The Main Criticisms of Traditional Financial Reporting
Traditional financial reporting is generally associated with providing information related to the financial performance, the position at a particular provided date, the changes in the financial position and many more and this are useful taking the economic decisions (Leuz and Wysocki 2016). Some of the major information contents mainly includes the statement of the asset that an entity is having, the liabilities, ownership structure and the statement of income, expenditure and profits. Besides this it is also responsible for providing information related to the investments, operations and the financial activities related to flow of cash.
The business world of today is becoming highly competitive along with being collaborative and distributed. The traditional financial reporting is not capable of providing the organizations with an opportunity of gaining a sustainable advantage (Cooper 2017). It is essential to make sure that each of the stakeholders are associated with making intelligent decisions depending upon the real-time information provided. The traditional financial system is lacking the analytic functionalities that are required for providing support to the intelligence needs and the speed at which most of the companies operate (Erb and Pelger 2015).
Traditional financial reporting is only associated with dealing with the financial aspects without reporting any kind of environmental and social impacts of the company. This Financial statements are associated with reflecting the concepts of the operations and the company’s operations. The traditional financial statements are not associated with showing the activities of the company which are associated with effecting the external social factors (Macve 2015). This statements are also capable of depicting the impacts of the actions of the company on the society and the environment or particularly in the communities where the report is present by having a special focus upon the relation existing with the ecosystem. The major reason behind this is that they are not inclusive of the sustainability report.
Major theories behind the Corporate Sustainability Theory:
The two major theories lying behind the corporate sustainability reporting have been listed below:
The Stakeholders Theory: This theory was stated and popularized by Edward Freeman. In this theory the stakeholders are considered to be an individual or a group who are capable of affecting or having the risk of being affected by the achievements or actions that an organization is having while making attempts to reach its objectives (Schwartz 2017). Stakeholder Theory is based upon the premise that the closer or stronger relationship that the organization is having with the external parties the easier it is for them to achieve their objectives and in case if the relation is worst then achieving the objectives becomes much harder.
The external stakeholders want an assurance regarding the fact that they are receiving as much as the amount that is being taken from them. One such example is how much the company is spending upon the programs intended to give back to the society (Ni and Van Wart 2015). The main goal of the stakeholder theory includes the enabling of the factors which are responsible for strengthening of the relationship that the organizations are having with the external parties.
The Theories Behind Corporate Sustainability Reporting
Legitimacy theory: Legitimacy theory is associated with explaining the fact if an organization wants to exist or to survive it must be associated with acting in line with the norms and values of the society. For this reason, it is essential that the corporations must provide the environmental disclosure in the actual report provided by them.
Besides this the theory is also associated with arguing on the fact that if an organization wants to maintain its existence then it must make sure that it stays legitimate in front of the external stakeholders who are considered to be having the power of affecting the legitimacy (Cheng, Ioannou and Serafeim 2014). One of the most important way by which the corporation can remain legitimate in the eyes of the public is by providing the them with the voluntary environmental and societal disclosures in the annual reports provided by them. This is one of the way by which the corporation is capable of publishing the social along with the environmental reports.
The Costs and Benefits of Providing this Information
Often special emphasis is upon the social and environmental aspects that the social responsibility and the corporate responsibility is having and besides this there also exists good practices which consists of a clear economic component. These components are often seen to have a long-term affect. The good practices related to social responsibility and sustainable reporting are valued in a positive way the investors as well as by the shareholders as they are entitled with the risk reduction. This in turn is responsible for the determination of the returns that are demanded from the organization (Shamir 2017).
Traditionally the customers are associated with expecting the fact that the companies would be providing them products and services which along with being safe would also be of high quality and satisfying as well. This products or services would then be initially associated with meeting the expectation that the customers are having. Which means the commercial and contractual action that they are having is responsible for the elimination of any kind of perceptive practice that are presented by the customers. In this case the post-sale service gets admitted, processed and the claims are recorder.
Corporate social responsibility and sustainability does not cost money and the truth is that in order to achieve the benefits there is a need of changing and this would be requiring an extra amount of effort along with some additional investments (Frederick 2016). However while considering the long run it is almost reported by everyone that this would be bringing a positive return for the company.
The extensions in the commitment by making use of the commercial relations is generally associated with referring to the inclusions. Along with the classic parameters related to the quality and price, there exists the environmental and social parameters in the process of homologation of the suppliers and the subcontractors. This is generally responsible for making the commitments for the CSR that the contracting organization is having.
The long term responsible management of the supply chain is associated with bringing a lot of economic benefits and this benefits are sometimes seen to be very much important like the Reputational risks and the costs are reduced (Lins, Servaes and Tamayo, 2017). This mainly happens as more and more consumers are associated with considering the fact that an organization is entirely responsible for the product or the service that it provides and this entirely irrespective of the supply chain. For all this reason working with the suppliers which are not meeting the minimum social responsibility requirement might be associated with affecting the reputation of the organization aand thereby increasing its competitiveness.
Social and environmental audits are to be carried out so as to audit the supplier companies which are most critical and this is done with an objective of ensuring the compliance with the minimums that are established in the contracts along with identifying the actions required for improvements along with being capable of raising them. This in turn is responsible for implication the suppliers in the cycle of the continuous improvement.
Opinion on if the firms should include more than financial information in their annual reports:
From the above discussion it can be suggested that the firms should necessarily be associated with providing more than financial information to the general public. The information should mainly be related to the various environmental and social costs (Lins, Servaes and Tamayo, 2017). The cornerstone for any of the actions, decisions or activities that are related to the protecting the workplace environment can be made by having knowledge and by identifying the various environmental risks faced by the activities of the company.
Knowing the various type of environmental impact with the greatest possible rigor by the companies as well as by the shareholders, posed upon the things that they produce or they can produce is becoming very important day by day. The major reason lying behind this is that they are being continuously subjected to pressure from the various areas so as to achieve the elimination or reduction that they are having (Shamir 2017). This is generally considered to be the objective of the numerous legislative, economic and the training initiatives which are associated with considering the concept of the environmental risk at the heart of its development. The company is generally valued more by the investors if they are responsible for showing a good will of depicting the fact that it cares for the environment as well as the other social responsibilities.
References:
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic management journal, 35(1), pp.1-23.
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Routledge.
Erb, C. and Pelger, C., 2015. “Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting. Accounting, Organizations and Society, 40, pp.13-40.
Frederick, W.C., 2016. Commentary: corporate social responsibility: deep roots, flourishing growth, promising future. Frontiers in psychology, 7, p.129.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Lins, K.V., Servaes, H. and Tamayo, A., 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), pp.1785-1824.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Ni, A. and Van Wart, M., 2015. Corporate Social Responsibility: Doing Well and Doing Good. In Building Business-Government Relations (pp. 175-196). Routledge.
Schwartz, M.S., 2017. Corporate social responsibility. Routledge.
Shamir, R., 2017. Between self-regulation and the Alien Tort Claims Act: On the contested concept of corporate social responsibility. In Crime and Regulation (pp. 155-183). Routledge.
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