CHAPTER 2

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presented the related literature and studies concerning the study
that the researchers deemed important and relevant.

Foreign Literature
Currently, many policymakers lack information needed to understand the
potential environmental impacts of their decisions, and the economic implications of
changes to their environment and natural resources. In contrast, a wealth of economic
information is usually available about production and income, which policymakers use to
understand the state of the economy, monitor trends, and make projections that inform
policy debates. Similarly, environmental accounts have the potential to provide key
information that policymakers can use to understand the state of the environment, how
it is changing over time, and the consequences of various policy options.
Environmental accounting provides a framework for organizing information on the
status, use, and value of natural resources and environmental assetsincluding
fisheries and forest accounts, among othersas well as expenditures on environmental
protection and resource management. The latest categorization of environmental
accounts by the international community include four types of accounts natural
resource asset accounts, pollution and material physical flow accounts, monetary and
hybrid accounts, and environmentally-adjusted macroeconomic aggregates. Importantly,

environmental accounting provides a way to link environmental data with the economic
data contained in a countrys System of National Accounts (International Organization of
Supreme Audit Institutions Working Group on Environmental Auditing Report, 2010).
Economic development will be sustainable only if it is pursued in a manner which
protects the environment, and that there is a need to pay greater attention to the
management of water, forest and land resources. Rising pressures on the environment
and increasing environmental consciousness have generated the need to account for
the various interactions between all sectors of the economy and the environment.
Environmental accounting is the ability to provide accurate information in the financial
statements regarding the estimated social cost occasioned by the production
externalities on the environment and how much deliberate intervention cost had been
incurred to bridge the gap between the marginal social cost and the marginal private
cost by a firm. Environmental reporting has been seen as a way of increasing
accountability

of

organizations

regarding

environmental

issues.

Environmental

accounting is an inclusive field of accounting. It provides reports for both internal use,
generating environmental information to help make management decisions on pricing,
controlling overhead and capital budgeting, and external use, disclosing environmental
information of interest to the public and to the financial community. There are several
advantages environmental accounting brings to business, notably, the complete costs,
including environmental remediation and long term environmental consequences and
externalities can be quantified and addressed. Companies and other organizations are
required to have accountability to stakeholders, such as consumers, business partners,

investors, employees, local residents, and administration, when utilizing environmental

resources, i.e. public goods, for their business activities (Anand & Srineevasa, 2014).
In practice, environmental reports can range from a simple public relations
statement to a detailed and in-depth examination of the company's environmental
performance, policies, practices and future direction. The central objective of any
environmental report has to be to communicate the company's environmental
performance to the report reader. Based on the assumption that the vast majority of
existing environmental reports are unable to satisfy all of the information requirements
of the target groups for which they are written, it is deemed important to first define the
different audiences, or target groups, of an environmental report. It is then consulted
with key representatives of each of these target groups and identified the most
important issues that they want to see presented in an environmental report. From the
results of

study of Azzone (1997) called A Stakeholders' View of Environmental

Reporting, the author proposed two separate reporting strategies which companies
may pursue for a more effective environmental report: (1) they can produce a generic
report concentrating on the key points which all target groups accept as being of
primary importance; or alternatively (2) they can produce specialized environmental
reports which address all of the requirements of a specific target group. (Azzone, 1997)
ISO 14001:2004 Environmental Management Systems specifies requirements for
an environmental management system to enable an organization to develop and
implement a policy and objectives which take into account legal requirements and other
requirements to which the organization subscribes, and information about significant
environmental aspects. It applies to those environmental aspects that the organization

identifies as those which it can control and those which it can influence. It does not itself
state specific environmental performance criteria. Using ISO 14001:2004 can provide
assurance to company management and employees as well as external stakeholders
that environmental impact is being measured and improved.
ISO 14001:2004 is applicable to any organization that wishes to establish,
implement, maintain and improve an environmental management system, to assure
itself of conformity with its stated environmental policy, and to demonstrate conformity
with the international standard.
All the requirements in ISO 14001:2004 are intended to be incorporated into any
environmental management system. The extent of the application will depend on factors
such as the environmental policy of the organization, the nature of its activities, products
and services and the location where and the conditions in which it functions.
(International Organization for Standardization, 2004)
IFRS 6 Exploration for and Evaluation of Mineral Resources, a standard that
permits an entity to develop an accounting policy for recognition of exploration and
evaluation expenditures as assets without specifically considering the requirements of
paragraphs 11 and 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors. Thus, an entity adopting IFRS 6 may continue to use the accounting policies
applied immediately before adopting the IFRS. This includes continuing to use
recognition and measurement practices that are part of those accounting policies.
Exploration for and evaluation of mineral resources means the search for mineral
resources, including minerals, oil, natural gas and similar non-regenerative resources

after the entity has obtained legal rights to explore in a specific area, as well as the
determination of the technical feasibility and commercial viability of extracting the
mineral resource.
Exploration and evaluation expenditures are expenditures incurred in connection
with the exploration and evaluation of mineral resources before the technical feasibility
and commercial viability of extracting a mineral resource is demonstrable. An entity
treats exploration and evaluation assets as a separate class of assets and make the
disclosures required by either IAS 16 Property, Plant and Equipment or IAS 38
Intangible Assets consistent with how the assets are classified.
IFRS 6 requires disclosure of information that identifies and explains the amounts
recognised in its financial statements arising from the exploration for and evaluation of
mineral resources, including its accounting policies for exploration and evaluation
expenditures including the recognition of exploration and evaluation assets the amounts
of assets, liabilities, income and expense and operating and investing cash flows arising
from the exploration for and evaluation of mineral resources (International Accounting
Standards Board, 2004).

Local Literature
The Philippines today shares with other countries the formidable problem of
protecting the environment and restoring and preserving a damaged and depleted
earth. We are all responsible, to one extent or another, for the cutting down of forests,
polluting of waterways, causing the extinction of various species.

Among many concerned quarters, educators have for some time been fostering
environmental awareness, starting even in the elementary school levels. Business
educators should do no less, and weave into their teaching and curricula the analytical
frameworks, tools and techniques that can enhance and enlighten the business
decisions that impact on our surroundings and habitat.
For many business operations -- the use of raw materials, the processes of
production, waste by-products and effluents, packaging, the final disposition of goods
after consumption, to name a few -- have environmental consequences. And business
executives are increasingly aware of growing legal, regulatory and media pressures
arising from the citizenrys expectations that firms and factories should not profit at the
expense of a communitys quality of life.
These pressures imply the need for new approaches, even a new mindset, for
businessmen, and business schools should respond appropriately.
One effort along these lines is the Green Marketing elective offered by the
Marketing Management department of De La Salle University. The course covers such
topics as green products and packaging, eco-labeling, and ISO 14000 (the
internationally recognized certification of an environmental management system). The
class project has student teams conducting an audit of the earth-friendliness of the
production and marketing of a specific product or service. The survey follows a format
developed by Dr. Eric Soares of the University of California at Hayward, and asks
whether materials procurement, production and packaging lead to pollution and waste;

how long the product lasts, how the product is disposed of after use, and related
questions.
Teachers and practitioners of accounting can likewise develop electives that deal
with the financial, auditing and tax implications of corporate efforts to comply with more
stringent environmental standard and contribute to sustainable development.
A course in environmental accounting will be a positive step in helping business
firms make sound, defensible decisions that make this planet more livable for present
and future generations. (Manalo, 2002)
The Philippines Environmental Policy is enunciated in Presidential Decree
No1151 (1977) which declares that it is the continuing policy of the State to: (1) create,
develop, maintain, and improve conditions under which man and nature can thrive in
productive and enjoyable harmony with each other; (2) fulfil the social, economic, and
other requirements of present and future generations of Filipinos; and (3) ensure the
attainment of an environmental quality that is conducive to a life of dignity and wellbeing.
The Decree also established the environmental impact assessment system,
which

requires

private

establishments

and

government

agencies

to

submit

Environmental Impact Statements (EIS) for every action, project, or undertaking

planned by them, which significantly affects the quality of the environment
(https://www.academia.edu/1152876/The_Philippine_s_Environmental_Policy_is_enunc
iated_in_Presidential_Decree_No_1151_1977_ Retrieved August 21,2015).

Foreign Studies
With increasing awareness of environmental issues, there has been rising
demand for environmental-friendly business practices. Prior research has shown that
the implementation of environmental management practices is influenced by existing
and potential stakeholder groups in the form of external pressures from legislators,
environmental groups, financial institutions and suppliers, as well as internally by
employees and owner/manager attitudes and knowledge. However, it has been reported
that despite business owner/managers having strong green attitudes, the level of
implementation of environmental-friendly practices is low. In order to explore the
connection between pressures for improved practices and the management actions
taken, researchers in the past examined how influence from various stakeholders is
related to awareness of environmental issues, and how this awareness relates to
actions taken within the businesses to reduce the environmental impact of their
operations. The results indicate that legislation does result in general environmental
awareness, and that organizations are then willing to change their business processes
and environmental strategies. However, despite their actions they have little awareness
of the benefits that might arise from cost reductions from their environmental-friendly
practices. Those influenced by their suppliers act to reduce waste, but do not put into
place formal environmental management systems, or use environmental messages to
market their goods or services. Nevertheless, it can be argued that they have a real
commitment to environmental issues, as evidenced by a willingness to voluntarily
contribute to environmental organizations (Gadenne, 2008).

Many studies have been conducted in order to investigate the reasons behind
the differences in corporate social and environmental disclosure (CSED) practices
throughout the world. Firms characteristics, corporate governance, and contextual
factors are provided as influential determinants of the level and quality of CSED. The
impact of these determinants can be seen in the attitudes and behaviours of the two
main parties in the issue of CSED; information preparers and information users. The
level and the quality of CSED made by companies can be justified by investigating and
understanding what motivates their managers and stakeholders to involve in social and
environmental issues. It is widely believed that stakeholders have an ability to influence
firms practices in relation to social and environmental performance and disclosure
(Elsakit & Worthington, 2012).
In the study The Attitudes of Managers andStakeholders towards Corporate
Social and Environmental Disclosure, Elsakit & Worthington (2012) concluded that
there is a symbiotic relationship between stakeholders and social and environmental
disclosure. The former benefits from the latter in taking right decisions and, at the same
time, stakeholders put pressure on companies to produce such disclosure and enhance
it to be more credible. Lastly, it might be worth discussing next one of those
stakeholders, which is analysts, as an example of how useful social and environmental
disclosure is, and the impact of ignoring such disclosure in decisions taken by
stakeholders.
Investigating the attitudes and behaviours of companies' managers and
stakeholders towards the issue of CSED provides insights into the justification of the
level and the quality of such disclosure. Understanding the reasons behind managers

decisions of releasing social and environmental information, and stakeholders

perception of the importance and usefulness of this information, is an important step to
improve the practices of this kind of disclosure. (Elsakit & Worthington, 2012)
A study by Lu & Abeysekera (2014) titled Stakeholders' power, corporate
characteristics, and social and environmental disclosure: evidence from China presents
an up-to-date investigation into corporate social and environmental disclosure practices
within the legitimacy and stakeholder frameworks in the context of China. The empirical
results provide important insights into the influence of stakeholders power and
corporate characteristics on corporate social and environmental disclosure practices of
socially responsible Chinese listed firms. Corporate characteristics, such as firm size,
profitability, and industry classification, are all significant factors influencing corporate
social and environmental disclosure. Consistent with legitimacy theory, those firms that
are more likely to be subject to public scrutiny, such as larger firms and firms in highprofile industries, disclosed more social and environmental information to meet the
expectations of the public. The pressures from various stakeholders, like government,
creditors, and auditors tested in this study, generally appear to be weak in China at
present. However, along with the increase in the stakeholders concerns about
corporate social responsibility behaviors, shareholders have influenced firms social and
environmental disclosures; and creditors have influenced firms disclosures related to
their environmental performance. According to stakeholder theory, those firms that seek
to gain or maintain the support of particular powerful stakeholders have begun to adopt
a disclosure strategy.

The study makes a contribution to the social and environmental accounting

literature by expanding the scope of extant research on corporate social and
environmental disclosure to the context of a developing nation, China. However,
findings of the study must be interpreted with considering the following limitations. First,
owing to the manual collection of disclosure data and a labor-intensive latent content
analysis process, a relatively small sample was used, which may limit the application of
the findings to firms outside the social responsibility ranking list. Second, despite
extensive efforts made regarding the choice of determinants and the development of
accurate proxies for various variables, subjectivity was inevitable. Third, it is also
acknowledged that the single-year data used for testing the relationships hypothesized
in this study may restrict the generalization of findings. Fourth, the study looks into the
extent of social and environmental disclosure rather than the existence of disclosure, as
the sample comprised socially responsible firms engaging in social and environmental
disclosure. (Lu & Abeysekera 2014).
The social and environmental issues and the impact of them on the decision
making process have been increasingly given attention to the financial reporting. Over
time there are many studies about Social and Environmental Accounting that have
different views and arguments on the importance to the corporate report. In developed
countries, the social and environmental accounting has joined the financial report and
annual report. The study of L (2011) titled A Study on Social and Environmental
Accounting, the Corporate Social Responsibility: Awareness, Benefits and Problems
Facing by Vietnamese Companies has an objective of assessing the understanding of
Vietnamese people on the social and environmental concept, their implementation on

companies in Hanoi. The finding uncovers that although most people understand the
importance of social and environmental activities and having corporate social
responsibility reports, few of Vietnamese companies is able to quantify the cost and
benefits of social and environmental activities as in the financial report (L, 2011).
The results of a research by Hieu (2011) have provided interesting findings on
two factors affecting CSR implementation and CSR reporting of enterprises in Vietnam.
For managers, a high level of awareness towards CSR may not be a factor to ensure
that enterprises will fulfill their CSR obligations and requirements. For consumers,
although they do not have a clear attitude, the research results show that the
awareness of Vietnamese consumers and their purchasing decisions influence
significantly on the CSR implementation as well as CSR disclosure of companies.
Although firms commit to provide high quality products and services at reasonable price
as important factors in being socially responsible, there are also gaps in CSR disclosure
and management belief. Due to the fact that there were lack of national standards and
requirements from investors and customers, Vietnamese companies are not willing to
report their CSR activities. Therefore, customers do not have or have very limited
information about CSR implementation and CSR achievement of companies; as a
result, they do not realize the importance and benefits of CSR. The majority of
consumers focus on the price of products rather than CSR when making purchasing
decisions. However, a large proportion of consumers mentioned that in the course of
integration Vietnamese companies would change their behaviors, undertaken actions
and show their responsibility for society. Moreover, if government pays more attention to
CSR, there will be a bright future for CSR to become general practices in Vietnam.

Those findings have challenged for companies to solve CSR issues in which how to
operate effectively to bring added-value to customers, and how to improve the attitude
and awareness of customers towards CSR to gain their loyalty.

The results of the research indicate that there is a perception gap in CSR issues
between managers and customers. The positive management awareness of CSR is
essential but not enough for the success of CSR implementation and practices.
Therefore, consumers that have ability to influence the profits of competing firms, and
indirectly also the direction of the economy need to pay more attention on whether
companies activities are responsible to society or not (Hansenand Schrader, 1997). If
the public have strong feeling and sensitive for CSR issues, the environmental and
social scandals might be prevented. Public positive awareness of CRS also encourages
firms to act and to behave responsibly and ethically (Hieu, 2011).

Local Studies
A study by Aquino (2009) titled An Evaluation of Financial and Non-Financial
Environmental Disclosures of Ten Publicly-Listed Mining Companies in the Philippines
revealed that there was no uniformity in the environmental disclosures of the 10 mining
companies. It was discovered as well that there was no existing environmental
disclosure is concerned. Moreover, there was no mandatory requirement for companies
to undergo environmental audit, and there are no generally-accepted standards

regulating the nature of audit work. In the absence of standards, the views of individual
practitioners will have a decisive effect on the form of the audit.
The study The Disclosure of Social and Environmental Activities among
Selected Manufacturing Firms in the Top 500 Corporations in the Philippines aimed to
determine the disclosure practices on social responsibility and environmental concern
among selected firms in the Top 500 Corporations in the Philippines. It also attempted to
determine as to what extent these selected firms level of involvement in social and
environmental activities relate to financial performance.
Disclosure of social and environmental activities engaged by the respondent
firms is more qualitative in nature rather than quantitative. Very little disclosure was
made in the annual report. The firms social and environmental involvements were
included in the message to stockholders or in a separate body in the annual report.
Disclosure was never found in the body of audited financial statements but in Notes to
Financial Statements and limited only to information about the employees retirement
benefits and employees stock option plan. More disclosure was shown in non-financial
reports like the company website, a separate social report, in company newsletter and
in survey to these firms. The social report was called by different names. They disclosed
ten different types of social activities and five different types of environmental activities.
The first three social activities these firms were involved in are (1) the giving of
donations and charitable contributions; (2) undertaking community development
programs; and (3) providing medical, dental and healthcare to non-employees. They
have the least involvement in providing sports and recreation program to outsiders or
non-employees. The environmental activities they frequently engaged in are (1) waste

management; (2) environmental protection, preservation, and rehabilitation; and (3)

environmental awareness campaign. They have the least involvement in energy
conservation.
The firms are very much involved in social and environmental activities but they
significantly differ in their involvement as shown in the pair observations of the two
dependent variables. Gross Revenue is the independent variable with the most
explanatory power to predict social and environmental activities. Total assets as
independent variable do not have any explanatory power and therefore do not influence
the occurrence of social and environmental activities.
In view of the research findings, discussions and conclusions, the following
recommendations are given:
Business firms should disclose and include social and environmental activities in
the audited financial statements more particularly in the Income Statement, Statement
of Cash Flows and in Notes Accompanying Financial Statements.
In the income statement, the costs of doing social and environmental activities
have to be disclosed and shown among the operating expenses. A distinctive account
title like Cost of social activities or Cost of environmental activities has to be used to
highlight that these firms are engaged in said activities. This will not only quantify the
social involvement of the firms; this may also place them in a competitive advantage
with other firms offering the same products and services.
It is also suggested to disclose the cost of doing social and environmental
activities in the Statement of Cash Flows specifically among the cash flows from

operations. As stated earlier, business firms do not only have economic and legal
responsibilities but social responsibilities, too.
These social and environmental activities should also be disclosed among the
Notes Accompanying Financial Statements in quantitative and narrative form.
Firms engaged in these activities may design a supplementary report depicting
the social and environmental activities and call the report by a common name like Social
Report. This will supplement the social and environmental activities that are shown in
the financial statements.
Since financial statements are the responsibility of management, social and
environmental activities as depicted in financial statements, should be made part and
parcel of the statement of managements responsibility for financial statements.
Finally, it is recommended to undertake a research on social and environmental
activities using a specific type of industry to determine if findings will be the same
across industries (Bernados, 2004).

Synthesis
The literature and studies reviewed and presented by the researchers in this
chapter provided them with the background data which guided them in the formulation
of their conceptual framework, research design, and interpretation of their own findings
in the present study. The various materials provided wealth of information and better
insights on the study being conducted.

The present study is closely related to the past study presented in this chapter
titled The Disclosure of Social and Environmental Activities among Selected
Manufacturing Firms in the Top 500 Corporations in the Philippines which aimed to
determine how companies disclose their environmental activities or practices in financial
statements and non-financial reports.
The theories, principles and concepts presented in literature and studies
reviewed enriched the researchers thoughts and perspective concerning the topic.
Moreover, the findings and the insights provided by these materials gave this study the
information it needed in the realization of the analysis.