An Empirical Investigation into the Boundary of Corporate Social Reports and Consolidated Financial Statements

Abstract

One aspect of the reporting of companies with a group structure that should not be overlooked, in terms of both the social and environmental report and the financial/economic report, has to do with setting the boundary of the report. Disclosure of information about where this boundary has been drawn is of fundamental importance as it serves to identify the very object of the report. Thus the issue is crucial, since the fact that a report may refer to one group of companies rather than another may radically change the given results. This research is based on the conviction that social and environmental reporting should be as integrated as much as possible with financial/economic reporting, so that information about the boundary issue will be consistent among social, environmental and financial reporting. The research presented in the paper was conducted over a time span of three years (2005, 2006 and 2007) and examines the social reporting of companies listed on the Milan Stock Exchange who presented social and environmental reports on a voluntary basis over the period under consideration.

Notes

This article draws on an Italian research programme (Project of Research of National Interest 2005, PRIN 05), which involved three Italian universities during 2006 and 2007. The research covered a wide spread of themes related to the concept of the group. In particular, two universities focused their attention on social and environmental reporting. Paolo Andrei had the idea to include the issue of the boundary in the PRIN research programme (Andrei, 2007), then the idea was discussed in depth and developed with Caterina Pesci (Andrei and Pesci, 2009). Consequently, the work presented in the paper, based on the idea of the necessity of integration between financial reports and social and environmental report, is the result of investigation and clarification accrued over several years.

This relationship can be included as a part of a broader debate within social science. In particular the debate involves the separation thesis, which is an important negative implication of the social thesis, maintaining that there is a conceptual separation between law and morality, that is, between what the law is, and what the law ought to be (according to Bentham and to Austin). The philosophical origins of this viewpoint date back much earlier, though, probably to the political philosophy of Thomas Hobbes. The relationship between social and environmental reporting and financial reporting may be considered part of this debate. For the financial report comes from a legal obligation and the social environmental report from a moral obligation. By embracing the separation thesis, the two documents could be completely separated from each other. Instead, by arguing the invalidity of this thesis it can be said that the two documents should be integrated as much as possible.

For a definition of the consolidated financial statements boundary, see Azzali (2002, p. 437), which explains that setting this kind of boundary means defining the subject of a financial report. Similarly, setting the boundary of a social report means making its subject clear. See also Balluchi (2006) and Saccon (2006).

Regarding the International Integrated Reporting Committee (IIRC) see: www.integratedreporting.org.

In this article the term ‘social and environmental report’ refers to a document used for social, environmental and financial disclosure. We prefer the term ‘social and environmental report’ instead of ‘sustainability report’ or any other term because in Italy it is the best translation of the term of choice for documents of this kind.

The International Accounting Standards (IASs, gradually being replaced by International Financial Reporting Standards, IFRs) discuss the methodology for defining the boundary of the report in IAS 27, while in Italy entities not obliged to apply IAS/IFRS must refer to D. Lgs. 127/1991, backed up by document n. 17 by Organismo Italiano di Contabilità (OIC 17 – Il bilancio consolidato). There are basically two differences between the Italian and international regulations: exclusion of heterogeneous activities required by D. Lgs. 127/1991, but not contemplated by IASB; and exclusion of controlled entities destined for sale within a short time, possible under Italian rules but not in IASs/IFRSs.

This document was preceded by the work of the Measurement Working Group, a board appointed to study this topic. For the work of the board, see Adams (2001) and Bagnoli (2004, pp. 109, 110).

These principles are also stated in the Boundary Protocol (GRI, 2005, p. 6). However, on the principle of materiality also exists a document by Accountability (2006).

In all cases, when defining the boundary, all the principles contained in the GRI must be considered.

The precise wording is: ‘The information in a report should cover topics and indicators that reflect the organization's significant economic, environmental, and social impacts, or that would basically influence the assessment and decisions of stakeholders’ (GRI, 2006, p. 8).

GRI suggestions about variations in the boundary are similar to Italian law on the boundaries for consolidated financial statements; in fact D. Lgs. 127/91 art. 39 sets out some rules for large variations in the boundary, in order to preserve comparability with the financial report of the year before.

It should be stated that out of four cases of social reports referring only to the holding company, one document has an attachment with a special separate section providing information about the main controlled entities. Although this social report does not provide information only about the holding company, it cannot be classified with the reports which refer to the whole group.

The GRI rightly calls attention to boundary setting as one of the elements that contribute to provision of a complete social report (GRI, 2006, p.12).