Advanced financial reporting - Essay Example

? ID: (ID Number) d: Advanced Financial Reporting The paper comprises 3 questions, each related to aspects pertaining to environmental reporting. It begins with an initial introduction about the aspects of environmental compliance and reporting. The first question is in connection with two provided annual reports of Halma plc and United Utilities plc, which required critical evaluation adequacy of disclosures given in the reports regarding environmental reporting. Also, it includes comprehensive description of disclosures that ought to be given in an annual report that gives a transparent, true and fair picture of company’s performance to existing and potential investors. After this follows second question which focuses on comparison between voluntary and mandatory guidelines in respect of environmental reporting. It requires detailed discussion about effectiveness of both guidelines and what advantages and disadvantages does their compliance offer for a company. The last question inquires about the current and proposed programmes to be effective in future relating to environmental compliances and regulations and how they might be helpful in ensuring better transparency and clarity of environmental reporting. Further the discussion entails about corporate measures that organizations should use to become alert and informed about regulations which are applicable in their case, about amendments therein and strategies to comply with them adequately. Finally, the paper closes with concluding statements about how companies should be more environmentally responsible in its operations and true in provision of its facts and disclosures in annual reports for its shareholders and potential investors. However, it should carry out cost-benefit analysis when deciding on voluntary compliances since being over-efficient might backfire and cause losses and low profits, affecting shareholder interests. INTRODUCTION There have been growing trends in recent years of increased awareness regarding environmental responsibilities of companies while running their business operations. Companies have started to believe how every activity carried out for profitable purposes has environmental and social footprints. Therefore, they take reasonable steps to mitigate harmful and adverse effects to acceptable levels. Some examples of environmental footprints include water spills, contamination, poisonous wastages and leakages, air pollution, carbon emission, greenhouse gas emission etc. Regulatory bodies and environmental authorities have been working constantly to make environmental laws and regulations stricter to protect public interests and give better picture to investors. Few mandatory guidelines have already been placed that are compulsory to be followed while other voluntary guidelines have been published for different industries to identify best benchmark practices which might be followed by entities on own motion to depict ‘greener’ reputation and public image to satisfy its members and potential investors. However, in order to ensure compliance with environmental frameworks, it is pivotal to be fully aware of all applicable regulations. Environmental risks can be mitigated through establishment of Environmental Management System and allotment of a dedicated team responsible for addressing all environmental concerns. Furthermore, organizations must account for relevant environmental costs and provisions for future obligations such as dismantling, cleanup and litigation costs in its financial statements. Environmental reporting disclosures can be as comprehensive as an entity would consider adequate since only few mandatory regulations exist. Therefore, environment-friendly stance of any organization shall depend on how detailed are the disclosures provided by it in its annual report and accounts. Question 1 In view of the contents of the document provided and the materials covered in the module, does the annual report currently provide adequate information to enable users assess the financial impact of environmental risks and related opportunities? What might you expect to see in a company’s annual report to indicate that environmental concerns are receiving adequate attention? Every organization must state its corporate responsibility, in its deliverables, to ensure that its business activities and operations do not have negative impact on environment and society. It should inform therein how their business affects the environment and emphasize what reasonable measures it takes to mitigate its impact through steadfast policies and strategies. It should mention its achievements in this regard and forward reporting about future plans. Also, the financial statements should account for environmental costs and liabilities that it may have to bear in near future. Case I: Halma plc Halma plc, in its annual report, clearly bifurcates its products into categories, distinctly identifying goods that focus on improving health and environment. Moreover, it has quantified revenue generated from each category, highlighting the fact that 42% of group’s earnings are based on environment-friendly products. This creates a very positive effect for investors who are environment-conscious. On the other hand, annual report shows its corporate responsibility for protecting the environment. It has defined its long-term strategy with respect to carbon emission policies and Environmental Management Systems. It assures its commitment to comply with mandatory and voluntary regulations including 100% compliance with Carbon Reduction Commitment Energy Efficiency Scheme and 19% with ISO 14001. It claims therein that it has been certified by FTSE4Good for not having any severe impact on environment. This gives reasonable comfort to investors about credibility of the company. It has managed to reduce carbon emission by 7% since 2007, giving a positive picture to users of report. With detailed analysis of its impact on environment, its achievements and strategies, information in annual report seems adequate. However, there were no environmental costs accounted for in financial statements but since it has very insignificant impact, it seems justified not to book such provisions (Williams & Thompson, 2011). Case II: United Utilities plc In its report, United Utilities has mentioned its great achievement of being awarded Business in the Community’s Company of the Year for its commitment to environmental developments. Biodiversity, one of the most sought aspects by investors today, has been used effectively in report by stating its achievements and professional associations in this area. It quantifies its sustainability targets by planning to redirect 95% of waste from landfill sites by 2015, thereby decreasing environmental costs. Also, it has taken up 5-year investment plan to bring drastic reduction in carbon pollution. It has been recycling wastes to produce energy and to ensure sustainability of scarce resources. It clearly talks about regulatory frameworks governing their business activities that may cause harm to environment, about risks of non-compliance with them and penalties payable in event of violation (10% of regulated turnover). Correspondingly, it confidently states about their strategy to mitigate those risks. The information in report gives complete picture of its environmental factors, giving quantifiable and accurate measures and providing comparability. As a result, users of this report shall be able to assess company’s performance and environmental liabilities to analyze prospects of current or potential investment (United Utilities Group plc, 2010). Question 2 Evaluate the extent to which the range of mandatory and voluntary guidelines constitutes a conceptual framework for environmental reporting and does this matter? Regulatory bodies have been laying great emphasis in recent years on transparency of corporate environmental reporting. Mostly, companies would try to comply with minimum mandatory requirements to stay clean from violations and penalties. Nevertheless, many organizations, especially those with public stakeholders, would depict their commitment to comply with voluntary guidelines to enhance their public profile. They would take measures, on their own motion, to be more environmentally responsible and to move towards becoming ‘green’ enterprise. These guidelines are significant in forming a regulatory framework for protection of environment and public interests since otherwise companies would mostly attempt to avoid incurring environmental costs and accounting for obligations, thereby affecting sustainability and environment. Analysis of Mandatory guidelines Carbon emission has been one of the most talked about concerns in field of environmental reporting. To counter its drastic effects, UK regulatory authorities introduced mandatory reporting guidelines requiring companies listed on London Stock Exchange, to comply with Greenhouse Gas Emission reporting, effective from April 2013. This will require them to report their gross emission rates and volumes and intensity ratios, addressing concerns of their investors regarding environmental stability of company (IEMA.net, 2012). It can be argued that limiting the mandatory reporting to quoted companies only would give benefit to unlisted entities whose operations might be emitting excessive amounts of carbon. However, the costs associated with this reporting are very high and may be seen as unfair by smaller private firms which cannot afford to determine their carbon emission impact merely for reporting purposes. Also, it may stifle efforts of some businesses and ultimately lead to their withdrawal from markets. Nevertheless, it can be seen a strong tool in the long term since initial reporting will lead to reduction schemes thereafter. It also provides standardization of environmental reporting and in turn comparability concerns of investors. Analysis of Voluntary Guidelines Investors have become more aware and conscious now and seek investments in companies that are more environmentally responsible. This is where voluntary guidelines sweep in since an organization complying with them would create highly credible reputation. DEFRA has published reporting guidelines for companies based in UK regarding measurement of environmental key performance indicators. This helps businesses to determine and quantify their environmental effects and measure them against set targets (DEFRA.gov.uk, 2006). Voluntary compliances give opportunity to benefit from product differentiation, enhanced status, reduction in costs through more efficient production methods and government subsidies for environmental compliances. Moreover, this has a spiral effect for companies seeking investments: voluntary compliances satisfy current shareholders and attract potential investors which in turn give more incentive to company to further adopt other voluntary codes, thereby again bringing in more investments and leading to a never-ending process that benefits business as well as the environment as a whole! However conflict of interests may arise: environmental compliance costs are unreasonably high and reduce distributable profits causing existing shareholders to suffer. Therefore, it requires thorough critical evaluation and cost-benefit analysis when deciding whether to enforce voluntary measures. Question 3 Evaluate the current or proposed initiatives which could affect reporting on environmental matters and the steps companies can take to ensure that they are aware of their obligations? Organizations need to take corporate measures to be aware of regulations governing them and any changes therein that might affect their business and reporting obligations. According to Winter and May, the level of how alert a firm is to changes in and applicability of environmental regulations, is directly proportional to level of its compliance with the same (Winter and May, 2001). It should work on enhancing its communication channels for information flow with other firms within industry, researching regularly on matters in this regard including litigations faced by other entities and establishing a dedicated team responsible to administer environmental compliances (Botelho, Pinto and Rodrigues, 2005). The entity should create an atmosphere of environmental awareness internally through education and training and encourage compliances with relevant regulations through reward and punishment system. Current Initiatives Currently, in UK, there are several environmental regulations in place that offer mandatory or voluntary guidelines. The only mandatory framework in effect currently is Greenhouse Gases Emission reporting framework. Apart from this, companies are encouraged to get certified under ISO 14001 which requires them to incorporate an effective Environmental Management System and implement material flow cost accounting methodology that accounts for environmental costs of products over their entire life cycles. Moreover, under UK climate change programme, the Companies Act 2006 has introduced a business review, being part of director’s report, and proposed changes in reporting obligations that require quoted companies to present, in their annual reports, major environmental risks, impact assessment and policies and strategies to mitigate them. Also, a group of institutional investors started an initiative known as Carbon Disclosure Project which was to ensure complete disclosures by listed enterprises regarding their greenhouse gas emission as well as from others within their supply chains. On global level, international standards have been published such as ISAE 3000 and AA 1000 which focus on auditing environmental data to provide greater reliance and assurance to investors. All these initiatives have given great comfort to investors who can manage better allocation of their investments to prioritize environment-friendly companies (ICAEW.com, 2011). Proposed Initiatives UK is expected to have drastic developments in environmental regulations in coming years, with heavier penalization and fines in events of environmental law violations and major modifications to Habitats Directive implementation reforms, Energy Bill and Carbon Reduction Commitment Energy Efficiency Scheme (Elcoate and Oliver, 2013). Further proposed changes in future to several acts and existing frameworks are mainly focused on increasing government subsidies to encourage environmental compliances, adopting more stringent regulations to protect environment and sustainable resources, reducing urban pollution, biodiversity and controlling hazardous wastes and spills. EU has revised F-gas regulations and proposed to initiate programme in 2015 to radically reduce emissions by absolutely banning usage of such harmful products and encouraging discovery of new alternatives of creating energy. The new corporate world in coming years, as aimed at by proposed initiatives, shall see a cleaner environment and newer generations shall have access to similar scarce resources as those present today. Question 4 Evaluate how a company can identify environmental issues that may have significant impact on its performance, reputation and relationships and address risks of non-compliance with regulations? Environmental regulations governing an organization have multiple fold effects on its position in corporate world and financial performance especially in events of non-compliance. Thus, it needs to be well informed of applicable frameworks, its impact and associated risks and consequences of complying or violating their provisions. Identification of Environmental Issues There are various methods that company can deploy to identify instances where there may be probable environmental concern involved. If it researches accurately, there are already several issues existing in industries that other entities are facing and therefore it can adopt stances of different organizations or otherwise benchmark with best-practicing companies known for being significantly ‘green.’ Other minor procedures, helpful in highlighting areas needing attention, include interviewing, budget evaluations, job evaluations and most importantly input and output analysis which can easily identify any abnormal wastages, spills or contaminations during business processes (GOLIN?SKA & ROMANO, 2012). Furthermore, it’s highly recommended for organizations to have in place a division especially devoted to ensuring environmental compliances and keeping up to date with any relevant changes. Or alternatively, it can implement Environmental Management System to regulate its environmental performance. It is also equally important to assess impact that each activity might have on organization’s performance and competitive position in market since this may help in prioritizing areas needing attention and allocating resources accordingly. It is very essential that all entities allot significant budgets to environmental research and development head. With ongoing research, it shall be easier to stay alert to amendments to legal frameworks, to evaluate new methods and technologies for becoming more environment-friendly and to discover new horizons of attaining sustainability getting edge over its competitors through breakthrough innovation. Management of Non-compliance Risks In event of non-compliance of environmental laws and regulations, a company faces devastating consequences in many aspects. Firstly, it gives bad name to the business affecting adversely its goodwill and brand names. Secondly, it has severe consequences in monetary terms through payment of penalties and other non-conformance costs incurred on deploying corrective measures. Finally, investments get repelled due to poor environmental performance and hence company faces liquidity problems, going concern issues and ultimately shutdown. Therefore, management should critically assess risks of non-compliance with environmental regulations. It should establish risk management policies which identify risks, prioritize them according to their severity, frequency and likelihood of occurrence and impacts, both financial and non-financial, and develop strategies to mitigate them to acceptable levels (Dobson, date unknown). The management can choose between conformance and non-conformance costs and carry out cost benefit analysis to be certain about its stance in this regard. Conformance costs include preventive and detective costs while non-conformance costs include corrective costs and penalties: An optimal balance of the two can enable the entity to achieve environmental compliance with least costs incurred. Apart from criticisms from outside world, it might also not be comforting for entity itself to be earning profits at the cost of environment suffering and thus there are risks of not achieving self-actualization state for the business. CONCLUSION In light of above given arguments we can conclude that entities need to become more environment-friendly in order to survive in today’s competitive markets and environment-focused regulatory frameworks. With today’s investors becoming more sensitive to harmful gaseous emissions and air or water contaminations, it is essential that entities, especially ones with public stakes involved, take radical steps to change its mission statement and long-term strategies to incorporate measures to address environmental concerns. While it is necessary to comply with mandatory guidelines, careful analysis needs to be carried out when deciding which voluntary requirements should one follow. Following all guidelines would be obviously safest approach but not reasonable considering the capital investments involved in such research and development areas. Therefore, an optimal balance between satisfaction of voluntary guidelines and materiality of costs incurred to achieve it needs to be attained thereby giving maximum benefits to the company, accommodating between environment and investments. Companies should implement Environmental Management System to ensure better management of environmental risks and mitigating them to acceptable levels. A detailed analysis of exposure of environmental risks should be provided in annual report of the company in order to give clear information to users of financial statements about level of exposures and risks involved for investment purposes. Also, it should include environmental costs associated with its activities and probable obligations that might be required to be settled in near future as a result of current activities affecting the environment. References BOTELHO, A., PINTO, L. M. C., & RODRIGUES, I. (2005). How to comply with environmental regulations? The role of information. Contemporary Economic Policy, 23(4), 568-577. DEFRA.gov.uk (2006). Environmental Key Performance Indicators Reporting Guidelines for UK Business. Retrieved from http://archive.defra.gov.uk/environment/business/reporting/pdf/envkpi-guidelines.pdf DOBSON, M. (n.d.). Office of Environmental Quality Environmental Management System Module 2 Environmental Aspects & Impacts. Retrieved from http://www.ncdot.gov/programs/environment/download/Mod2_EMS.pdf ELCOATE, V., & OLIVER, R. (2013, January 10). UK faces radical changes to environment regulation in 2013 - The Information Daily.com. Retrieved from http://www.theinformationdaily.com/2013/01/10/environment-sector-in-2013 GOLIN?SKA, P., & ROMANO, C. A. (2012). Environmental issues in supply chain management new trends and applications. Berlin, Springer. http://dx.doi.org/10.1007/978-3-642-23562-7. IEMA.net (2012, July). GHG Report | IEMA GHG Management and Reporting Special Report. Retrieved from http://www.iema.net/ghg-report ICAEW.com (2011). 2011 Press releases. Retrieved from http://www.icaew.com/en/about-icaew/newsroom/press-releases/2011-press-releases United Utilities Group Plc (2010).  Annual report and financial statements for the year ended 31 March 2012. Retrieved from http://annualreport2012.unitedutilities.com/documents/AnnualReport2012.pdf WILLIAMS, A. J., & THOMPSON, K. J. (2011, June 21). Preliminary results for the 52 weeks to 2 April 2011 – Halma plc. Retrieved from http://www.halma.com/news/halma-news/2011/21-06-2011.aspx WINTER, S. C., & MAY, P. J. (2001). Motivation for compliance with environmental regulations. Journal of Policy Analysis and Management, 20(4), 675-698. Read More