Reporting and Disclosure
Chapter 5 Reporting and Disclosure Discussion Questions 1. Transparent financial reporting means that timely and accurate disclosures are made on all important matters affecting a company’s financial position and performance. It implies openness, communication, and accountability.
Transparent financial reporting protects investors because nothing is hidden from them. Investors can better assess the risks of owning securities when information is truthful and complete. Transparent financial reporting also improves market quality.
It enhances investor confidence. Open communication creates markets that are fair, orderly, efficient, and free from abuse and misconduct. 2.
Four reasons why multinational corporations are increasingly being held accountable to constituencies other than traditional investor groups: a. The development and growth of the influence of trade unions. b. The growing recognition of the view that those who are significantly affected by decisions made by institutions in general must be given the opportunity to influence those decisions. c.
The rejection by many governments of classical economic premises such as the belief that the regulated pursuit of private gain maximizes society’s welfare. d. The increasing concern over the social and economic impact of multinational corporations in host countries. 3. Arguments in favor of equal disclosure include: a. The absence of equal disclosure would create an unfair playing field for U.
S. companies. Non-U. S. companies would have a competitive advantage in that they would not have to disclose the same information and so would not incur the costs involved in generating and publishing it. .
Investors in non-U. S. companies have the same information needs as those who invest in U. S. companies.
A market concerned with investor protection would make sure that investors have timely and material information on all listed companies, not just those domiciled in the United States. c. Unequal disclosure might impede cross-company comparisons involving U. S. and non-U. S.
companies. Possible reasons against equal disclosure include: a. The high cost of meeting equal disclosure requirements may deter foreign issuers from listing in the United States. . The extra costs involved work against the benefits of listing to the foreign companies. Evaluation of arguments: All of these arguments have merit.
There is no unambiguously correct answer as to what disclosure requirements should be imposed on foreign issuers, and there has been a contentious debate on this subject in the United States in recent years. In practice, fairness arguments often carry great weight in public debate, even when objective economic analysis does not support them. 4.
The simple answer is that mandatory disclosures are corporate disclosures made in response to regulatory requirements (for example, rules issued by national regulators or stock exchanges), and that voluntary disclosures are purely discretionary in nature. The distinction between mandatory and voluntary disclosures can be ambiguous in some settings, however. For example, the requirement that U.
S. companies must file Form 10-Ks with the U. S. Securities and Exchange Commission is straightforward. However, measurement and disclosure approaches for some of the items in the Form 10-K are not.
Similarly, there are widely divergent views concerning what types of press announcements are mandatory versus voluntary.
Two possible explanations for differences in managers’ voluntary disclosure practices are: (1) Managers in highly competitive industries may be less forthcoming than managers in less competitive industries due to the expected cost of releasing information of potential use to their competitors. (2) Managers are expected to be more forthcoming when there is good news to disclose, than when there is bad news, particularly when the news can be expected to affect share prices.
Two explanations for differences in managers’ mandatory disclosure practices are: (1) cross-jurisdictional differences in disclosure requirements, (2) and differences in the extent of compliance with disclosure rules due to cross-jurisdictional differences in enforcement. 5. Triple bottom line reporting refers to reporting on a company’s economic, social, and environmental performance.
It is a form of social responsibility reporting designed to demonstrate good corporate citizenship. So-called “sustainability” reports are an increasingly popular means of triple bottom line reporting.
There is substantial variation in social reporting today. More regulation would improve comparability, but it might also stifle reporting innovations. The usefulness of social reporting to outside parties, particularly investors, needs to be demonstrated before implementing more regulation for it. 6.
Often we expect to observe less voluntary disclosure by companies in emerging market countries than by those in developed countries: a. Equity markets are relatively less developed in many emerging market countries, resulting in lower total demand for company information by investors and analysts. b.
In many emerging market countries, most financing is supplied by banks and insiders such as family groups. This also leads to less demand for timely, credible public disclosure, and in these markets enhanced disclosure may have limited benefits. In general, we expect to observe fewer regulatory disclosure requirements in emerging market countries than in developed countries for the same reasons.
The equity markets and disclosure requirements in many emerging market countries are not yet well developed, and accounting and auditing systems in emerging market countries are less well developed than in more developed market countries. . The two broad objectives of investor-oriented equity markets are investor protection and market quality. In the absence of investor protection, investors will not be willing to participate in a market. However, in the absence of market quality, markets will not function satisfactorily. Many would consider the objectives equally important.
8. It certainly is possible that more required disclosure will further encourage investor participation in capital markets by providing more and better information on which to base investment decisions.
Benefits of increased investor participation include increased liquidity, reduced transaction costs, and more accurate and efficient market pricing. However, it can also be argued that in some situations disclosure requirements are excessive. In markets where disclosure requirements are considered too stringent, companies may be deterred from publicly listing their shares, and may choose to use secondary markets (such as the over-the-counter market in the United States) that lack the investor protections of regulated stock exchanges, and which provide investors with lower liquidity and higher transaction costs.
Thus, more required disclosure is not necessarily better than less.
9. Forecasts of revenues and income are relatively uncommon because there can be legal repercussions if forecasts are not met. Forecasts rely on subjective estimates of uncertain future events, making them unreliable in many situations. Vaguer forms of forward looking information are more common than precise forecasts. For example, directional forecasts (up or down) of revenues and income are more common than range forecasts which are, in turn, more common than precise forecasts of these amounts. 10.
Corporate governance refers to the structure of relationships and responsibilities among shareholders, board members, and corporate managers. Investors and financial analysts use information about a company’s corporate governance (for example, whether an audit committee’s members are independent, and responsibilities and remuneration of board members) to better assess the level of investor protection (and therefore, expected cash flows to investors) at the company. Exercises 1. Daimler’s Outlook section in its 2008 annual report has the following forecasts: a.
Global demand for automobiles will decrease 10 percent in 2009.
Demand for cars and light trucks and commercial vehicles will decrease in the major market of the United States, Western Europe, and Japan. (p. 83) b. Unit sales of cars, trucks, vans, and busses will all decrease in 2009. Overall, there will be a “significant” decrease in 2009 and a “slight” increase in 2010.
(p. 84) c. Revenues will be lower in 2009 with a slight increase in 2010. There will be a “burden” on earnings in 2009, but an increase in 2010. Cash flows will be lower in 2009.
(p. 85) d.
Specific spending plans for investments in property, plant, and equipment, and research and development for 2009 to 2010 are provided along with comparative amounts for 2008. The individual planned spending amounts for cars, trucks, and vans are also provided. (pp.
86–87) e. Employee numbers will decrease in 2009. (p. 87) For most items, Daimler has a two-year forecast horizon and directional (increase or decrease) forecasts. However, specific amounts are given for investments in property, plant, equipment, and research and development. Investors should find this information useful.
Investors are concerned about a company’s future prospects. Management’s expectations guide users’ own forecasts. Investors would also find specific forecasts of revenue and earnings useful. 2. IFRS 8 requires that the following items be disclosed for each reportable segment: a.
Profit or loss b. Assets c. Liabilities d. Particular income and expense items if such measures are regularly provided to the chief operating decision maker e. Reconciliations of reportable segment revenues, profit or loss, assets, and liabilities to consolidated totals A reportable segment is an operating segment about which separate financial information is available that is evaluated regularly by management in assessing segment performance and deciding how to allocate resources to operating segments.
) In addition to the above items, information must also be disclosed about: a. Revenues derived from products or services b. Revenues derived from countries c. Major customers d. How operating segments are determined Lafarge discloses that its reportable segments are its three product lines.
The company discloses all of the items required to be disclosed by reportable segment.
Operating income, assets, liabilities, and individual income and expense items are reported. Segment revenues, operating income, assets, and liabilities are reconciled to consolidated totals. Lafarge also discloses revenues by selected countries and regions of the world. In addition, capital expenditure and assets by selected countries and regions are disclosed. There is no information about major customers, but Lafarge may have a large, diversified customer base.
Overall, Lafarge complies with the requirements of IFRS 8 and even goes beyond its requirements in some cases. 3. a. Roche’s total number of employees grew slightly at 1. 8 percent.
Most of the employees (34,570, 43 percent of the total) are in Europe, followed by North America (25,823, 32 percent of the total.
The fewest employees are in Latin America (4,988, 6 percent of the total). b. Latin America and North America have the highest turnover rates at 14. 3 percent and 10. 4 percent, respectively.
“Manufacturing reorganizations” were responsible for the turnover in both areas. c. Roche states that “a diverse workforce is critical to the success of a global company…and that…diversity promotes innovation, and allows flexibility and inspires creativity…. Roche seems to have had some success in promoting diversity in the company. Roche notes that it employs people from 139 countries and that half of its headquarters employees are from outside Switzerland.
Local nationals accounting for the majority of the workforce in Roche affiliates and for 75 percent of the management teams. Data presented on gender diversity (women in the workplace) all show improvements. d. Outside investors may find this information useful because it speaks to the welfare of company employees. For example, satisfied employees will work harder to achieve a company’s goals than unsatisfied ones will.
The information is also useful in judging whether companies comply with employment laws, such as those dealing with nondiscriminatory hiring.
4. The overall conclusion is that Roche’s safety record is stable whereas its environmental record has improved somewhat. Safety: The accident rate is comparable between 2009 and 2008, but the rate for these years is lower than 2007. Occupational accidents are comparable between 2009 and 2007, but the number of accidents for these two years is lower than 2008. Occupational illnesses are lower in 2009, compared to 2008 and 2007.
Work related fatalities are 0, 1, and 0 for each of the three years, so nonexistent (or nearly so for 2008).
Finally, work-related accidents per million working hours are comparable between 2009 and 2008, and lower than 2007. Taking the three years together, the conclusion is that safety has remained fairly stable over the three years. Environmental: Overall energy use increased in 2009 and 2008 compared to 2007, but energy use per CHF of sales and per employee is stable over the three years. Greenhouse emissions increased in 2009 and 2008 compared to 2007, but emissions per CHF of sales is lower in 2009and 2008 compared to 2007.
Ozone-depletion causing halogenated hydrocarbons emissions have decreased each year. Emissions to the air of VOCs and sulfur dioxide have also decreased each year, whereas those of particulates and nitrogen oxides have remained stable.
General waste produced has increased over the three years, whereas chemical waste produced has decreased. Finally, water statistics are mixed. Water used and heavy metals discharged into watercourses show a downward trend. Organic matter discharged into watercourses shows an upward trend. Water withdrawn is down slightly.
Overall, Roche’s environmental record seems improved in most areas. 5. a. According to the Web site, the objective of the International Auditing and Assurance Standards Board (IAASB) is to serve the public interest by: 1. Setting high quality standards on auditing, assurance, quality control, and related service standards.
2. Facilitating the convergence of international and national standards, thereby enhancing the quality and uniformity of practice throughout the world and strengthening public confidence in the global auditing and assurance profession. b.
According to this Web site, auditing standards refer to the audit or review of historical financial information, whereas assurance standards refer to engagements dealing with subject matters other than historical financial information. c.
PricewaterhouseCoopers states that Roche’s internal sustainability reporting guidelines are being properly applied, that its internal reporting system is functioning as designed, and that “nothing has come to our attention that causes us to believe…” that the Sustainability Report “…does not give a fair picture of Roche’s performance. Thus, Roche has received so-called “negative assurance” on its sustainability reporting. 6. a. Corporate social responsibility is about how companies conduct themselves in relation to “stakeholders,” such as workers, consumers, and the broader society in which firms operate.
b. Some argue that “the business of business is business. ” In conducting their business, companies provide huge and critical contributions to society. Among these are productivity gains, innovation and research, employment, and human capital development.
In poor countries, companies often contribute critical capital, technology, and skills that reduce poverty.
Companies that compete and prosper make society better off. Under this view, the proper guardian of the public interest is government, not business. Another view is that social issues (and social responsibility) are not tangential to business but fundamental to it. Companies that ignore public sentiment make themselves vulnerable to attack. Ignoring social issues turns a blind eye to forces that may alter a company’s strategic future.
Thus, companies ought to do ore than the law requires because social issues ultimately feed into shareholder value. c. Whether companies ought to report on their social responsibility activities probably depends on one’s view of corporate social responsibility.
Nevertheless, a strong case can be made that proactive disclosure of a company’s societal contributions can positively affect its image and ultimately its bottom line. d. As noted in c.
, the relevance of CSR disclosures for outside investors is that a company’s societal contributions can positively affect its image and ultimately its bottom line. . a. The performance indicators recommended in the GRI guidelines are as follows: ECONOMIC PERFORMANCE INDICATORS Aspect: Economic Performance Core EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments. Core EC2 Financial implications and other risks and opportunities for the organization’s activities due to climate change. Core EC3 Coverage of the organization’s defined benefit plan obligations.
Core EC4 Significant financial assistance received from government. Aspect: Market Presence Add EC5 Range of ratios of standard entry level wage compared to local minimum wage at significant locations of operation. Core EC6 Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operation. Core EC7 Procedures for local hiring and proportion of senior management hired from the local community at locations of significant operation. Aspect: Indirect Economic ImpactsC
EC8 Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in-kind, or pro bono engagement.
Add EC9 Understanding and describing significant indirect economic impacts, including the extent of impacts. ENVIRONNMENTAL PERFORMANCE INDICATORS Aspect: Materials Core EN1 Materials used by weight or volume. Core EN2 Percentage of materials used that are recycled input materials. Aspect: Energy Core EN3 Direct energy consumption by primary energy source. Core EN4 Indirect energy consumption by primary source.
Add EN5 Energy saved due to conservation and efficiency improvements.
Add EN6 Initiatives to provide energy-efficient or renewable energy based products and services, and reductions in energy requirements as a result of these initiatives. Add EN7 Initiatives to reduce indirect energy consumption and reductions achieved. Aspect: Water Core EN8 Total water withdrawal by source. Add EN9 Water sources significantly affected by withdrawal of water. Add EN10 Percentage and total volume of water recycled and reused.
Aspect: Biodiversity Core
EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas. Core EN12 Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas. Add EN13 Habitats protected or restored. Add EN14 Strategies, current actions, and future plans for managing impacts on biodiversity. Add EN15 Number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk.
Aspect: Emissions, Effluents, and Waste Core EN16 Total direct and indirect greenhouse gas emissions by weight.
Core EN17 Other relevant indirect greenhouse gas emissions by weight. Add EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved. Core EN19 Emissions of ozone-depleting substances by weight. Core EN20 NO, SO, and other significant air emissions by type and weight. Core EN21 Total water discharge by quality and destination. Core EN22 Total weight of waste by type and disposal method.
Core EN23 Total number and volume of significant spills.
Add EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally. Add EN25 Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the reporting organization’s discharges of water and runoff. Aspect: Products and Services Core EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation. Core
EN27 Percentage of products sold and their packaging materials that are reclaimed by category.
Aspect: Compliance Core EN28 Monetary value of significant fines and total number of nonmonetary sanctions for noncompliance with environmental laws and regulations. Aspect: Transport EN29 Significant environmental impacts of transporting products and other goods and materials used for the organization’s operations, and transporting members of the workforce. Aspect: Overall Add EN30 Total environmental protection expenditures and investments by type SOCIAL PERFORMANCE INDICATORS Labor Practices and Decent Work
Aspect: Employment Core LA1 Total workforce by employment type, employment contract, and region. Core LA2 Total number and rate of employee turnover by age group, gender, and region. Add LA3 Benefits provided to full-time employees that are not provided to temporary or part-time employees, by major operations.
Aspect: Labor/Management Relations Core LA4 Percentage of employees covered by collective bargaining agreements. Core LA5 Minimum notice period(s) regarding operational changes, including whether it is specified in ollective agreements. Aspect: Occupational Health and Safety Add
LA6 Percentage of total workforce represented in formal joint management–worker health and safety committees that help monitor and advise on occupational health and safety programs. Core LA7 Rates of injury, occupational diseases, lost days, and absenteeism, and number of work-related fatalities by region. Core LA8 Education, training, counseling, prevention, and risk-control programs in place to assist workforce members, their families, or community members regarding serious diseases. Add LA9 Health and safety topics covered in formal agreements with trade unions.
Aspect: Training and Education Core
LA10 Average hours of training per year per employee by employee category. Add LA11 Programs for skills management and lifelong learning that support the continued employability of employees and assist them in managing career endings. Add LA12 Percentage of employees receiving regular performance and career development reviews Aspect: Diversity and Equal Opportunity Core LA13 Composition of governance bodies and breakdown of employees per category according to gender, age group, minority group membership, and other indicators of diversity. Core LA14 Ratio of basic salary of men to women by employee category.
HUMAN RIGHTS PERFORMANCE INDICATORS Aspect: Investment and Procurement Practices Core HR1 Percentage and total number of significant investment agreements that include human rights clauses or that have undergone human rights screening. Core HR2 Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken.
Add HR3 Total hours of employee training on policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained. Aspect: Nondiscrimination Core HR4 Total number of incidents of discrimination and actions taken.
Aspect: Freedom of Association and Collective Bargaining Core HR5 Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk, and actions taken to support these rights. Aspect: Child Labor Core HR6 Operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor. Aspect: Forced and Compulsory Labor Core HR7 Operations identified as having significant risk for incidents of forced or compulsory labor, and measures to contribute to the elimination of forced or compulsory labor.
Aspect: Security Practices Add HR8 Percentage of security personnel trained in the organization’s policies or procedures concerning aspects of human rights that are relevant to operations. Aspect: Indigenous Rights Add HR9 Total number of incidents of violations involving rights of indigenous people and actions taken SOCIETY PERFORMANCE INDICATORS Aspect: Community Core SO1 Nature, scope, and effectiveness of any programs and practices that assess and manage the impacts of operations on communities, including entering, operating, and exiting.
Aspect: Corruption Core SO2 Percentage and total number of business units analyzed for risks related to corruption. Core SO3 Percentage of employees trained in organization’s anticorruption policies and procedures. Core SO4 Actions taken in response to incidents of corruption.
Aspect : Public Policy Core SO5 Public policy positions and participation in public policy development and lobbying. Add SO6 Total value of financial and in-kind contributions to political parties, politicians, and related institutions by country. Aspect: Anticompetitive Behavior Add
SO7 Total number of legal actions for anticompetitive behavior, antitrust, and monopoly practices and their outcomes. Aspect: Compliance C SO8 Monetary value of significant fines and total number of nonmonetary sanctions for noncompliance with laws and regulations. PRODUCT RESPONSIBILITY PERFORMANCE INDICATORS Aspect: Customer Health and Safety Core PR1 Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures.
Add
PR2 Total number of incidents of noncompliance with regulations and voluntary codes concerning health and safety impacts of products and services during their life cycle, by type of outcomes. Aspect : Product and Service Labeling Core PR3 Type of product and service information required by procedures and percentage of significant products and services subject to such information requirements. Add PR4 Total number of incidents of noncompliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes. Add
PR5 Practices related to customer satisfaction, including results of surveys measuring customer satisfaction. Aspect : Marketing Communications Core PR6 Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion, and sponsorship. Add PR7 Total number of incidents of noncompliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship by type of outcomes.
Aspect : Customer Privacy Add PR8 Total number of substantiated complaints regarding breaches of customer privacy and losses of customer data.
Aspect: Compliance Core PR9 Monetary value of significant fines for noncompliance with laws and regulations concerning the provision and use of products and services. b. Most of the emphasis seems to be on social performance disclosures, as this is the area requiring the most extensive amount of disclosure. c.
One issue in deciding whether an item of disclosure would be relatively easy or difficult to make is whether the company’s information system already collects the data. Most of the items on the GRI list are probably in the company’s information system, but perhaps not its accounting information system.
For example, the environmental indicators are likely to be known by the environmental engineers. Many of the social indicators are likely to be known by the human resources group. The consequences of disclosure should also be considered. Consequences include the effects on public relations and government scrutiny.
The company will face adverse consequences if it has a “bad” story to tell in any area. As discussed in the chapter, corporate social responsibility is controversial. Interesting classroom discussions can revolve around whether the public has a “right to know” about the items in the GRI guidelines. 8. a.
According to Volvo’s disclosure, the independence requirements means that only one person from the company’s management may be a member of the Board, that a majority of the board shall be independent of the company and the company management and that at least two of the members that are independent from the company and the company’s management shall also be independent of the company’s major shareholder.
In addition, the Code demands that a majority of the members in the Audit Committee shall be independent of the company and company management, and that at least one member shall be independent of the company’s major shareholders.
The board member who is part of the company’s management may not be on the Audit Committee. b. Only one person (Leif Johansson, CEO) from the company’s management is a member of the board. Three board members are employee representatives and, therefore, not independent of the company.
Thus, 8 of the 12 (a majority) board members are independent of “the company and company management. ” Of these eight, six are also independent of the major shareholders. The audit committee consists of three individuals, all of whom are independent of the company and company management.
All three are also independent of the major shareholders. The composition of Volvo’s board of directors meets the independence requirements. c.
One member is not independent because he is the CEO. Two other members are not independent because they represent a major shareholder. However, these latter two are still “independent of the company and company management. ” The board has overall responsibility for monitoring the activities of the company and ensuring that shareholders’ interests are protected. It is important that the board be independent of management, otherwise management will be monitoring its own work.
Major shareholders are a related party and are in a position to use their board membership for preferential “sweetheart” deals.
In all situations, objectivity may be jeopardized and proper monitoring of management and the shareholders’ interests compromised. Thus, there are good reasons for considering these criteria in deciding whether board members are independent. d. The audit committee has three members and all of them are independent. All three members of the audit committee are independent of the majority shareholders.
9. a.
The six sections of the OECD Principles of Corporate Governance are as follows: 1. Ensuring the basis for an effective corporate governance framework: The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law, and clearly articulate the division of responsibilities among different supervisory, regulatory, and enforcement authorities. 2.
The rights of shareholders and key ownership functions: The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. 3.
The equitable treatment of shareholders: The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violations of their rights. 4. The role of stakeholders in corporate governance: The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
. Disclosure and transparency: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. 6. The responsibilities of the board: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. b.
These principles contribute to corporate governance by delineating the responsibilities, accountability, and relationships among shareholders, board members, managers, and stakeholders designed to meet corporate objectives. They improve the operations and control of the company’s activities. 10. The placement of the 34 countries can be the subject of some discussion with students, and there are many ways to be “surprised. ” For example, some students might be surprised to see the United States at the top of the list given the recent accounting scandals there.
However, based on Chapters 3 and 4 (and extrapolating from them), we suggest that the high placement of Brazil (#4) and Mexico (#6) are a surprise.
Both are emerging economies and, in general, reporting and disclosure are not as advanced in emerging economies as they are in developed economies. The placement of the United Kingdom (#11) and the Netherlands (#16) is also a surprise. Chapter 3 argues that the quality of financial reporting is particularly good in both countries. Indeed they are among the world leaders. That they place below Brazil and Mexico is also a surprise. Perhaps the low ranking of Japan (#29) is also a surprise.
From Chapter 4, one would not expect Japan to be (a) near the bottom, (b) so far below Germany, and (c) below so many emerging economy countries. Case 5-1In the Green 1. Many observers believe that concern over climate change is the biggest driver in the growth of corporate social responsibility. (Note to instructors: see “Just Good Business: A Special Report on Corporate Responsibility,” The Economist (January 19, 2008): pp. 1–24. ) For a variety of reasons, multinational corporations are working harder than ever to protect their reputations and improve the atmosphere in which they do business.
Companies with poor records of social responsibility invite the scrutiny of watchdog organizations and regulators. Poor environmental performance can result in fines, loss of customers (due to loss of reputation), and other negative financial repercussions. Companies with poor environmental performance may also face new regulations which, again, have negative financial consequences. At the same time, proactively protecting the environment can have financial benefits through an enhanced reputation that attracts new customers.
The chapter mentions the phrase, “you manage what you measure,” and providing outsiders with information on your environmental performance probably ensures that something is actually being done.
More and more companies are “going green,” and there are risks for those who ignore this new ethos. 2. The Global Reporting Initiative (GRI) recommends the disclosure of 30 environmental performance indicators: Aspect: Materials Core EN1 Materials used by weight or volume. Core EN2 Percentage of materials used that are recycled input materials. Aspect: Energy Core EN3 Direct energy consumption by primary energy source.
Core EN4 Indirect energy consumption by primary source. Add EN5 Energy saved due to conservation and efficiency improvements. Add EN6 Initiatives to provide energy-efficient or renewable energy based products and services, and reductions in energy requirements as a result of these initiatives. Add EN7 Initiatives to reduce indirect energy consumption and reductions achieved. Aspect: Water Core EN8 Total water withdrawal by source. Add EN9 Water sources significantly affected by withdrawal of water.
Add EN10 Percentage and total volume of water recycled and reused. Aspect: Biodiversity Core
EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas. Core EN12 Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected areas. Add EN13 Habitats protected or restored. Add EN14 Strategies, current actions, and future plans for managing impacts on biodiversity. Add EN15 Number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk.
Aspect: Emissions, Effluents, and Waste Core EN16 Total direct and indirect greenhouse gas emissions by weight. Core EN17 Other relevant indirect greenhouse gas emissions by weight. Add EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved. Core EN19 Emissions of ozone-depleting substances by weight. Core EN20 NO, SO, and other significant air emissions by type and weight. Core EN21 Total water discharge by quality and destination.
Core EN22 Total weight of waste by type and disposal method. Core EN23 Total number and volume of significant spills.
Add EN24 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally. Add EN25 Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the reporting organization’s discharges of water and runoff. Aspect: Products and Services Core EN26 Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation.
Core
EN27 Percentage of products sold and their packaging materials that are reclaimed by category. Aspect: Compliance Core EN28 Monetary value of significant fines and total number of nonmonetary sanctions for noncompliance with environmental laws and regulations. Aspect: Transport EN29 Significant environmental impacts of transporting products and other goods and materials used for the organization’s operations, and transporting members of the workforce. Aspect: Overall Add EN30 Total environmental protection expenditures and investments by type. 3. Roche discloses most categories of social performance indicators.
Disclosures are good in the categories of energy; water; emissions, effluents, and waste; compliance; and “overall”. Specifically, there are disclosures of these indicators: (energy) 3, 4, 5, 6, (water) 8, (emissions, effluents, and waste) 16, 18, 19, 20, 21, 22, (compliance) 28, and (overall) 30. Some of the nondisclosures in these categories could be because they are not applicable to Roche. (It is difficult to know for sure whether a nondisclosure means that there is nothing to disclose [i. e.
, the item is not applicable] or whether an item could be disclosed but isn’t. Roche has few or no disclosures in the categories of materials, biodiversity, products and services, and transport. All of these categories seem relevant to a pharmaceutical company, so they are areas where Roche could potentially improve its environmental disclosures.
Roche provides a scorecard of compliance with all GRI indicators. Roche’s disclosure reprinted in Exhibit 5-3 lists a Web link to www.
roche. com/reporting_and_indices. From this link, one may navigate to www. roche. com/gb08_gri.
pdf, a document entitled, “Global Reporting Initiative (GRI) Content Index 2008. This document is a scorecard of compliance with the GRI indicators. The scorecard is generally consistent with the observations in the previous paragraph. However, it is noted that Roche explains that the biodiversity category (Indicators EN 11 through EN 15) is not relevant to Roche because Roche operates in urban environments, not in or near protected areas. 4.
O. J. ‘s company should be able to match, and even exceed, Roche’s disclosures. It is recommended that the company report performance indicators in all categories, as follows: a.
Materials: materials used by weight/volume, and percentage of recycled materials used b. Energy: energy consumption and savings, and initiatives to save energy c.
Water: water use d. Biodiversity: activities involving protected areas, and any habitats protected or restored e. Emissions, effluents, and waste: greenhouse gas, ozone-depleting, and other significant air emissions, and initiatives to reduce them; water and waste discharge f. Products and services: activities that reduce the environmental impact of products and services g.
Compliance: fines for noncompliance with environmental laws and regulations h.
Transport: environmental impacts of transporting products and employees i. Overall: environmental protection spending by type It is further recommended that the environmental disclosures be audited, as Roche’s disclosures are. Of course, the ability to disclose any of the above items assumes that the company’s information system collects the necessary data to do so. New systems may need to be implemented to achieve this objective. Case 5-2Seeing Is Believing 1.
Characteristics that predict relatively low disclosure levels in Mexico: a. Sources of finance (Chapters 2 and 4). The private sector in Mexico has been largely financed by family groups and banks. These factors are highly correlated with low financial disclosure levels. b.
Government involvement (Chapters 2 and 4). Although some industries have been privatized recently, many enterprises in Mexico still are owned by the government, and the banks and family groups that finance the private sector traditionally have maintained very close ties with public officials. . Legal system. Mexico is a code law country, which by itself is associated with low disclosure. (However, the Mexican accounting profession historically has had very close ties with its counterpart in the United States, and this largely outweighs the existence of a code law system.
) d. Level of economic development. Mexico is relatively much less developed than Western Europe and the United States. As disclosure typically increases with economic development, this would indicate relatively low disclosure in Mexico. e.
Level of shareholder protection.
The text (Chapter 5) suggests that shareholder protection in emerging economies is rudimentary. A low level of shareholder protection involves, among other things, relatively low legal requirements for financial disclosure. 2. Characteristics that predict relatively high disclosure levels in Mexico: a.
The historically close connection between the Mexican and U. S. accounting professions (Chapter 4) would encourage disclosure practices in Mexico to emulate those in the United States, which are the highest in the world. b.
NAFTA and the resulting closer ties among Mexico, Canada, and the United States have led to accountants and regulators in all three countries agreeing to pursue harmonization of accounting standards. For Mexico, harmonization would entail a large increase in financial disclosure.
c. Reduced government ownership in the economy, reduced government influence in the private sector (especially since the defeat of the PRI in the 2000 presidential election), and the increasing importance of public equity markets in Mexico all tend toward an increase in financial disclosure. . As a developing country, Mexico needs to import significant amounts of capital to finance economic growth. The need to satisfy the information requirements of foreign lenders and investors is a strong force toward increased financial disclosure. e.
Mexico now looks to the International Accounting Standards Board in developing Mexican accounting standards. Companies listed on the Mexican Stock Exchange will use International Financial Reporting Standards (IFRS) starting in 2012 (Chapter 4).
Full disclosure is an important principle of IFRS. 3. Improvements in Mexican accounting measurement and disclosure practices: The factors mentioned in answer 2 all are influential in causing improvements in Mexican accounting measurement and disclosure practices. Specific improvements mentioned in the text include: a.
Strengthening of Securities Market Law penalties for illegal acts and fraud within financial institutions. b. Increased influence of IASB and closer alignment of Mexican GAAP and IFRS.
