must make clear “the assumptions hidden in theorizing, and re-evaluate whether they accord with a conceptualization of our aims for research” (p. 184).

There is perhaps cause for concern when it comes to consideration of the theoretical perspectives of CSR. Mathews (1997, p. 487) comments with regard to CSR in the early years (the 1970s) that “there seems to have been relatively little curiosity expressed about the motivation of those making disclosures”. Of the later years he concludes that there has not been a lot of improvement, and though there has been increased interest, there has been little consensus. Zeghal and Ahmed (1990) are even more damning, concluding that “in spite of many years of experience, corporate social

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accounting has no unifying paradigm and a framework for adequate disclosure is still not developed” (p. 38). They go further to state that “Social accounting has suffered, therefore, from a lack of progress and little consensus exists with regard to objectives, measurement method and reporting framework” (Zeghal and Ahmed, 1990, p. 38). This view is perhaps a little pessimistic.

Tilt (1994) has outlined three broad positions for research in CSR: the functionalist or neo-classical economic paradigm; the interpretive or “middle of the road” paradigm; and, the radical, critical or socio-political paradigm. It should be noted that these three groupings really represent somewhat arbitrary divisions on a continuum. However there does exist some degree of delineation. It is interesting to note these three perspectives match very closely the three broad arguments presented by Mathews (1993, p.9) as to the importance of CSR. Firstly, market-related arguments, which hold that additional disclosures are to be encouraged on the basis that shareholders and creditors will benefit from a more responsive market. Secondly, socially-related arguments which hold that additional disclosures establish the moral nature of the corporation, and therefore satisfy the implicit social contract between business and society and to legitimate the organisation in the eyes of society. Finally, radical-related arguments, which posit a whole new role for accounting. It is not within the scope of this paper to adequately explore these three paradigms, only acknowledge their existence. But as a final note it is important to remember the point made by Deegan (1997, p. 71), that “all theories are simplifications of reality”.

NORMATIVE RESEARCH - THE ROAD BACK TO RELEVANCE

Llewellyn (1996, p. 1, emphasis in original) has noted “that interpretive and critical accounting researchers should now reconnect with accounting as a practice and be prepared to present theories for

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practice rather than restricting their research to theories about practice”. This is to be achieved through the consideration of normative issues. “Researching theories for practice would acknowledge normative issues - in the sense that all theoretical development would be seen as having potential ethical implications” (Llewellyn, 1996, p.1). One of the most exciting and relevant models for normative research in CSR is the Conditional - Normative theory. “The hallmark of a conditional - normative theory is the inclusion of the objective as well as the instrumental hypotheses (i.e. the empirically determined means-end relations), within the theoretical framework” (Mattessich, 1992, p. 190, emphasis in original). In this framework ‘conditions’ are placed upon the application of the normative conclusion. If certain results are desired, and the conditions meet certain requirements, then appropriate (normatively determined) action is taken. The aim is “to provide a range of tools for practitioners to choose from, depending on preconceived and actual needs” (Mattessich, 1992, p. 190). This is an attempt to draw together theory, practice and society, bridging many of the divides that have been identified. It is perhaps pertinent to review Mattessich’s (1992, p. 192) final 3 points:

1. The time is ripe to unite accounting theory and societal norms in a single theoretical framework but, simultaneously, treat general empirical assumptions differently from specific purpose - orientated hypotheses;

2. That academic accounting (as a whole) is an applied science in which conditional - normative reasoning - i.e., the search for connecting efficient means with given ends - ought to be at the very centre; and

3. Reject false pride, which the expression ‘applied science’ seems to injure. It is truth not appearance that counts.

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Theory is a means to an end; it provides a skeleton, upon which research must be hung, but at the end of the day, although it supports the thesis it is not the product.

“Accounting, to the extent that it is a choice about how to effect our lived experience - our ends - is a practice grounded in moral discernment. Accounting is important precisely to the extent the accountant can transform the world, can influence the lived experience of others in ways which cause that experience to differ from what it would be in the absence of accounting, or in the presence of an alternative kind of accounting. Why would an invented human practice like accounting even exist except as a choice about how to shape human experience?” (Franics, 1990, p. 7).

THE FUTURE OF ACCOUNTING

Accountants in practice are presented with a choice, either to change or to remain the same. Accounting academics should be precipitative in any changes that practice needs to make; their role should be to inform both practitioners and society. “[A]ccountants, whether academic or professional, must redirect their efforts before it is too late and they find themselves to be experts in a shrinking area of diminishing importance. One way to prevent this happening is to broaden the field covered by accounting to include social and environmental data” (Mathews, 1997, p. 506).

CSR research has the potential to change accounting. It has widened the scope of what counts as accounting information, and it has begun to consider a wider variety of stakeholders (see for

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example, Baker and Hayes (1995) who focus on employee concerns). The potentially broader role that accounting could play through the identification, measurement, and communication of interactions between the firm and society is slowly being recognised by "managers, the media, politicians and the public" (Mathews, 1997, p. 481). In contributing broader information to more people this should allow them to make better-informed decisions and contribute to a better society. Yet there is still a long way to go.

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