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Jaffar and Buniamin (2005) Environmental Reporting

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Malaysian Accounting Review
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  1 Malaysian Accounting Review Vol. 3 No. 1, 43-60, Oct 2004 ENVIRONMENTAL REPORTING IN MALAYSIA: PERSPECTIVE OF THE MANAGEMENT Romlah Jaffar   Accounting DepartmentFaculty of Business ManagementNational University of Malaysia  Sharifah Buniamin Department of Accounting & FinanceCollege of Business ManagementUniversity Tenaga Nasional (UNITEN) Abstract This study examines the issue of environmental reporting from the perspective of themanagement of corporation in Malaysia. Specially, this study investigates whether themanagers’ awareness of the environmental issue, managers’ perception on the awareness ofthe communities on the environmental issue, building of corporate good image and type ofindustry influence managers to report environmental information. This study also examines thetype of media preferred by managers to report environmental information. The results of thestudy support the legitimacy theory that companies used environmental reporting as a tool tolegitimate their existence in the society. The main purpose of reporting is to build a goodcorporate image. Managers’ awareness of the issues, managers’ perception of the awarenessof the public on the issues and types of industry are however not strong enough to justify thereporting of the information. Additional analyses, based on an open-ended question revealquite the same finding that the main reason managers provide environmental information is toshape good corporate image. The most preferred to report the information is in the SpecialEnvironmental Report.  2 INTRODUCTION Topics of environmental accounting and reporting have received substantial interest fromacademic 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 isargued 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 havecaused most harm to the environment. Moreover, corporations also have more resources toundertake preservation activities.Past research on environmental management accounting issues, normally use normativeapproach, looking into on how environmental issue can be incorporated in the overallaccounting 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. Thereare many methods or ways suggested in the literature on how to incorporate these costs intothe product or services. On the corporate strategic aspect, the overall goal in tackling thisissue is to have a continuous improvement framework to improve environment performance.Meanwhile, past research on the environmental financial accounting perspective, usedpositive accounting theory approach in investigating the environmental reporting practiceand the perceived usefulness of the environmental information. Past studies on theenvironmental 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 & Stagliano1991; Blacconiere & Nortcutt 1997), with level of environmental disclosure. Meanwhile studieson usefulness of environmental information identify certain groups of users and asked themwhether the need environmental information to make social and economic decisions (Tilt 1994;Deegan & Rankin 1996). Most of the respondents mentioned that environmental information isone of the information they seek to make decisions.As mentioned earlier, the majority of past studies used the positivist approach in investigatingthe environmental reporting issue. Mangos and Lewis (1995) commented on the limitation ofusing this approach as it emphasizes on using economic variables as factors that determinedthe reporting practice. They suggested that future research should also consider the social-economic paradigm that combines the social and economic variables to analyze managers’selection of accounting practice, in this case, the reporting practice of environmentalinformation. The new social-economic paradigm can provide a richer, more inclusiveexplanation of factors influencing information supplied to the capital market Neu (1992) inwhat he called a ‘social constructionist perspective’ suggested the inclusion of societalvariables in the future environmental accounting research.Past studies have concluded that certain company characteristics such as size, financialperformance, market performance and type of industry explain the environmental reportingpractice of publicly listed companies. However, factors that determine environmentalreporting practice from the management’s perspective are almost nonexistent. This studyextends previous studies by examining factors that influence managers to reportenvironmental information to the public. Specifically, this study will investigate whether managers’ awareness of the environmental issue, managers’ perception on the awareness ofthe communities on the environmental issue, building of corporate good image and type ofindustry influence managers to report environmental information.  3 LITERATURE REVIEWCorporate Environmental Reporting Around the World The last three decades have witnessed an explosion of interest in the study of environmentalreporting around the world (see for examples, Robert 1991, Tsang 1998, William 1999, Holland &Foo 2003). Studies on environmental reporting during these periods attempted to investigatetrends of environmental disclosure; factors that determine companies to report environmentalinformation; the association between environmental disclosure and financial performance.Studies on trends of environmental reporting, especially during 1970’s and 1980’s, have shownthat 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 bydeveloping a disclosure or score index of environmental information in annual reports. Thefrequently 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 ofdisclosure (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, UnitedKingdom, and Singapore have also shown an increasing trend of environmental disclosure(O'Donovan & Gibson 2000, Gray et al. 1995, Tsang 1998). The implementation of morestringent environmental regulation and legislation and the occurrence of environmentallyrelated 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 thatthere are mixed results on the association between levels of environmental disclosure withfinancial performance. Studies for examples by Russo and Fouts (1997), Konar and Cohen(1997), Teoh et al. (1998) shows a positive relationship between environmental disclosure andfinancial performance. Meanwhile studies by Stanwick and Stanwick (1998a) and Stanwick and Stanwick (1998b) indicate a negative relationship. However, studies on relationshipbetween size and environmental disclosure have consistently produced positive results. Bigcompanies 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 environmentalperformance. Companies that performed badly in term of environmental performance haveshown 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 thatcompanies use environmental disclosure to offset negative environmental performance(Patten & Trompeter, 2003). Study by Patten and Trompeter (2003) has also documentedevidence that companies use environmental disclosure as a proactive measure to reducepressure from the public.Past studies also indicate that there are differences, in term of amount and level ofenvironmental reporting, across countries. The reporting practice of companies in developingcountries such as Malaysia, Indonesia and Thailand is lower compare to reporting practice inmore developed countries (Gamble et al. 1996; Fekrat et al. 1996). These differences are dueto 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 todisclose environmental information to the public. This would explain the small percentage ofMalaysian 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 362companies (20.44%) in environmentally sensitive industries and listed on the First Board of theKLSE, provide environmental information in their annual report. The industries involved are  4 construction, plantation, industrial products, consumer products, trading and services,property, and mining. Level of reporting is measured based on quality, quantity and type ofreporting. The results of the study show that the environmental performance variable issignificant in influencing companies to report this information. Companies that have problemsrelated to the environment provide detailed environmental information in annual reports,compared to companies that do not have problems relate to the environment. The study alsoindicates that company size can influence the quantity of environmental information butcannot influence the quality of reporting.A recent survey by ACCA on the corporate environmental reporting practice of Malaysiancompanies shows that the number of reporting companies grew from 25 in 1999 to 40companies in 2001. These represent 5.3% and 7.7% of the KLSE First Board listed companies in1999 and 2001 respectively. The Industrial Products sector (which include oil and gas, metalsmanufacturing, cement manufacturing, chemical, etc) is the largest sector engaged inenvironmental reporting (comprising 23% of reporting companies in 1999, and reaching 28% by2001). The Plantation sector was the second largest (18% - 13%), followed by Consumer Productsector (15% - 19%), Trading and Services (8% - 13%), Construction (8% - 10%), Infrastructure andproperties (5% - 8%) and Finance (4% - 6%). All reporting companies used their annual report tocommunicate environmental information to their stakeholders. However, the majority ofreporting companies (95%) devoted less than a page to report the information. Environmentalmanagement and achievement were the two most commonly reported.Study by Nik Nazli and Maliah (2002) on environmental reporting practice of 96 companiesfrom 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 (8companies out of 13 companies in the sample). They conclude that, ‘….voluntary environmental disclosure in the annual reports of Malaysiancompanies are not only very low in volume, but are also very general andad-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 environmentalreports reveals that seven (7) of the top ten (10) largest in Malaysia companies provideinformation on environmental issues. Unfortunately, the largest company in the list, MalayanBanking Berhad, did not provide any environmental information. Moreover, most of thereporting companies used less than half a page of the annual report for the information. Thecontent of the reports were very general, mentioned for example, “ Company X has taken aproactive stance in pursuing a policy of environmental management at several level”. The results on the low level of environmental disclosures suggests some support for thecontention made by Williams (1999: 225),  “…that in the Asia-Pacific region management maynot consider environmental and social accounting disclosure to be of importance to suppliersof finance, such as investors, when making investment decisions and therefore, do not feel anypressure to supply these details”. CONCEPTUAL FRAMEWORK This study use legitimacy theory in order to explain environmental reporting behavior amongMalaysia companies. Gray et al (1995) define legitimacy as,‘…. a condition or status, which exists when an entity’s value system is congruent withthe 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 policiesto the public is influenced by the norms and values existed in the society at that time. Acompany must appear to consider the rights of the society. If a company does not appear tooperate within the bounds and norms, which are considered appropriate by society, then
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