- The Bonus plan hypothesis, which suggests that the managers of the firms who are using bonus plans will possibly choose accounting procedures which move reported earnings from a future period to the current period.
- The Debt covenant or debt/equity hypothesis, which suggests that the management of firms with high debt/equity ratios will also choose accounting procedures which move reported earnings from a future period to the current period and
- The Political cost or size hypothesis, which suggests that the management of firms susceptible to high political cost, due to their size or earnings or due to the sector that they perform, are more likely to choose accounting procedures which move reported earnings from the current period to future periods; or policies that help their companies to be more acceptable by the members of their society (advocacy advertising or social and environmental disclosures).
1. b. Questioning the PAT ability to explain the ER and to provide a conceptual framework for it.
Belkaoui and Karpik, were among the first who tried to test Watts and Zimmerman arguments and to link the choice of accounting techniques made by managers, in order deal with the cost monitoring and the political visibility of their companies, with the social and environmental disclosure. Using both a literature based survey and empirical tests they associate the political visibility, as it is measured by the size, of the firms with the tendency of their managers to disclose more social and environmental information. They suggest that this can be used as a technique to reduce the reported profits of a firm, since the environmental and social reporting increases the costs of the firm, as well as to build a good image for the firm. Finally, through their findings, they seemed to support that politically visible firms tend to disclose more social and environmental information while firms with high debt/equity ratios tend to disclose less.
Lemon and Cahan argue that, public pressure groups as the environmental activist organizations will try to pressure government officers to impose costs on firms with bad environmental performance. As a consequence, companies which are politically visible or are under the scrutiny of the public about their environmental performance might be more willing to provide information about their environmental programs. Since the companies annual reports are the main source of information used by all the interested parties, those companies are expected to disclose an increasing amount of environmental reporting information in their financial accounts.
Deegan and Carroll are trying to relate the willingness of some companies to get an annual reporting excellence award with the political cost hypothesis. In order to get this award those companies paid more attention to social and environmental reporting than companies who are not interested in something like that. Finally they suggest that companies susceptible to high political cost are more likely to apply for such an award than companies not susceptible to it.
Milne is arguing against the PAT ability to explain the greening of financial accounting disclosure. He assumes that the main point of the PAT is the managers’ willingness to use the financial reporting in order to protect their own wealth interests. Moreover, he points out that W.Z. makes only few references to social responsibility and its relationship with their main arguments. Consequently, he suggests that there can not be links between the PAT and the ER. But, with all due respect, he seems to base his arguments on a word by word examination of the PAT and he does not pay the necessary attention into the theories ability to be expanded in a related subject area. Systems theory for example, was subject of the biology studies but nowadays it is used widely by the business studies literature.
Eventually, it seems that PAT can explain the increasing disclosure of environmental reporting information into the firms’ annual reports. The most links between them are more likely to be found through the Political cost hypothesis. The question coming next is about the PAT ability to provide a framework for the ER.
A review of W.Z. arguments reveals that PAT focuses more in explaining the motives behind the managers’ willingness to adopt several accounting techniques in order to support their own benefits or to protect their companies from being exposed to high political cost. They mention social and environmental reporting, but it seems that they are using it as a possible tool which can be used by the firms. Moreover, W.Z. seems not to be interested in providing a framework for the techniques they mention, their job is more about explaining and predicting the policies that can be chosen by the firms’ management in order to achieve their goals.
In addition, no one of the PAT supporters (Belkaoui and Karpik, Deegan and Carroll, Lemon and Cahan) seems to relate it with a possible framework for the ER. What they try to do is, to explain how PAT can be related with social and environmental disclosure and to test it through their researches. It seems that PAT can not provide a framework for the ER but now one might ask what can provide such a framework.
2. RESEARCH ABOUT WHAT CAN PROVIDE A CONCEPTUAL FRAMEWORK FOR THE ENVIRONMENTAL REPORTING
With the intention of suggesting, what can provide a generally accepted statement of theoretical principles that could form the frame of reference (conceptual framework) for the ER, this paper attempts to evaluate the suggestions of the related academic literature and research work and to associate them with the everyday practise of the business world and the demands of the interested parties both in UK and overseas.
Trying to deal with the question ‘Could corporate environmental reporting (CER) shadow financial reporting (FR)’ Solomon made a questionnaire survey using a sample of 267 individuals/organizations. This sample was divided into three sub-sample groups:
- The normative party consisted of environmental consultants, government and professional organizations, trade and industry associations and academics.
- The interested party consisted of environmental pressure groups, researchers, independent financial advisors, political and professional bodies, institutional investors, fund managers, banks, and media.
- The company group consisted of companies from all the major industries.
His purpose was to compare the answers of the users, the providers and those who are setting the standards of the environmental reporting information in order to test his research hypotheses.
Based on the findings of this survey Solomon suggests that there exist many similarities between the explicit conceptual framework of the FR and the implicit conceptual framework of the ER. He also points out the differences about the elements of the FR and the ER and the disagreement about who should perform the verification of the ER information. Eventually, he supports that the ER conceptual framework can shadow the FR conceptual framework since the financial reporting mechanism in the UK can provide an appropriate vehicle for both of them.
In contrast to Solomon’s findings, Deegan and Rankin found that there exists an expectations gap between the annual reports users and the annual reports preparers in their country (Australia). This gap is related with the users’ expectations from the environmental reporting information disclosed in the annual reports. Nevertheless they also support the idea that it is the accountants’ job and responsibility to formulate ER standards able to satisfy the users’ demands.
Bebbington Gray and Larrinaga, provide important information about the development of the social and environmental accounting both in Europe and in UK. They evaluate the willingness of the European professional accountancy bodies to train their members in how to provide more reliable environmental information to European society. They mention that UK literature is subdued about the evolution in social and environmental accounting outside the English-speaking countries. Eventually, they suggest that UK researchers need to cooperate with researchers from the other European countries in order to develop reliable standards for the social and environmental accounting. In the same way Owen and Lehman present the environmental and social accounting as a challenge to accounting profession for further development.
Holland and Foo, comparing the quality and the quantity of environmental information disclosed in the annual reports of the companies in UK and US, found that the more legislative based, reporting system in the US make the managers less effective to provide ER information of the same quality and quantity as the managers in UK. Even if it is not mentioned by the researchers themselves, one may assume that searching the annual reports is a de facto acceptance of the relationship between the FR explicit conceptual framework and the ER disclosure. The same assumption might be done by studying the Moneva’s and Llena’s research about the environmental disclosures in annual reports of large companies in Spain.
Consequently, apart from the problems concerning with the elements and the verification of the ER information, it seems that Solomon’s suggestion that ‘the corporate financial reporting has become the implicit, de facto framework for CER’ can be verified through the literature and the research work both in UK and overseas.
CONCLUSION
The above study had the intention to test the PAT ability to explain the greening of financial accounting disclosure and to provide a framework for improving it. Through the related literature can be suggested that PAT is able to explain the inclusion of ER information in the financial accounts due to the companies willingness to avoid high political cost. On the other hand, PAT does not look able to provide a conceptual framework for improving the ER.
According to the literature and the research work about the practise, both in UK and overseas, the development of the above framework is more likely to be related with the existing conceptual framework of the FR.
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