Accounting: Research Proposal

Accounting: Research Proposal
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1. Introduction and Background to the Issue
The issues of sustainability and transparency are creating the need for businesses to
incorporate wide information in their annual reports for addressing the varying needs and
requirements of its different stakeholders. The business stakeholders are placing large emphasis
on gaining an insight regarding the nature of business activities, their associated social and
environmental risks and the value that they intends to create for them. As such, the businesses
are emphasizing on incorporating non-financial information in their annual reports in addition
with the financial information and this is leading to development of the concept of integrated
reporting (Zhou, Simnett, & Green, 2017). Integrated reports providing disclosure of both
financial and non-financial information and thus is regarded to be very accurate for depicting the
holistic picture of the company by aligning its financial objectives with the non-financial
performances. The incorporation of sustainability reports enhances the reliability of the public
disclosures developed by the business corporations.
Integrated reporting is increasing large attention from the public and the companies to
meet the future challenges and opportunities of implementing more reliability in the business
operations and activities. This can be achieved by businesses through disclosing the information
in relation to the corporate governance, resource use, strategic risks and operational risks
management for creating long-term value for the stakeholders. There has been increasing
evidence shown by researches that the extent of integrated disclosure by business corporations is
positively associated with the valuation of firms. The concept of integrated reporting is largely
adopted by the firms operating within South Africa but is also recently adopted on a voluntarily
basis within Australian firms. It has been estimated that about 200 big companies operating
within Australia are adopted the concept of developing integrated reports. Sustainability
reporting is regarded as one of the essential requirements of developing and disclosing integrated
reports (Simnett & Huggins, 2015).
The Global Reporting Framework has been developed in this context to provide guidance
to business entities in measuring and disclosing their performance in relation to the social,
economic and environmental issues. The development of integrated reports by the Australian
firms will help in providing encouragement to the companies for considering their sustainability
risks and finding ways for enhancing their long-term performance and growth. The traditional
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reporting practices adopted by Australian firms do not prove to be very useful in providing a
comprehensive account of all the business activities that is covered by the development of
integrated reports. It helps in ensuring to the stakeholders that business entities are socially and
environmentally responsible and is also serving a means for them to enhance their goodwill in
the mind of stakeholders and thus promoting their long-term growth and performance (Lee &
Yeo, 2016). In this context, this research proposal is developed specifically for the purpose of
`developing an understanding of the nature of information included within the integrated reports
and examining the benefits of the information disclosed through it to the market participants such
as shareholders, managers, auditors, regulators and financial intermediaries.
2. Literature Review
As per the views of Simnett, Vanstraelen & Chua, (2010), the integrated reporting (IR)
framework has been developed by International Integrated Reporting Council (IIRC) that has
provided a principle-based approach for developing and presentation of integrated reports. This
innovative form of reporting significantly different from the current financial and sustainability
framework used by businesses in providing an integrated view of the overall performance of
business entities. It has been directed by the European legislators that integrated reporting format
is an effective method to be adopted by businesses to respond to the financial as well as non-
financial needs of business corporations. However, an important issue that is present in this
context is that whether the IR framework is able to disclose all relevant internal and external
decision-making information to the end-users. In this context, it has also been stated by Manetti,
& Toccafondi (2012), the assurance of the sustainability reports will ensure to the stakeholders
that the extent of sustainability information provided through the integrated reports is reliable
and trustworthy. The voluntarily nature of the integrated reporting system provides manager’s a
discretionary power to disclose only positive information and conceal any negative facts related
to its sustainability performance. As such, the assurance of integrated reports by a third-party
such as auditor or any other governing party is required to make such reports more comparable
and reliable and enhancing the trust of the end-users.
Pflugrath, Roebuck and Simnett (2011) has emphasized on the difference in the perceived
credibility of the sustainability reports on the basis of their type of assurance such as by
professional accountants or sustainability consultants in the mind of the end stakeholders. The
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study has indicated that credibility of a CSR report is perceived to be greater by the end-users
when it is assured by a professional accountant. The assurance of the integrated reports is
directly related with the credibility of the information due to improved quality of non-financial
information provided to the stakeholders. The non-financial information that is being included
within the sustainability reports need to be reviewed with the adoption of an internal control
system by business entities. As such, the audit committees and other systems of corporate
governance ca play a key role in enhancing the assurance of the sustainability information
disclosed by business entities.
The study carried out by Dhaliwal, Radhakrishnan, Tsang, & Yang (2012), has
emphasized on the link between the quality of Corporate Social Responsibility (CSR) disclosures
and the accuracy in the analyst forecast about its performance. The stakeholder theory in this
context has stated that effective management of stakeholder relationships is essential for
fostering better financial performance of a firm. This requires increased disclosures regarding the
information related to governance, risk management and social and environmental impact of a
firm by the stakeholders for developing a positive image in their mind regarding the nature of its
operational activities. The non-financial disclosures provided through development of
sustainability reports and integrated it with the financial reports enables in providing credible and
value-relevant information and reducing the uncertainty about the future earnings potential.
Further in this context Cohen & Simnett (2015) has also argued that the increasing pressure on
companies for assuring their sustainability reports is causing the need for them to be assured by
an external third party. The assurance of CSR reports is carried out by the big four auditing firms
and experts from outside the auditing profession. The assurance of the sustainability reports is
directly related with enhancing the relevance and reliability of the content disclosed within these
reports voluntarily by the firms. The CSR reports are regarded to be less reliable if they are not
assured for the stakeholders.
As per the opinion of Stanley (2011), there is direct influence on the level of audit fees
and the quality of the firm performance in relation to CSR (Corporate Social Responsibility).
The audit fees are also impacted largely by the complexity of the audit and the size and nature of
business operations. The more complex is the level of sustainability performance disclosed by an
entity the higher is the auditor labor hours which subsequently lead to an increase in the audit
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