Content uploaded by Haruna Maama
Author content
All content in this area was uploaded by Haruna Maama on Jul 08, 2020
Content may be subject to copyright.
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
1 1528-2635-24-2-533
INTEGRATION OF NON-FINANCIAL INFORMATION
INTO CORPORATE REPORTING: A THEORETICAL
PERSPECTIVE
Haruna Maama, University of KwaZulu-Natal
Msizi Mkhize, University of KwaZulu-Natal
ABSTRACT
Firms are adopting integrated reporting (IR), despite been voluntary in many countries.
Meanwhile, the disclosure of these additional non-financial information (NFI) requires
economic, human and capital resources. The question posed is: why do firms spend time and
resources to provide information that is not mandated by any standard or law? This study,
through a theoretical perspective examines why firms provide voluntary non-financial
information. The study adopted a critical literature review research approach. The findings of
various studies on IR/NFI disclosure were critically reviewed to identify areas of consensus and
areas of peculiarity. The study found that the legitimacy, institutional, signalling and inter-
generational equity theories explain the IR practice of manufacturing, mining, petroleum and
pharmaceutical industries, whose activities are perceived to have a negative impact on the
society and the environment. On the other hand, firms in a service and trading industry, which
are perceived to have a little negative impact on the environment and society are shaped by
stakeholder, signalling, institutional and agency theories. Besides, strategic theories like
legitimacy, institutional, signalling, agency, and inter-generational equity theories explain the
integration of NFI into corporate reporting by firms in capital markets or countries that are
heavily regulated. This study makes a unique contribution to the literature on corporate
reporting, which is in its embryonic stage by identifying and contextualising the various theories
underpinning the integration of non-financial information into corporate reporting.
Keywords: Non-financial Information, Corporate Reporting, Legitimacy Theory, Stakeholder
Theory, Agency Theory, Signalling Theory, Institutional Theory.
JEL Classification: M41
INTRODUCTION
Since the turn of the century, an increasing emphasis is placed on separate ethical,
environmental and social sustainability reporting such that firms are anticipated to obtain the
integration of non-financial information (NFI) in their annual reports (Amel-Zadeh & Sarafeim,
2017). This integration is viewed as critical if firms are to include accountability to stakeholders
into their core operations in a meaningful way (Kilic & Kuzey, 2018). This places a huge
responsibility on corporate firms and accountants because of the complexity of handling a
variety of users who require almost an unlimited range of information to make a decision. This is
because there are several events that are potentially significant to different users. In addition,
information needs are likely to be contradictory among different users.
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
2 1528-2635-24-2-533
One issue that is yet to be addressed in the field of integrated reporting (IR) is lack of
standards to guide these firms on the set of non-financial information to include in their annual
reports and how to report them. In addition, the disclosure of non-financial information by firms
is voluntary in many countries. Meanwhile, the disclosure of these additional non-financial
information requires additional economic, human and capital resources as well as exposing firms
to litigation risk. It thus stands to reason that companies would avoid these extra costs unless
there are expected quantifiable benefits. Besides, the inclusion of non-financial information
exposes the activities of a firm to more scrutiny, and thus, some firms will be unwilling to report
them. However, a number of companies have started to include non-financial information in their
reporting practice (van Zyl, 2013; Ackers & Eccles, 2015; Mensah et al., 2017).
The question posed is: why do these companies spend time and resources to provide
information that is not mandated by any standard or law? Besides, it is not known why firms
include non-financial information in their annual reports. Answers can be found to these
questions in two different ways. Both theories and empirical research methods can be used to
find answers to this question (Omran & Ramdhony, 2015 and Kilic & Kuzey, 2018). In this
paper, the theoretical aspect is explored to provide possible reasons why firms provide voluntary
non-financial information despite its associated cost and strategic implications. This study is
significant because, there are little efforts to identify and synthesise the various theories that
drive the adoption of IR by firms. Since the field of IR is relatively young and evolving, there is
the need to provide the theories that explain the inclusion of NFI (integrated reporting) by firms.
The role of these theories needs to be situated in prospects in some form of realistic framework,
which must then be subjected to analysis. The understanding of these theories of IR will broaden
the understanding of why firms and organisations adopt IR. Moving forward, it also serves as a
guide to firms on the adoption of IR. This study thus critically reviews the theories of non-
financial information disclosure by firms and organisations.
THE CONCEPT OF INTEGRATED REPORTING
Integrated reporting, is a reporting practice that relates to the relationship between a firm
and its physical environment and society, inclusive of disclosures on economic, community
involvement, natural environment, human and intellectual capital, governance practice, risks,
energy and product safety (Van Zyl, 2013; de Villiers et al., 2017). Therefore, IR provides non-
financial information in the annual reports of a firm that offers investors and other users of
corporate information the ability to influence the actions of a company. Burke and Clark (2016)
argue that investors and investment professionals demand more integrated information, that is,
the information they can rely on, clearly related to the business model, to the value creation of a
firm and risk management. Some good sides of integrated reporting as reported by previous
research are that it: takes account of past, present, and future information; links
economic/financial and non-financial information; targets several stakeholders; provides succinct
and material information and guarantees transparency of information (de Villiers et al., 2017).
The conceptual origin of integrated reporting is traced to two distinct bodies: the King
Report on Governance for South African firms (King III) and the International Integrated
Reporting Council (IIRC) in the United Kingdom (Abeysekera, 2013). The ambitious long term
vision of IIRC for corporate reporting is to find ourselves in a world where integrated thinking
and integrated management are implanted within the conventional business practice in the
private and public sectors, assisted by integrated reporting as a corporate norm (IIRC, 2013). It is
envisioned that the cycle of integrated reporting and integrated thinking will result in the
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
3 1528-2635-24-2-533
productive and efficient allocation of capital, which will act as forces for financial sustainability
and stability. An Integrated Reporting Framework (IRF) was subsequently launched to provide
guidelines for the adoption and implementation of integrated reporting in 2013. The speed of the
development of the framework is a testimony to the meteoric rise of integrated reporting and the
increasing global visibility and the importance of IIRC (van Zyl, 2013).
As has been indicated, the Integrated Reporting Framework does not contain any
obligatory disclosure requirements for integrated reports. The personal perspective of each firm
in reporting its value creation process is thus respected. This means that firms are at liberty to
integrate any form of non-financial information about value creation they deem fit to
communicate to users. However, the framework offers some basic concepts: the value creation
for shareholders and other stakeholders and the process of creating the value. The practice of
integrated reporting in the field of corporate reporting can be situated along with financial
reporting, governance, intellectual capital reporting, environmental reporting and social reporting
(Abeysekera, 2013). The framework thus encourages companies to strategically approach the
effects of these components on them.
METHODOLOGY
This study is a critical literature review. Thus an exploratory study technique was adopted
using existing literature. Specifically, the study undertook a critical literature review of one
hundred and twenty-nine (129) studies on the non-financial information reporting. The
continental distribution of the literature reviewed comprises thirty-nine (39) from Africa; thirty-
seven (37) from Asia and Australia; twenty-eight (28) from Europe and twenty-five (25) from
both South and North America. A desktop analysis was adopted using existing literature of
similar themes. These studies were reviewed using thematic analysis and the findings belonging
to similar themes were grouped and analysed together.
ANALYSIS AND DISCUSSIONS
Literature provides that seven theories can be used to explain why firms engage in non-
financial information disclosure. These theories include legitimacy theory; stakeholder theory;
signalling theory; agency theory; positive accounting theory; institutional theory and
intergenerational equity theory. The following section discusses the various theories within the
framework of integrated reporting.
Legitimacy Theory
Several researchers such as Deegan & Rankin (1996), Branco & Rodrigues (2006), Wong
(2011), Ghosh (2015) and Maama & Appiah (2019) have applied legitimacy theory to scrutinise
the practices of non-financial information disclosure among companies. The legitimacy theory
emerges from the realisation that the support firms obtain from society is important for their
growth, image, and sustainability. To obtain and maintain such supports, these firms and
organisations voluntarily provide certain non-financial information as a persuasive tool to enable
the community to see their existence and activities as legitimate, genuine, supportive and
appropriate (Maama & Appiah, 2019). This suggests that the legitimacy theory directly depends
on the concept of social contract, which emphasises an organisation’s dependence on its
environment, the different expectations of society and an organisation’s attempt to rationalise its
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
4 1528-2635-24-2-533
presence in society through the legitimisation of its activities (Newson & Deegan, 2002).
Legitimacy here implies that firms normally strive to be seen to be responsible. As a
result, Cormier & Gordon (2001) provided four strategies of legitimacy adopted by companies: to
educate society about the purpose of the organisation; to change the perception of society
concerning the company’s activities; to distract or manipulate the attention of society, and to
change the expectations of society. This implies that firms are inclined to disclose information
about their activities, especially those involving social and environmental elements when society
demands them to do so. Accordingly, advocates of non-financial information disclosures put
forward transparency, communication, and accountability as the main reasons for firms to engage
in CSR and environmentally friendly activities (Wong, 2011; Ghosh, 2015 and Mensah et al.,
2017). The growing number of studies on legitimacy theory suggests that NFI disclosure is
mostly an avenue to achieve the objectives of an organisation.
The findings in existing studies appear to indicate a legitimating purpose of NFI
disclosure. Hogner (1982) conducted an early study of the extent of non-financial information
disclosure of a US company for over 80 years. The study revealed that the disparity in
disclosures might be connected to changing expectations from the constituents of society. In an
examination of the variations in the non-financial information disclosure policies adopted by
Australian firms in the era of established environmental prosecutions, Deegan & Rankin (1996)
found that prosecuted firms made disclosures of more positive environmental information in the
year they were prosecuted than any other years. Comparing them to firms that were not
prosecuted, the authors found that those firms also disclosed more positive social and
environmental information, possibly to divert attention from their environmental crimes. A
similar observation was made by Bae Choi, Lee & Psaros (2013) to the effect that the tendency
to disclose environmental and social information is also linked to the general attention society
placed on the reporting companies.
Similarly, the attention by the media, particularly, may also lead to increased non-
financial information disclosure (Deegan et al., 2002). In a study of large Australian companies
over an extended period, Deegan et al. (2002) found a positive relationship between media
attention and NFI disclosure. Therefore, it is submitted that the media can be a source of
information that can be relied upon. In Canada, Magness (2006) studied the non-financial
information disclosure of forty-four (44) companies and found that organisations that relied more
on communication through press releases were inclined to disclose more environmental
information voluntarily. This finding corroborates the findings of extant studies on the media’s
ability to focus on the concern of society on corporate environmental performance, which
increases ESG disclosures (Brown & Dillard, 2014). In more recent studies, Plumlee et al. (2015)
established that firms disclosed more information on responsible business practices as a response
to increased media scrutiny. In Ghana, Mensah et al. (2017) found that manufacturing firms that
are noted to have more negative environmental impacts disclosed more positive ESG information
in their annual reports while Ackah & Lamptey (2017) found that banks in Ghana disclosed more
social responsibility information than environmental information.
Some studies on IR have, however revealed that the disclosure of NFI cannot be explained
satisfactorily by the application of legitimacy theory. For instance, Campbell et al. (2003)
conducted a longitudinal study of UK companies spanning over 20 years and ironically,
legitimacy theory was not considered adequate in explaining non-financial information
disclosure. Similarly, Wilmshurst & Frost (2000) conducted a study concerning chief financial
officers and found partial support for the applicability of legitimacy theory. However, Campbell
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
5 1528-2635-24-2-533
et al. (2003) argue that the perception of the size of firms’ legitimacy gap also affects the volume
of disclosures, which is a matter of perception accuracy. The authors maintain that a relatively
low level of NFI disclosure could be credited to a firm being a poor judge of society’s opinion of
it.
The mixed evidence presented above may be an indication that a legitimacy theoretical viewpoint
may not be adequate in explaining NFI disclosure. However, the weight of the evidence suggests
that the legitimacy theory relates to motivation to be involved in corporate social responsibility
and environmentally friendly activities and reporting. This has led to more non-financial
information disclosures in recent years. If increased reporting is a way to attain increased
accountability, this could have ended in augmented accountability. What is more, the concept of
accomplishing legitimacy with particular stakeholders is worthwhile when scrutinising NFI
disclosure from the perspective of the managerial stakeholder.
Stakeholder Theory
Stakeholder theory acknowledges that diverse stakeholder groups have varied opinions on
how a firm should be managed (Kamla & Rammal, 2013). As the name suggests, the stakeholder
theory involves stakeholders (Deegan & Rankin, 1996; Maama & Appiah, 2019) consisting
individuals, a group of people, institutions or organisations who are involved with a firm in a
legitimate capacity (Andon et al., 2015). This suggests that there are perspectives of multiple key
stakeholders, involving investing, campaigning and procuring stakeholders (Carroll, 1991).
Carroll (1991) maintains that a natural right exists between the concept of environmental or social
responsibility and the stakeholders of a firm. This is reflected by the fact that the concept of a
stakeholder personalises social and environmental responsibilities by identifying the particular
groups or individuals that firms must consider in its corporate non-financial information
disclosure orientation. In a review study on non-financial information disclosures, Owen (2008)
observed a scantiness of studies scrutinising stakeholders’ perspectives on this phenomenon.
Owen (2008) and Ioana & Adriana (2014) contend that, as stakeholders use reliable and relevant
NFI to help them make decisions, it is essential for firms and organisations to provide this
information to help in their decision-making process.
Deegan (2019) note that corporate environmental and social responsibilities, as well as
reporting, can be examined by reviewing the choices made at a firm or organisational level to
meet the expectations of important stakeholders. From this perspective, the authors contend that
there is no requirement on whether information must be made available to whom, or what kind
of information ought to be provided. However, corporate information disclosures or reporting is
viewed as a means by which companies meet the needs of stakeholders who are regarded as key
to the continued survival and existence of the organisation. In affirming that further academic
inquiry must be undertaken to develop theories for integrated reporting, Ullmann (1985)
proposed that strategic stance in light of the power of stakeholders provides a foundation for
companies to attend to the demands for non-financial information disclosure.
Moreover, since a firm has many stakeholders, the non-financial information disclosure
cannot be observed as valuable if it is not focused on the needs of all the stakeholders upon
whom the accounting organisation has an impact (Shauki, 2011; Wong, 2011). This emphasises
that the needs and preferences of stakeholders regarding NFI disclosure are important. Other
studies such as Neu et al. (1998), Maama & Appiah (2019) and Deegan (2019) also hold the
view that NFI disclosure is managed by firms strategically. Deegan (2019), for instance, suggests
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
6 1528-2635-24-2-533
that stakeholder groups should be managed concerning the interest of the firm, and the more
pivotal the stakeholder is to the firm, the more effort will be undertaken to manage the
relationship. This view is consistent with Livesey’s (2002) view that organisations may change
their non-financial information disclosure practice according to their perceptions of stakeholders’
power.
Another perspective is that the stakeholder theory can be divided into two major
categories: ethical and managerial (Hamid & Atan, 2011). The ethical category suggests that
stakeholders deserve to be treated justly and equitably (Hamid & Atan, 2011). However, the
managerial category implies that stakeholders must be managed for the organisations to thrive.
The managerial aspect responds to stakeholders’ needs based on the power they can exert on the
organisation (Deegan, 2002). It is obvious that, although it may be fair and ethical, implementing
a stakeholder approach to non-financial information disclosure is by no means an easy and simple
step to take, and it might constitute a daily challenge for managers and accountants. What is clear
here is that both the legitimacy and stakeholder theories are neither separate nor competing.
However, they are closely related, and they could be used to complement each other.
Signalling Theory
According to the signalling theory, there is a perceived information gap between
management and shareholders. As a result, shareholders might suspect that all the necessary
information is not being released by the management. This would lead to information assymentry
between management and investors. As a result, investors would be hesitant to invest more in a
firm because the information needed to take a decision is not available. The signalling theory
addresses this information asymmetry existing between two parties when the source of the
asymmetry is the information quality or the intention of the information (Correa-Ruiz, 2013; Su
et al., 2016). In this context, the quality of the information relates to the extent to which a party
discloses its unobservable attributes in return for a premium from the other party (Correa-Ruiz,
2013). However, the intention of information is the reduction or elimination of probable moral
hazards that emanate from the actions of a firm. Motivated by these insights, the signalling
theory has been used by management and accounting researchers to explain the reasons for the
adoption of IR and the potential benefits associated with the adoption of good governance as
well as environmental and socially responsible practices and the reporting of these. There is
evidence to suggests that companies that adopt environmentally and socially acceptable practices
can reduce the challenges of information asymmetry between themselves and their stakeholders
and consequently improve financial performance (Su et al., 2016).
The original idea of the signalling theory related to information asymmetry in the labour
market and financial information (Amir & Lev, 1996). However, prior studies suggest that the
inclusion of NFI in the reporting practice of a firm is a voluntary action embraced by companies
that is beyond the narrow remit of the technical, economic and legal requirements of an entity
(Su et al., 2016). Therefore, firms use non-financial information to signal the aspects that are
overlooked by stakeholders, such as customers, suppliers and employees. More significantly,
Barnett & Salomon (2012) argue that these stakeholders cherish the unobserved attributes that
the NFI disclosure practices embody. This line of argument assumes that integrated reporting has
a similar signalling effect across varied institutional environments (Ioannou & Serafeim, 2012).
Given the wide diversity of corporate investments globally, the effectiveness of integrated
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
7 1528-2635-24-2-533
reporting as a tool for mitigating information asymmetry may be changed when communicated
to diverse institutional environments (Ioannou & Serafeim, 2012). The suggestion here is that the
strength of the signal may vary for different institutional environments.
It can be observed from the foregoing discussion that integrated reporting may be used as
a signal that provides additional non-financial information to relevant stakeholders, particularly
in emerging markets. However, for a quality signal to be achieved, the integrated reporting
practice must satisfy two conditions (Omram & Ramdhony, 2015). Firstly, low performing firms
need more resources and effort to embrace integrated reporting as opposed to high performing
firms. The second condition is that the benefits for companies to adopt integrated reporting is
enough to compensate for the costs for high performing firms. This is because firms incur both
explicit monetary costs and implicit management costs as well as litigation risk through the
adoption and practice of IR. Thus, it can be observed that the signalling theory is conceived in
terms of management aiming to influence the behaviour and actions of stakeholders, which does
not make it different from both the legitimacy and stakeholder theories.
Agency Theory
The agency theory hypothesises that the separation between the owners and managers of
firms has generated a problem, especially when their interests are incompatible. This
incompatibility of interest emerges because management sometimes prefers to maximise their
personal financial interest, even if it is at the detriment of owners (Sayekti, 2015). The foregone
quandary is called the principal-agent or agency problem. The agency problem is normally the
focus of investors and other stakeholders, and management attempt to manage this situation
when managing the strategic decision of a firm (Maama et al., 2019). Management sometimes
attempts to avoid the perceived agency problem by providing non-financial information to
portray them as accountable. This eventually increases the confidence of investors, attracts more
capital and increases the price of the shares of the company (Omran & Ramdhony, 2015).
Some studies provide evidence to support the notion that the agency theory encourages
management to provide additional NFI to stakeholders, even when the disclosure is against their
personal interest (Deegan, 2002). Schulze et al. (2003) are of the opinion that the agency
problem brings about huge agency costs, and there is a need for shareholders to monitor and
reduce these costs. Thus, shareholders demand extra information, particularly non-financial
information from management to prevent them from pursuing their personal interest at the
expense of that of shareholders. Hodge et al. (2009) and Pflugrath et al. (2011) also express the
view that, when there is an agency problem, managers attempt to seek the favour and support of
stakeholders through the provision of additional non-financial information.
Positive Accounting Theory
Positive accounting theory (PAT), also known as political cost theory, has been proposed
to explain the reasons behind the disclosure of NFI by firms. The PAT was developed by Watts
and Zimmerman (1978). It must be understood that the original papers of PAT by Watts &
Zimmerman (1978) was meant to provide information to obtain favours from the regulatory
authorities. Their subsequent book entitled, “Positive Accounting Theory” in 1978 and the
review of their earlier works in 1990 show that their original work in 1978 referred to the
provision of social responsibility information, which is one component of integrated reporting.
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
8 1528-2635-24-2-533
The assumption behind Watts & Zimmerman’s (1978) PAT is that firms ordinarily would act to
maximise their utility and as a result, management would lobby accounting standards-based
egoism. Watts & Zimmerman (1990) maintain that, for management to succeed in this pursuit,
they identify factors that are likely to be central to their lobbying behaviour, of which the key
part is to provide ESG information to be seen as responsible.
According to the positive accounting theory, a firm is described as a collection or nexus
of contracts (Velte & Stawinoga, 2017). These contracts are important for obtaining the
cooperation of self-seeking individuals (Velte & Stawinoga, 2017). For instance, in a firm, there
are contracts with managers, shareholders/investors, suppliers, customers, employees, and the
community. Therefore, contracts enable individual parties to behave in a way that will maximise
the wealth of shareholders. In doing so, there will be contracting costs connected to the contract,
particularly negotiation, performance monitoring, and evaluation costs. Because of this, positive
accounting theory postulates that companies will always seek to maximise the contracting costs,
which will influence the policies adopted that comprise accounting policies (Graffikin, 2007).
The main idea behind this is that a firm is a nexus of contracts and accounting methods form an
essential part of this set of contracts.
The foregoing discussion is consistent with the objective of PAT as provided by Watts
and Zimmerman’s (1986), which is to describe, explain and predict the accounting practices of
the managers of firms. Therefore, companies publish information such as ethical, governance,
social and environmental information to influence the behaviour of certain categories of
individuals. After the development of PAT by Watts & Zimmerman (1990), many other studies
(Graffikin, 2007; Velte & Stawinoga, 2017) have attempted to provide evidence for positive
accounting theory as an explanation for the disclosure of NFI. In addition, studies have attempted
to use this theory to explain the inclusion of various types of voluntary NFI (Milne, 2002).
However, researchers, particularly Kabir (2007) and Yusoff et al. (2015) disagree with
the underlying arguments of positive accounting theory because of the fundamental assumptions
of this theoretical framework. Thus, Yusoff et al. (2015) suggest that positive accounting theory
is not about what reporting should be. Instead, it is about what reporting is. Similarly, Gray et al.
(1995) agree with the many critics of the positive accounting theory and thus refused to subject it
into serious analysis because they believe it to be meaningless. However, the authors partially
agree that their position was a heretic, based on no empirical support. Based on this, however,
and as a foundation for justifying why companies make non-financial information disclosures,
the explanation of positive accounting theory cannot be dismissed easily. The explanation is
based on empirical evidence that is mostly similar to that used to support other theories for non-
financial information disclosures, especially legitimacy theory, that Gray et al. (1995) appear to
find more acceptable. As Cong et al. (2014) note, prior studies have demonstrated that a strong
relationship exists between information disclosure, firm size, and the type of industry.
The relationship between firms’ size and NFI disclosure appears to be robust empirically.
These results are claimed to support legitimacy theory in addition to favouring positive
accounting theory (Deegan & Rankin, 1996). Additionally, Lemon & Cahan (1997) observe a
pattern that public variables, such as the size and industry classification of firms, are significant
in explaining positive accounting theory, while variables relating to profitability such as return
on assets (ROA) and return on equity (ROE) are not. It can, however, be observed that the
arguments offered by positive accounting theory regarding the adoption of integrated reporting
support legitimacy theory, which postulates that companies must satisfy an implied contract with
the community in which it operates. This means that positive accounting theory in itself cannot
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
9 1528-2635-24-2-533
be used as an independent theory in justifying why firms include NFI in their corporate reports.
It is important to put forward that if positive accounting theory can be accepted as a basis for this
justification, then a more rigorous enquiry of the arguments is needed. However, there is not
much available, up-to-date empirical evidence to explain this.
Institutional Theory
Companies may agree on the form of NFI to disclose owing to institutional pressures to
follow the practice of their peers and because accounting symbolises a particular form of
institutionalised exercise within organisations (Ramdhony, 2015). This suggests that institutional
theory may explain the reason why firms in a certain area or sector may display analogous
features (Horvat & Korošec, 2015). In addition, institutional theory can be used to explain
accounting rule choice (Carpenter & Feroz, 2001). The idea is that institutional theory adds to a
clear understanding of the accounting practices of companies and society of which they are part
(Hoque & Alam, 1999). This is because, companies may have to establish their conformity with
and adherence to the expectations, customs, and principles of the members of society to obtain
the backing of society, and thus achieve legitimacy (Owen, 2013).
Similar to the stakeholder theory and the legitimacy theory, the institutional theory
postulates that firms will adopt a specific behaviour to obtain access to resources and support
from key stakeholders (Deegan, 2019). Another key point is that institutional theory is related to
the concept of isomorphism (coercive and mimetic) (Greenwood & Hinings, 1996; Ramdhony,
2015). Institutional theory has traditionally been used to examine how organisations conform to
isomorphic pressure to gain legitimacy to enhance their survival rate (Deegan, 2019).
Isomorphism is defined as a situation where firms are pressured to be identical to their peers
(Plumlee et al., 2015).
In scrutinising the external reporting practices of organisations as part of institutional
practice, it is important to be aware that eventually, firms strive for a state of legitimacy and
societal support (Rahaman et al., 2004; Deegan, 2019). In a study conducted in the UK, Collison
et al. (2009) found that firms cherish being included as members of the FTSE4Good index
because of ‘peer group pressure’. Moreover, to be included in the index, firms are required to
disclose non-financial information. In another study in Bangladesh, Islam & Deegan (2008)
found that pressures and forces from multinational consumers had forced local clothing suppliers
to initiate organisational communication to dismiss the concerns of unacceptable labour practices.
Similarly, to secure funds from international bodies like the World Bank, developing countries
may be required to embrace certain accounting and reporting practices as required by the World
Bank (Neu & Ocampo, 2007). Therefore, the institutional theory suggests that firms would adopt
integrated reporting because on particular factors, including the institutions within which they
operate.
The Theory of Intergenerational Equity
The rate of usage of natural resources is one and a half times more than the rate of their
replacement (van Zyl, 2013). As a result, increasingly, there is a growing concern that the world
cannot provide sufficient resources for the sustained survival of humankind. Some of these
resources (like coal, oil, gas, and uranium) are exhaustible and non-renewable, and thus cannot
be replaced once they are used up (Abeysekera, 2013). However, other resources such as water,
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
10 1528-2635-24-2-533
soil, wood, air, and sunlight are renewable and can be replaced as they are used. Although not
much can be done with the resources that are non-renewable, steps need to be taken to preserve
renewable resources for sustained human survival (Wild & van Staden, 2013). Simply put,
renewable resources ought to be employed for sustainable development (Cong et al., 2014;
Deegan, 2019). Due to this observation, the term “sustainable development” was developed by
the United Nations in the year 1987. It is, therefore, necessary that companies report on how they
use these particular resources so that future generations will not be disadvantaged. The above
notion of the use of resources across generations is part of the theory of intergenerational equity.
In other words, intergenerational equity is the idea of the present generation benefiting
from the available resources without compromising the ability of the next generation to do so.
This suggests that the activities of some firms, especially those in the mining, oil, gas and the
general exploration industry cannot be termed as sustainable because most of their activities
deplete natural resources without replacing them for the benefit of the next generation. The
critical question is, does it mean that the present generation must leave these non-renewable
resources for our children? The paradox is that our children may also be told to leave the
resources for their children. This suggests that it is not possible for some firms to be sustainable
in a strict sense of the term. However, there must be efforts to make sure that future generations
are not disadvantaged. To clear this paradox, intergenerational equity must be viewed as the use
of resources fairly so that no generation is disadvantaged at the expense of another. The key
activity to ensure intergenerational equity is through corporate reporting (Abeysekera, 2013).
Contrary to the preceding, Watson (2015) contends that since profit-driven organisations
have to stay alive to sanction sustainability, their economic sphere takes precedence. Therefore,
these firms may act contrary to the concept of sustainability owing to the signals of the market
(e.g. pricing, taxation, subsidies, and state regulations) that makes such actions profitable and
rational. The question then is: how does the accounting profession ensure intergenerational
equity in the use of resources? The answer is that firms should provide adequate information on
how the principle of intergenerational equity is ensured. Thus, many firms use intergenerational
equity as a strategic tool to appear legitimate in the minds of stakeholders (van Zyl, 2013). This
ensures that these firms have continued access to resources.
Even though there may be compulsory reporting responsibilities for these companies on
their financial performance, the regulations and legal rules have up to now not placed obligatory
responsibilities on these firms to account for resources beyond those that have financial
implications (Abeysekera, 2013). It can be noted that some of these resources are used at no cost
to profit-driven companies because the market system has not been able to impose monetary
value on them. In Ghana, for instance, the effects of water pollution on human beings, animals
and plants are not fully costed into the water price of companies. Another case in point is the use
of child labour for cheaper production (e.g. fishing and cocoa farming) is not fully costed as the
purchase of raw materials by organisations.
Discussion
The analysis has revealed that firms disclose non-financial information for predisposition
purpose. That is, these firms disclose voluntary non-financial information to influence behaviour
and actions. For instance, the obvious reason for the inclusion of non-financial information
among firms was to achieve legitimacy and signal the market to influence the cost of capital and
attract extra resources. Prior literature suggests that companies use non-financial information
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
11 1528-2635-24-2-533
disclosure to manage their image. The analyses have revealed that these firms try to achieve
these strategic objectives by reporting information that puts them in positive lights. For instance,
as De Villiers & van Staden (2011) found, firms with a long-term environmental reputation
adopt three basic strategies concerning non-financial information disclosure. These strategies
include disclosure of more positive environmental information in their annual reports; disclosure
of non-financial information to target shareholders, lenders and other investors; and the
explanation that the effects of these disclosures on cash flow will not be too much and further
provides information on actions taken to prevent future occurrences. All these actions are
consistent with the theories of legitimacy, signalling, intergenerational equity and institutional.
Similarly, the evidence support that firms disclose non-financial information for
legitimacy, institutional, intergenerational equity and signalling purposes (De Villiers &
Marques, 2016). The evidence shows that firms are likely to make more non-financial
information disclosures in countries with robust investment protection, enhanced democracy,
effective government structures and more press freedom. Besides, the literature showed that
firms with specific characteristics disclose more non-financial information. These characteristics
include firms with larger assets and revenue, firms in environmentally and socially sensitive
industries, more profitable firms, highly geared firms and firms that spend high on capital
expenditure. These disclosures are underpinned by legitimacy, signalling, institutional and
intergenerational equity theories.
Studying the corporate social and environmental disclosures of the leading one hundred
(100) companies in Australia from 1967 to 1977, Trotman (1979) established that disclosures
increased across time. Trotman expounded that the rise in disclosures was a strategy to improve
public image and also to obtain public acceptance. Consistent with the findings of Trotman
(1979), Deegan & Rankin (1996) observed that businesses seem hesitant to provide any
information within their annual reports about any adverse environmental and social
consequences of their operations. This was particularly prevalent with both prosecuted firms and
firms that had never been prosecuted. The authors found that the companies that had been
prosecuted provided substantially more positive environmental and social disclosures than their
colleagues that had not been prosecuted. This finding aligns with the opinion that companies that
have been indicted consider that there is a necessity to counter bad and adverse information of
their prosecution with more positive and favourable news relating to their environmental
activities. These findings appear to suggest that firms have the trust that there is the need to
legitimise the existence of their activities in the form of enhanced disclosure of good or positive
environmental and social news.
Again, somewhere in north-western Africa, Ramdhony (2015) examined non-financial
information disclosure practice by Mauritian commercial banks. Findings revealed that banks
with higher visibility disclosed more social responsibility information which confirms that the
signalling, legitimacy and stakeholder theories are explanations for non-financial information
disclosure by Mauritian banks. Similarly, legitimacy theory explains the non-financial
information disclosures of firms in India as found by Goswami (2014) that the majority of the
Indian companies reported positive environmental initiative in their annual report. Similarly,
prior studies provide evidence that companies use non-financial information to manage their
image. Thus, firms will be hesitant to disclose social, environmental and governance information
that provides a bad reflection on their image unless it is demanded by law or it is in the public
domain (known already). If the information is already known, the strategy adopted by firms is to
manage the situation with the disclosure of more positive information. Similarly, it is observed
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
12 1528-2635-24-2-533
that firms are more careful with powerful stakeholders concerning the kind of non-financial
information released.
CONCLUSION
Many theories shape the integration of NFI into corporate reporting: legitimacy,
institutional, institutional, intergenerational equity and agency theories. These theories are
context and jurisdiction-specific; that is, firms from different countries and different industries
adopt integrated reporting practices which are distinct from other firms in different countries or
industries. For instance, the integrated reporting practice of manufacturing, mining, petroleum
and pharmaceutical industry, whose activities are perceived to have a negative impact on the
society and the environment are shaped by legitimacy, institutional, signalling and
intergenerational equity theories. However, firms in the service and trading industry, which are
perceived to have a little negative impact on the environment and society are influenced by
stakeholder, signalling, institutional and agency theories. Additionally, the integration of NFI
into corporate reporting by firms in capital markets or countries that are heavily regulated are
influenced by strategic theories like legitimacy, institutional, signalling, agency and
intergenerational equity theories. A major limitation of this study is the lack of empirical
evidence to confirm the application of these theories in various contexts. Therefore, the study
suggests that further studies must be conducted to empirically examine the factors that influence
the NFI reporting practices of firms.
REFERENCES
Abeysekera, I. (2013). A template for integrated reporting. Journal of Intellectual Capital, 14, 227-245.
Ackah, P., & Lamptey, L.L. (2017). Corporate social responsibility reporting (CSRR) by banking industry in a
developing economy. Asian Journal of Economics, Business and Accounting, 2(3), 1-10
Ackers, B., & Eccles, N.S. (2015). Mandatory corporate social responsibility assurance practices: The case of King
III in South Africa. Accounting, Auditing & Accountability Journal, 28(4), 515-550.
Amel-Zadeh, A., & Serafeim, K. (2017). Why and how investors use ESG information: Evidence from a global
survey. Harvard Business School Working Paper, 17-079
Andon, P., Baxter, J., & Chua, W.F. (2015). Accounting for stakeholders and making accounting useful. Journal of
Management Studies, 52(7), 986-1002.
Bae Choi, B., Lee, D., & Psaros, J. (2013). An analysis of Australian company carbon emission disclosures. Pacific
Accounting Review, 25(1), 58-79.
Barnett, M.L., & Salomon, R.M. (2012). Does it pay to be really good? Addressing the shape of the relationship
between social and financial performance. Strategic Management Journal, 33(11), 1304-1320.
Branco, M.C., & Rodrigues, L.L. (2006). Communication of corporate social responsibility by Portuguese banks: A
legitimacy theory perspective, corporate communications. An International Journal, 11(5), 232-248.
Brown, J., & Dillard, J. (2014). Integrated reporting: On the need for broadening out and opening up. Accounting,
Auditing & Accountability Journal, 27(7),1120-1156.
Burke, J.J. & Clark, C.E. (2016). The business case for integrated reporting: Insights from leading practitioners,
regulators, and academics. Business Horizons, 59, 273-283.
Campbell, D., Craven, B. & Shrives, P. (2003). Voluntary Social Reporting in three FTSE sectors: A comment on
perception and legitimacy. Accounting, Auditing & Accountability Journal, 16(4), 558-581.
Carpenter, V.L., & Feroz, E.H. (2001). Institutional theory and accounting rule choice: An analysis of four US state
governments’ decisions to adopt generally accepted accounting principles. Accounting, Organizations and
Society, 26(7-8), 565-596.
Carroll, A.B. (1991). The pyramid of corporate social responsibility: Toward the moral management of
organizational stakeholders. Business Horizons, 34(4), 39-48
Collison, D., Cobb, G., Power, D., & Stevenson, L. (2009). FTSE4Good: exploring its implications for corporate
conduct’, Accounting, Auditing & Accountability Journal, 22(1), 35-58.
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
13 1528-2635-24-2-533
Cong, Y., Freedman, M. & Park, J. D. (2014). Tone at the top: CEO environmental rhetoric and environmental
performance. Advances in Accounting, 30(2), 322-327.
Cormier, D. & Gordon, I., M. (2001). An examination of social and environmental reporting strategies, Accounting,
Auditing & Accountability Journal, 14(5), 587-616.
Correa-Ruiz, C. (2013). A commentary on integrated reporting: A review of developments and their implications for
the accounting curriculum. Accounting Education, 22(4), 360-362.
De Villiers, C., & Marques, A. (2016). Corporate social responsibility, country-level predispositions, and the
consequences of choosing a level of disclosure. Accounting and Business Research, 46(2), 167-195.
de Villiers, C., & Van Staden, C.J. (2011). Where firms choose to disclose voluntary environmental
information. Journal of Accounting and Public Policy, 30(6), 504-525.
de Villiers, C., Hsiao, P.C.K., & Maroun, W. (2017). Developing a conceptual model of influence around integrated
reporting, new insights and directions for future research. Meditari Accountancy Research, 25(4), 450-
460.
Deegan, C.M. (2019). Legitimacy theory. Despite its enduring popularity and contribution, time is right for a
necessary makeover. Accounting, Auditing & Accountability Journal, 32(8), 2307-2329
Deegan, C. (2002). Introduction: The legitimising effect of social and environmental disclosures: A theoretical
foundation. Accounting, Auditing & Accountability Journal, 15(30), 282-311.
Deegan, C., Rankin, M., & Tobin, J. (2002). An examination of the corporate social and environmental disclosures
of BHP from 1983-1997. Accounting, Auditing & Accountability Journal, 15(3), 312-343.
Deegan, C., & Rankin, M. (1996). Do Australian companies report environmental news objectively? An analysis of
environmental disclosures by firms prosecuted successfully by the Environmental Protection Authority.
Accounting, auditing & accountability journal, 9, 50-67.
Ghosh, S. (2015). Communication of corporate social responsibility activities by private sector companies in India:
Research findings and insights. Metamorphosis, 14(2), 1-21
Goswami, M. (2014). Corporate environmental accounting: The issue, its practices and challenges; a study on indian
corporate accounting practices. IOSR Journal of Business and Management, 16.
Gaffikin, M. (2007). Accounting research and theory: the age of neo-empiricism. Australasian Accounting, Business
and Finance Journal, 1(1), 1-19
Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate social and environmental reporting: A review of the literature
and a longitudinal study of UK disclosure. Accounting, Auditing & Accountability Journal, 8(2), 47-77.
Greenwood, R., & Hinings, C.R. (1996). Understanding radical organizational change: Bringing together the old and
the new institutionalism. Academy of management review, 21(4), 1022-1054.
Hamid, A.F.Z., & Atan, R. (2011). Corporate Social Responsibility by the Malaysian Telecommunication Firms.
International Journal of Business and Social Science, 2(5), 198-208.
Hoque, Z., & Alam, M. (1999). TQM adoption institutionalism and changes in management accounting system: A
case study’, Accounting and Business Research, 29(3), 199-210.
Horvat, R., & Korošec, B. (2015). The role of accounting in a society: Only a technological solution for the problem
of economic measurement or also a tool of social ideology? Our economy, 61(4), 32-40.
Hodge, F., Hopkins, P.E., & Pratt, J. (2006). Management reporting incentives and classification credibility: The
effects of reporting discretion and reputation. Accounting, Organizations and Society, 31(7), 623-634
IIRC (2013). The International Integrated Reporting Framework. United Kingdom. Retrieved from www.theiirc.org
on 25/01/2016
Iоаnnоu, I., & Ѕеrаfеim, G. (2012). Whаt drivеѕ cоrpоrаtе ѕоciаl pеrfоrmаncе? Thе rоlе оf nаtiоn-lеvеl inѕtitutiоnѕ.
Jоurnаl оf Intеrnаtiоnаl Buѕinеѕѕ Ѕtudiеѕ, 43(9), 834-864.
Islam, M.A., & Deegan, C. (2008). Motivations for an organisation within a developing country to report social
responsibility information: evidence from Bangladesh. Accounting, Auditing & Accountability Journal,
21(6), 850-874.
Kabir, H. (2007). Positive Accounting Theory and Science. Journal of CENTRUM, 136-149.
Kamla, R., & Rammal, H.G. (2013). Social reporting by Islamic banks: Does social justice matter? Accounting,
Auditing & Accountability Journal, 26(6), 911-945.
Kılıç, M., & Kuzey, C. (2018). Determinants of forward-looking disclosures in integrated reporting. Managerial
Auditing Journal, 33(1), 115-144.
Lemon, A.J., & Cahan, S.F. (1997). Environmental legislation and environmental disclosures: Some evidence from
New Zealand. Asian Review of Accounting, 5(1), 78-105.
Livesey, S.M. (2002). The discourse of the middle ground: Citizen Shell commits to sustainable development.
Management Communication Quarterly, 15(3), 313-349
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
14 1528-2635-24-2-533
Magness, V. (2006). Strategic posture, financial performance and environmental disclosure: An empirical test of
legitimacy theory’, Accounting, Auditing & Accountability Journal, 19(4), 540-563.
Maama, H., & Appiah, K.O. (2019). Green accounting practices: Lesson from an emerging economy. Qualitative
Research in Financial Markets, 11, 456-478.
Maama, H., Mkhize M., & Kimea, A. (2019). Institutional investors, corporate governance and firm performance:
Evidence from Emerging Economy. African Journal of Business and Economic Research, 14(3), 91-109
Mensah, E., Frimpong, K., & Maama, H. (2017). Envirоnmental repоrting praсtiсes by listed manufaсfuring firms:
The Perspeсtive оf an Emerging Economy. Asian Journal of Economics, Business and Accounting, 2, 12.
Milne, M.J. (2002). Positive accounting theory, political costs and social disclosure analyses: A critical
look. Critical perspectives on accounting, 13(3), 369-395.
Neu, D., & Ocampo, E. (2007). Doing missionary work: The World Bank and the diffusion of financial practices’,
Critical Perspectives on Accounting, 18(3), 363-389.
Neu, D., Warsame, H. & Pedwell, K. (1998). Managing public impressions: Environmental disclosures in annual
reports. Accounting, Organizations and Society, 23(3), 265-282.
Newson, M., & Deegan, C. (2002). Global expectations and their association with corporate social disclosure
practices in Australia, Singapore, and South Korea. The International Journal of Accounting, 37(2), 183-
213.
Omran, M.A., & Ramdhony, D. (2015). Theoretical perspectives on corporate social responsibility disclosure: A
critical review. International Journal of Accounting and Financial Reporting, 5(2), 38-55.
Owen, D. (2008). Chronicles of wasted time? A personal reflection on the current state of, and future prospects for,
social and environmental accounting research. Accounting, Auditing & Accountability Journal, 21(2),
240-267.
Owen, G. (2013). A rejoinder to commentaries on integrated reporting: A review of developments and their
implications for the accounting curriculum. Accounting Education, 22(4), 363-365.
Pflugrath, G., Roebuck, P., & Simnett, R. (2011). Impact of assurance and assurer's professional affiliation on
financial analysts' assessment of credibility of corporate social responsibility information. Auditing: A
Journal of Practice & Theory, 30(3), 239-254.
Plumlee, M., Brown, D., Hayes, R.M., & Marshall, R.S. (2015). Voluntary environmental disclosure quality and
firm value: Further evidence. Journal of Accounting and Public Policy, 34(4), 336-361.
Rahaman, A.S., Lawrence, S. & Roper, J. (2004). Social and environmental reporting at the VRA: Institutionalised
legitimacy or legitimation crisis? Critical Perspectives on Accounting, 15(1), 35-56.
Ramdhony, D. (2015). Corporate social reporting by Mauritian banks. International Journal of Accounting and
Financial Reporting, 5(2), 56-73.
Sayekti, Y. (2015). Strategic corporate social responsibility (CSR), company financial performance, and earning
response coefficient: Empirical evidence on indonesian listed companies. Procedia-Social and Behavioral
Sciences, 211, 411-420.
Ѕchulzе, W.Ѕ., Lubаtkin, M.H., & Dinо, R.N. (2003). Еxplоring thе аgеncy cоnѕеquеncеѕ оf оwnеrѕhip diѕpеrѕiоn
аmоng thе dirеctоrѕ оf privаtе fаmily firmѕ. Аcаdеmy оf Mаnаgеmеnt Jоurnаl, 46(2), 179-194.
Shauki, E. (2011). Perceptions on corporate social responsibility: A study in capturing public confidence. Corporate
Social Responsibility and Environmental Management, 18(3), 200-208.
Trotman, K.T. (1979). Social responsibility disclosures by Australian companies. The Chartered Accountant in
Australia, 48(9), 24-8.
Ullmann, A.A. (1985). Data in search of a theory: A critical examination of the relationships among social
performance, social disclosure, and economic performance of US firms. Academy of Management
Review, 10(3), 540-557.
van Zyl, A.S. (2013). Sustainability and integrated reporting in the South African corporate sector. Journal of
Sustainability Management, 1, 19.
Velte, P., & Stawinoga, M. (2017). Integrated reporting: The current state of empirical research, limitations and
future research implications. Journal of Management Control, 28, 275-320.
Watson, L. (2015). Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, 1-
16.
Watts, R.L., & Zimmerman, J.L. (1990). Positive accounting theory: A ten-year perspective. Accounting review,
131-156.
Watts, R.L., & Zimmerman, J.L. (1978). Towards a positive theory of the determination of accounting
standards. Accounting review, 112-134.
Academy of Accounting and Financial Studies Journal Volume 24, Issue 2, 2020
15 1528-2635-24-2-533
Wild, S. & van Staden, C. (2013). Integrated reporting: Initial analysis of early reporters–an institutional theory
approach. 7th Asia Pacific Interdisciplinary Accounting Research Conference, Kobe, 26-28.
Wilmshurst, T.D. & Frost, G.R. (2000). Corporate environmental reporting: A test of legitimacy theory. Accounting,
Auditing & Accountability Journal, 13(1), 10-26.
Wong, R. (2011). Corporate Social and Environmental Reporting: A User Perspective. A thesis submitted for the
degree of Doctor of Philosophy University of Bath School of Management.
Yusoff, H., Darus, F., & Rahman, S.A.A. (2015). Do corporate governance mechanisms influence environmental
reporting practices? Evidence from an emerging country. International Journal of Business Governance
and Ethics, 10(1), 76-96.
