Accountability and accounting regulation the case of the Spanish environmental disclosure standard.pdf

the european accounting review 2002 11 4 723 740 accountability and accounting regulation the case of the spanish environmental disclosure standard carlos larrinaga universidad de burgos francisco carrasco and carmen correa universidad pablo de olavide de sevilla fernando llena and jose m moneva universidad de zaragoza manuscript fi rst received march 2001 manuscript accepted january 2002 abstract mandatory environmental reporting has been seen as a way of increasing accountability of organizations regarding environmental issues this paper is concerned with one standard which requires all the spanish companies to include environmental disclo sures in their fi nancial statements from the survey of the rationale of the disclosure requirements we suggest that more sound environmental initiatives are obscured by an end of pipe emphasis additionally from the research of the reporting activity of a sample of companies a low compliance level results with roughly 80 of companies not providing any environmental information in addition those companies who are reporting some environmental information neglect those aspects of the regulation that are not in their interests to report the interpretation of these fi ndings using the theoretical distinction between administrative and institutional reforms leads us to conclude that the spanish standard on environmental disclosure is insuffi cient to enable new accountability relationships and to empower stakeholders 1 introduction environmental accounting has been seen as a way of discharging corporate accountability vis a vis stakeholders regarding environmental matters1 gray 1992 gray et al 1996 owen et al 1997 moreover environmental accounting address for correspondence carlos larrinaga departamento de econom a y administracio n de empresas universidad de burgos plaza infanta elena e09001 burgos spain copyright 2002 european accounting association issn 0963 8180 print 1468 4497 onlinedoi 10 1080 0963818022000001000 published by routledge journals taylor freedman and stagliano 1991 deegan and rankin 1997 however in the absence of environmental accounting standards the user stakeholder is forced to rely on voluntary environmental reporting this has raised a number of critiques as research has conclusively demonstrated the argument that voluntary environ mental reporting is being actually used to at best legitimate corporate activities or at worst to convey a misleading view of corporate environmental performance the results of some studies indicate that environmental reporting is not related to corporate environmental performance ingram and frazier 1980 wiseman 1982 rockness 1985 and is incomplete deegan and rankin 1996 moneva and llena 2000 in particular regarding the non disclosure of bad news in addition the vast majority of companies are not making any environmental disclosure neu et al 1998 contend that voluntary environmental reporting in annual reports gain credibility due to its proximity to the audited fi nancial statements in their view environmental disclosures seek to manage public impressions of organizational actions but not necessarily through the provision of false information 1998 273 rather companies select which events should be highlighted and which should be omitted and defy or dismiss the demand of one relevant public in order to meet the demands of more important publics in order to place in context the main theme of this paper it is useful to note the distinction made by owen et al 1997 between administrative and institutional reforms for them an initial role of environmental accounting is to develop reportingmechanismsto fi llthegapbetweenanincreasingenviron mental regulation and a stagnant environmental reporting the new reporting techniques administrative reform could be adopted by fi rms voluntary environ mental reporting however owen et al 1997 contend that technical arrange ments in the absence of institutional reform are not effective in empowering accountability relationships and stakeholders and that this applies to voluntary environmental initiatives undertaken by companies an institutional reform would imply a discursive dialogue and new structures of corporate governance of which mandatory environmental reporting could be a crucial element in particular legislation could improve environmental reporting by avoiding a the difference between companies that disclose and companies that do not b opacity regarding bad news c disclosure of non audited information gray et al 1996 assert that the most appropriate solution for europe is to go down the route of making social reporting mandatory 1996 212 deegan and rankin 1996 1997 and owen et al 1997 have also called for accounting regulators to place the development of environmental accounting and disclosure standards on the agenda reporting on environmental issues and sustainable development has been recommended by among other institutions the united nations isar 1998 the european commission 1993 2001a 2001b see also aaf 1995 and by the fe de ration des experts comptables europe ens fee 1995 with the exceptions 724the european accounting review downloaded by cornell university at 15 08 31 may 2013 of adams et al 1995 and bebbington 1999 there is a paucity of research concerning the evaluation of mandatory social and environmental disclosure the main reason being the absence of such a regulation nevertheless some european governments have made environmental reporting mandatory denmark vedso 1996 the netherlands gray et al 1998 spain see below and norway and sweden naa 1999 the spanish disclosure standard offers a unique opportunity to evaluate some problems and opportunities of mandatory environmental reporting on the one hand it has been proposed adams et al 1995 1998 neu et al 1998 that the actual practice of social and environmental reporting could be interpreted as an effective means of intervention and confusion on the other hand owen et al 1997 complain of such an approach which in their view if not engaged in practice could be an abdication of responsibility and risks complicity with the destructive forces in our world instead they suggest examining new developing institutional arrangements designed to empower stakeholders institutional reform using the spanish reform as a subject of study the main purpose of this paper is to investigate whether environmental accounting regulation is an institutional reform and therefore would be capable of increasing organizational account ability regarding their environmental impact the rest of the paper proceeds as follows the next section outlines the environmental disclosure required by the spanish accounting regulation compliance with this particular requirement of the spanish accounting regulation is dealt with in section 3 a qualitative analysis addresses disclosure completeness in section 4 and in section 5 the very conception of the environment conveyed by the standard is examined section 6 discusses the implication of the fi ndings for the objective of the paper and fi nally section 7 concludes 2 the electric utilities general accounting plan hopwood contends that behind the european accounting regulation there is a tradition of recognizing the social as well as the economic roles of statutory information requirements and the role of the state in enabling and facilitating rather than transcending market processes in the information sphere hopwood 1994 250 indeed the european union action programmes on the environment have called for enterprises to disclose as part of their annual accounts details of their environmental policy and activities and their expenses on environmental programmes they also demanded to make provision in their accounts for environmental risks and future environmental expenses european commission 1993 2001a gray et al 1996 recently the european commission issued a recommendation addressed to the member states in order to regulate environ mental accounting and reporting european commission 2001b the spanish environmental disclosure standard725 downloaded by cornell university at 15 08 31 may 2013 though the european union has not made environmental disclosure compul sory several national accounting regulators have addressed environmental reporting this paper will refer to the cases of denmark and spain the danish environmental protection act s chapter 5 requires more than 3 000 companies to submit yearly accompanying the fi nancial statements a green report including general information a directors report a resource consumption report and if audited the auditors opinion information can be omitted for competitive reasons vedso 1996 while there is no prescribed reporting format vedso 1996 the demand of a resource consumption report suggests an eco balance approach the spanish initiative see below differs in several respects from the danish first while the danish develops an eco balance approach the spanish initiative remains in the realms of conventional fi nancial accounting second spanish environmental disclosures made by companies must follow a prescribed format finally and more importantly in the spanish case environmental disclosure has to be included in the notes to the fi nancial statements thus there is a requirement to audit it as an aspect of the fi nancial statements it is worth remembering some features of the spanish accounting regulation see la nez 1994 for a more detailed explanation the standard setter is the instituto de contabilidad y auditor a de cuentas icac accounting and auditing institute a governmental institution that belongs to the economy ministry the last profound reform of accounting regulation took place from 1986 until 1990 owing to the integration of spain in the european community in january 1986 the main vehicles of accounting regulation are the companies act and the plan general de contabilidad pgc general accounting plan that contains accounting principles valuation rules and mandatory models of fi nancial statements the pgc currently in force was issued in 1990 subsequently the icac has continued to issue standards on recognition valuation and disclosure through two different means on the one hand focused standards resoluciones dealing with specifi c accounting matters on the other hand the icac has issued several adapted pgcs considering the specifi c features of different industries e g the adapted pgc for electric utilities was issued in 1998 paradoxically the icac has issued general standards through the adapted pgcs this is the case of the disclosure obligation discussed in the present paper which was issued through the adapted pgc for electric utilities rd 437 98 in the foreword of the adapted pgc it is enacted that even though this environmental disclosure standard was introduced in one adapted pgc it is to be considered generally applicable understanding that the required information is but a clarifi cation of the pgc contents moreover while the standard was fi rst issued in march 1998 it was additionally reinforced in december 1998 through the adapted pgcs for the water supply and sewage industry2and for the road transport facilities 3indeed it is also worth mentioning that as a requirement for the publicity of accounts companies are required to present their fi nancial statements to the mercantile registry the ministry of justice following the accounting regulation issues 726the european accounting review downloaded by cornell university at 15 08 31 may 2013 table 1 environmental disclosure standard 437 98 a environmental information to be disclosed in the notes to the fi nancial statements memoria a item 4 raccounting criteria related to environmental actions with environmental impact and saving and energy effi ciency programmes it should be disclosed valuation criteria and impacts on the earnings of the company particularly the criteria used for discriminating expenses between current expenses and a higher value of assets should be disclosed description of the assessment and calculation method for the liabilities caused by the environmental impact item 18 2 current expenses related with energy saving and effi ciency projects indicating the amount and their nature item 19information on the environment description and characteristics of the most signifi cant systems equipment and installations capitalized whose aim be the minimization of environmental impacts and the protection and improvement of the environment its nature purpose accounting value and its accumulated depreciation should be included current expenses with the aim of environmental protection and improvement distinguishing between ordinary and extraordinary items including its purpose in every case risks and expenses covered with provisions related to environmental actions with special reference to those derived from current litigation reparations and others for every provision it should be disclosed initial amount accruals write downs final amount contingent liabilities related to environmental protection and improvement including risks transferred to other entities method of assessment and contingent factors with indication of the eventual effects on net worth and on profi ts if needed reasons that impede this assessment must be explained as well as the minimum and maximum risks b environmental disclosure standard re classifi ed 1 accounting policy in relation to the recognition and valuation of current expenses and environmental assets 2 accounting policy in relation to the recognition and evaluation of environmental liabilities 3 expenses on resource saving and effi ciency 4 nature purpose and accounting value of environmental assets 5 current expenses 6 environmental provisions 7 environmental contingent liabilities note athe same information except that included under item 18 2 is included word for word in the other adapted pgcs and in the mercantile registry forms source royal decree 437 1998 the spanish environmental disclosure standard727 downloaded by cornell university at 15 08 31 may 2013 some forms of fi nancial statements intended for all the spanish companies the last model issued in may 2000 4includes the environmental disclosure standard discussed here it is important to put in context the issuance of the spanish environmental disclosure standard in a deregulating and privatization atmosphere two different laws for the electric utilities industries came to light in the 1990s according to the foreword of the second law 54 1997 27 november 1997 its objectives are ensuring the electricity supply ensuring its quality and ensuring that this is done at the least possible cost all this without forgiving the environmental protection this aspect becomes particularly relevant given the characteristics of this sector this same law broadly enacts the content of fi nancial statements for the companies belonging to this industry according to the law article 20 special attention must be paid to the inclusion in the annual accounts of information dealing with corporate actions which impact on the environment with the aim of integrating progressively environmental preservation in economic decision making in the companies accordingly the adapted pgc for electric utilities companies rd 437 98 includes the obligation to disclose some environmental information in the notes to the fi nancial statements memoria 5this information is spread through different items see table 1 a in item 4 which deals with accounting policies the adapted pgc requests to disclose the criteria employed to value assets liabilities and expenses related to the corporation s environmental impact item 19 as demanded in the adapted pgc is to be fully devoted for disclosing the nature and the amount of environmental investments expenses provisions and contin gent liabilities finally as part of item 18 the adapted pgc requires to disclose the expenses on energy saving and effi ciency programmes however this particular aspect has been omitted in the other adapted pgcs and in the mercantile registry forms all the information to be disclosed is re classifi ed in table 1 b resulting in seven specifi c items the standard came into force in 1998 as a result spanish companies have to disclose environmental information as part of the notes to the fi nancial state ments from 1998 the standard and its effect on effective disclosure are examined in this paper in order to evaluate whether mandatory environmental reporting would increase accountability and transparency vis a vis corporate environmental impacts compliance of spanish companies with the standard is examined next 3 compliance with the spanish environmental disclosure standard this section reports on a survey of the implementation of the environmental disclosure standard that involved a content analysis of the 1997 1998 and 1999 fi nancial statements of the companies included in the 1999 general index of the madrid stock exchange the year 1997 was analysed in order to control for 728the european accounting review downloaded by cornell university at 15 08 31 may 2013 environmental disclosures made prior to the standard issuance in the area of social and environmental reporting there do not seem to be signifi cant differences between quoted and non quoted spanish companies moneva and llena 2000 out of 125 companies included in the index 42 fi nancial and services fi rms were not examined considering their less important direct environmental impact additionally the fi nancial statements of 13 companies were not available due to merger and acquisitions processes as a result we examined the annual reports of 70 industrial fi rms whose distribution is exhibited in table 2 these industrial and relatively large companies are expected to be producing a signifi cant environmental impact for the purpose of this research it is not only important whether companies comply with the standard but also how they comply therefore in a fi rst stage some measure of compliance