The disclosure of social and environmental information is not decision useful because it is motivated by self-interest, and is not comparable and reliable.

Social and environmental reporting is defined as ‘the process of communicating the social and environmental effects of organisation’s actions within the society and to society at large’ (Gray et al, 1987). General purpose financial statements contain information to satisfy different stakeholders, each with its own individual economic decision-making needs and therefore, the disclosure of environmental and social information of the company is required for a range of stakeholders with different needs and different purposes (Drever, 2007). This could be one simple reason as to why managers would disclose information voluntarily. However, is the disclosed information intended to be useful to stakeholders in making economic decisions?

Decision usefulness theory suggests that the selected financial information has to fulfill the qualitative characteristics of relevance and reliability, while the subsequent presentation of the financial information should be both understandable and comparable in order to be decision useful to stakeholders and other interested groups. The major stakeholder when it comes to disclosing social and environmental information is the society. It is due to this fact that many organisations consider the society’s expectations as high value because corporations only exist because the society has provided them with the means to do so; therefore they have obligations to society. This view is derived from legitimacy theory which suggests that there is a social contract between society and organisation (Liu and Taylor, 2008). An organisation’s survival will be threatened if society perceives that it has breached its social contract. This is one idea of motivation for managers to disclose social and environmental information in the reports. Another idea could be represented in Institutional theory. This theory assumes that organisations would be influenced by other institutions or pressure is created from outside stakeholders to establish a code of conduct (Deegan and Blomquist, 2006). Over-time, institutions in an industry take a similar characteristic of following what others are doing. This would motivate managers to follow other companies to disclose social and environmental information. At the end of the day, different groups are interested in different types of information to accommodate their needs. However, the real issue here is whether the social and environmental information presented in the reports is important and suitable to meet these differing needs of different stakeholders.

One can argue that it’s hard to measure the monetary figures of damages cause to the environment e.g. disposal of factory waste into river, carbon pollution etc. In an extreme case like this, many companies would either ignore the figures for the information or give an estimate of the figures for disclosing in the annual reports and balance sheet. For the accounting profession to include social and environmental activities in the annual report, it would be difficult to ensure that right emphasis is placed on the information. A problem can occur where a company with a poor environmental record can change the society’s perception of that company, where as the inability of management to put a financial value on those activities will not give a true and fair view of the balance sheet because management is not being able to determine the correct value of the environment. This would not satisfy the qualitative characteristics of reliability and comparability of decision usefulness theory and would eventually be misleading to potential stakeholders and affect their decision. Sometimes enormous pressure from stakeholders could result in companies producing overly complex social and environmental information which once again could be less decision useful for certain user groups of the annual reports. On the other hand, Watts and Zimmerman’s PAT would predict that some firms may use Fair value to measure environmental issue such as carbon. If revaluation at its fair value is allowed to be used, any changes to the value of carbon will not go to the profit and loss. It will go into the equity division in other comprehensive income. With that if there might be any changes to the liability section, then that would go in the profit and loss. This will create difference between the assets and liabilities when carbon is considered. This would once again have an impact on the reliability and comparability characteristics of the financial statements and therefore, will be less decision useful.