Financial Accounting Theory Individual Report
Impact of Impending Legislation on Sustainability Reporting by New Zealand Local Governments
Introduction:
It has been found by studies that preceding to the beginning of the Environmental Reporting Bill, the development and direction of the sustainability reporting by the local governments of New Zealand were voluntarily consistent with the impending legislation. The Environmental Reporting Bill of New Zealand was introduced in 2014 in the parliament to have a national environmental reporting system to render the environmental sustainability of New Zealand. This Environmental Reporting Bill is regular with the sense of national distinctiveness of the country symbolized by the expression “clean and green.”
The Environmental Reporting Bill and the Resource Management Act of 1991 both rely on the regulation of the local administration and their responsibilities to them regarding reporting and monitoring of the environment. Environmental Reporting Bill is aimed for the improvement of the environmental reporting consistency and its examination figures on a local level and also made a statutory responsibility for consistent environmental reporting for New Zealand local governments. Sustainability Reporting Bill focuses on the natural resources of New Zealand like fresh water, air, marine, land, climate domains, and atmosphere. The reports as per the Environmental Reporting Bill must describe the state of these domains regarding pressures these may be witnessing, any environmental impacts or causes any potential changes in the domain state. The GRI guidelines differed from these obligations which took more of a holistic approach towards the environmental impacts (Hoppe and Niemann, 2017).
Fewer studies have targeted investigating the sustainability disclosure and reporting of New Zealand local governments. The studies have recognized that the cause for reduced sustainability reporting by the New Zealand local governments is its attention to internal stakeholders as compared to external. The councils of New Zealand are not following any specific constant framework for the environmental and social reporting, and this leads to non-comparability in disclosures across the councils. It is also evident in the difference in the content, the extent of reporting and the terminologies across the councils. The disclosure by the local councils is done through different documents as well. These include report cards, annual reports, the condition of the sustainability reports, regional reports, environmental reports, and annual report of data.
The studies prior conducted has been suggesting that the sustainability reporting by the governments has been mostly in its initial development stages which is reflected by the inconsistencies in the extent and type of the sustainability reporting (Lodhia, Jacobs and Park, 2012). Furthermore, it has also been revealed that the studies have been focused on looking at the voluntary reporting of the local governments in expectation of impending legislation. The study looked at the changes in the environmental reporting before the enactment of the legislation regarding the environmental reporting, which would affect the environmental reporting (Sutantoputra, M and Johnson, 2012).
Theories Explaining Voluntary Sustainability Reporting:
The voluntary reporting by the local governments has been explained by various theories which include the stakeholder theory, the institutional theory and the legitimacy theory (Stewart and Susith, 2014).
The Institutional Theory:
The institutional theory suggests that social diffusion and reporting is an isomorphic process which is triggered by the mimetic isomorphism which means that companies and governments try to have the image of openness and reputable image to the citizenry (Bebbington, Unerman and O’Dwyer, 2014). It is also triggered by the normative processes that are consequently the result of the various related public reforms (Tilling, 2004). Other than this, another trigger is the coercive mechanisms which relate to the enforcement of new regulations needing the organizations to maintain or regain their legitimacy. The institutional theory tends to be off from the idea that managers can voluntarily engage in organized activities which are considered to achieve certain outcomes. It believes it more to be the outcome of some influential factors in the form of social pressures (Sogini, Pistoni and Herzig, 2013).
Legitimacy Theory:
Legitimacy theory is another theory which takes into account voluntary managerial actions. Managers are now constantly required to fulfill the organizational accountability in the public segment. The decisions of the organization are linked with a wide range of influences, including the community, political, and financial factors. The legitimacy theory is more of a specific theory which is developed in the political, economic framework (Ismail and Haddaw, 2014).
The legitimacy theory relies on the view that the action of the entity is expected to be desirable and appropriate within the organization of values, norm, idea, and explanation that are socially constructed. This Theory suggests that when facing a situation in which the managers consider a resource as critical to the survival of the company then it considers strategies which would ensure a continual supply of that specific resource (Hoque, 2018). The public agencies, on the contrary, are visible and thus attract greater attention from external stakeholders needing greater organizational legitimacy requiring a positive response. Both the stakeholder theory, and the legitimacy theory consider the organization as depending on the assets of the society (Omran and Ramdhony, 2015).
It is evident that the introduction of the Environmental Reporting Bill has put some pressure on the public sector organizations to revisit their sustainability concepts. The passing of the Environmental Reporting Bill would be considered as fulfilling this role. The local governments are the ones who are much closer to the actual communities and therefore have broader access to initiate change in communities regarding a sustainable future. The local governments, however, in return depend on the main government for support and financial funding.
Regarding the legitimacy theory and its stages in the form of gaining, maintaining, repairing, and losing legitimacy by an organization, the introduction of the Environmental Reporting Bill can be considered as a threat to lose legitimacy if not implemented appropriately and on time. It shows that there is going to be periods in which the organization would voluntarily increase its disclosures to meet the threats like postponing of defeating the regulations. Therefore, to respond to the threat of being imposed by regulations, organizations in the public sector try to increase their voluntary disclosures of environmental and sustainability reporting. It has been found that the legitimization tactics would vary as dependent on the state of the public organization and its efforts for maintaining, regaining, or repairing of the legitimacy (Ministry of Environment, 2015).
Studies Conducted:
Impending Legislation Impact on Sustainability Disclosures of Local Governments of NZ
Research conducted on investigating the link between the consideration of the Environmental Reporting Bill as a threatening issue of legitimacy, and the tactics resulting in legitimacy disclosures for gaining, maintaining or repairing of the legitimacy was attempted (Frame, Jan and Colin, 2009). The research considered the local government of New Zealand as the sample including the seven regional councils. The dependent variable was considered to be the Disclosure index, which consists of the reports against GRI3.1 and GRIS SPA including the core elements and additional elements of disclosures. The time span used was from 2009-2013. The results of the study found the data to be constant with the legitimacy theory and showed that the local area councils of New Zealand persistently increased their environmental disclosures in five years before the introduction of the Environmental Reporting Bill. By doing so, these councils actively gained legitimacy for countering the posed threat of regulation by Environmental Reporting Bill. It is aligned with the notion of defending the legitimacy to defeat or postpone the Environmental Reporting Bill. The choice of tactics of disclosure showed the aim of maintaining legitimacy in the public sector of New Zealand (Othman, Nath and Laswad, 2017).
Determinants of Voluntary Reporting:
Putting this in perspective, the determinants of the voluntary disclosures of the local and central government regarding financial reporting can provide some evidence regarding environmental and sustainability reporting as well. It has been suggested that the agency relationships in the sector are the driving force for the motivation of the managers to disclose information to enable their actions to be monitored. A study has examined various factors which can be the influencing factor for driving voluntary disclosures. This study revealed that municipal wealth, leverage, type of council and the press visibility were directly linked with the voluntary financial reporting of the New Zealand local establishments. The results of the research examined if there were some specific determinants which affected the discretionary financial reporting of the local authorities of New Zealand. And the outcome was largely constant with the hypothesis. The financial leverage of the New Zealand local authorities, their municipal wealth, council type and press visibility were the influencing factors regarding the discretionary reporting and disclosures (Laswad, Fisher and Oyelere, 2005).
Reasons for Initiating Sustainability Development Initiatives
Another study focused on the documenting of the self-descriptions of the organizations of the reasons for initiating the sustainable development reporting and explored this study in the institutional theory framework. Using the institutional theory, the study used regulatory, cognitive and normative institutions along with the organizational dynamics driving the Sustainability reporting activities. The outcome of the research showed that for the specific studies organizations, the reason for initiating the sustainability development reporting was based on rational decisions. The reasons were major because the organization has started using a differentiation strategy considering it will contribute to the business (Ministry for the Environment of New Zealand, 2018).
The results of the study of the organizations showed most of the legitimacy and accountability motivations to be the reason for initiating the sustainable development reporting. Other than this, some of the institutions also considered differentiating them based on Sustainability Development or as for their corporate responsibility efforts. For most of the part, the institutionalization affected the activity as compared to the content of the sustainable development report. This research shows that organizations are extremely responsive to the activities of their peers and hence mimetic pressures can be sometimes more important than moral based or regulatory pressures for the encouragement of such activities. While it is evident that the regulatory pressure would rather increase the incidence in sustainable development reporting, it would be more about superficial compliance. The mimetic pressures make sure the institution considers it as a business case. Even while considering it as limiting or changing the course of the actions, this might be considered as the opportunity to develop shifts towards sustainable development reporting (Ministry of the Environment, 2015).
Political Competition and Voluntary Disclosures:
Another study was conducted which investigated the relationship between the environmental disclosures by the local administration of New Zealand and the political competition. The research included the longitudinal analysis of the local government reporting of the environmental and sustainability disclosure in their yearly reports for the years 2005-06 and 2009-10. The study of content analysis was used for the attachment of the scores to the extent of the environmental reporting. The study showed a positive relationship between environmental reporting and political competition. The local governments reporting the voluntary information on the environment, increased in 2007 as compared to in 2006. The trend in the disclosures was attributed to the elections in local governments in 2007. The outcome of the study was constant with the expectation of the agency theory which shows the insights on perceived agency costs (Mir, 2015).
Voluntary Disclosures of Sustainability Reporting are increasing Environmental Performance:
Another study examines the disclosures of the intentional sustainability reporting by the local management in Australia (Williams, 2011). It examined if the voluntary disclosures of sustainability reporting enable the environmental performance as well. The content analysis index based on the as dependent on the environmental segment of the Global Reporting Initiative was created (Deegan and Gordon, 2012). The outcome of the study showed that the number of voluntary environmental disclosures amongst the Australian local administration is quite low, however positive association exists between the underlying environmental progress and the sustainability disclosures (Oates and Moradi-Motlagh, 2016).
Conclusion:
The conclusion of this study shows that the impending regulations of the New Zealand government on sustainability and environmental reporting do cause the voluntary disclosures by the local governments to increase. It has been proven not only by the use of the agency theory, and legitimacy theory, but also by using the institutional theory. The results show that the even though the efforts are put to defeat or postpone the reporting legislation to uphold the legitimacy of the public council, however, the number of disclosures does have a positive association with the actual environmental performance as well. Furthermore, even though political competition or mimetic pressure is another factor which influences the increase in the voluntary disclosures in environmental sustainability disclosures by the local administration of New Zealand.
References:
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Deegan, C. and Gordon, B. (2012) ‘A Study of the Environmental Disclosure Practices of Australian Corporations’, Accounting and Business Research, vol. 26, no. 3, pp. 187-199.
Frame, B., Jan, B. and Colin, H. (2009) ‘Initiating sustainable development reporting: evidence from New Zealand’, Accounting, Auditing & Accountability Journal, vol. 22, no. 4, pp. 588-625.
Hoppe, T. and Niemann, L. (2017) ‘Sustainability reporting by local governments: a magic tool? Lessons on use and usefulness from European pioneers’, Public Management Review, vol. 20, no. 1, pp. 201-223.
Hoque, Z. (2018) Methodological issues in accounting research, Spriamus Press Ltd.
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Ministry for the Environment of New Zealand (2018) New Zealand’s Environmental Legislation, [Online], Available: http://www.mfe.govt.nz/publications/environmental-reporting/state-new-zealand%E2%80%99s-environment-1997-chapter-four-environment-4 [5 October 2018].
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