Assurance And Impression Management Of Sustainability Reporting In Malaysia

Assurance of sustainability reporting

Giving the concern of transparency and the enhancement of credibility of sustainability reporting, it is necessary to have assurance in place ( Perego & Kolk, 2012). Undeniably, credibility, reliability and quality of voluntary sustainability and environmental reporting is enhanced with the existence of voluntary assurance in general as well as country based ( Moroney et al., 2012).

To answer the question of which countries are likely to apply reporting assurance, Kolk and Perego ( 2010) and Simnett et al. ( 2009) pointed out that countries which are stakeholder-oriented have more tendency to partake their sustainability reports assured. This result however is disagreed by Herda et al. ( 2014) which concluded that high quality assurance is found in countries with weak investor protection as there is a need of assurance to protect the interest of investors which are not prioritised by the firms. This is further agreed by Pflugrath et al. ( 2011) which opine that external assurance has direct positive relationship with the creditability of the information disclosed.

Looking from micro perspective, firms seek for assurance is mainly driven by signalling theory where they try to distinguish themselves from their rivals that may engage in impression management ( Simnett et al., 2009). Anyhow, sustainability reports assurance is observed at an increasing trend and develop steadily with sustainability reporting ( Gillet, 2012).

As the listing requirement does not require sustainability reporting assurance to be done, SRG has outlined the importance of internal and external assurance in ensuring credibility of sustainability performance and disclosures to the stakeholders. Flexibility of assurance is given based on the company’s size and financial constraints, providing the assurance on various sustainability disclosures such as data, narratives, data collection process and any other disclosures which based on other recognised frameworks and standards.

Institutional theory

Institutional theory proposes that organisations try to adopt new practices and processes without self-reasoning ( Gürtürk & Hahn, 2016). The base of institutional is legitimacy whereby companies tend to adopt commonly acknowledged procedures to avoid loss of acceptability ( DiMaggio & Powell, 1983). With the question of why there are homogeneous companies observed in the industry, DiMaggio and Powell ( 1983) initialized institutional theory with three concepts, namely coercive, mimetic, and normative pressures that may influence the organizational behaviour. This will result in homogenous practices among companies without any further improvement or efficiency in the current practices ( Liang et al., 2007).

Coercive isomorphism is a form of external and formal pressures unleashed by dependent parties including cultural perception at the social ground of which the organisations operate ( DiMaggio & Powell, 1983). The pressure can emerge from various external parties such as regulatory pressure, policies, professions, standards, etc. ( Liang et al., 2007). Coercive isomorphism is supported by a research conducted to examine the relationship between legal requirement and the content of CSR reporting whereby strong positive relationship is found after the regulation was implemented in 2007 ( Othman et al., 2011). Coercive isomorphism is applicable in sustainability reporting practice but lack of influence in assurance as the rule does not require assurance to be mandatory.

Mimetic isomorphism indicates that pressure comes from uncertainty when firms start to mimic other peers or rivals to legitimate themselves and ensure survival in the industry ( DiMaggio & Powell, 1983). This especially will happen when the firm operates in a less experienced and understood environment or having ambiguity in the internal strategy and goal ( Liang et al., 2007). Due to these reasons, the mimicking process often takes those superior and similar to the copier ( Joseph & Taplin, 2012). This is especially obvious when mandatory sustainability reporting was just introduced in Malaysia without the requirement of assurance. This has made the practice to be uncertain and therefore drive the firms to copy the superior ( Gürtürk & Hahn, 2016).

Normative isomorphism is basically a result of professionalism which defined by DiMaggio and Powell ( 1983) as “pressure of a group of members of similar profession or an occupation to outline the standards and their work methodology to sustain the practice of future member of similar professions, and to fix a cognitive base and maintaining their autonomy and legitimacy in their occupation” (p. 152). The belief is constructed on the base that people with the same profession may act based on similar professional values and code of conduct, which create a homogenous corporate environment across similar industry ( Liang et al., 2007). This is mainly observed among the professional audit firms like the Big Four which trying to maintain their professionalism and peer influence ( Manetti & Becatti, 2009).

Legitimacy driven impression management

Whether or not the sustainability information disclosed to the stakeholders are true or only a make-up to the reporting can be examined from impression management engaged via reporting ( Sandberg & Holmlund, 2015). As explained by Hooghiemstra ( 2000), impression management is “a field of study within social psychology studying how individuals present themselves to others to be perceived favourably by others”. Impression management is mainly driven by the need to bridge the desired outcome and the current image. With the motivation, the firms would start to employ tactics to change the behavior for the alteration of how others may look at them ( Leary & Kowalski, 1990). Instead of costly and time consuming organizational change, firms are looking for short-cuts through impression management in sustainability reporting ( Mohamed et al., 1999).

Legitimacy is principally based on the perception of public or stakeholders towards the organization. Although legitimacy may be founded with objective perception, to a certain extent, it may also be created subjectively by the stakeholders ( Suchman, 1995). While legitimacy can be contradicting due to subjective view from various stakeholders, institutional isomorphism comes into play as legitimacy should depends on the outer structure or macro environment where the organisation operates in ( Ogden & Clarke, 2005). For instance, the privatization of water industry by the government (institutional factor) entails a higher pressure from the macro environment towards the industry. Given the rise of concern from the public (stakeholders), the water companies tend to employ impression management tactics in their annual reports to maintain legitimacy ( Ogden & Clarke, 2005).

Research framework

Audit and assurance plays a major role in shaping a better accountability for sustainability ( Perego & Kolk, 2012). Sustainability assurance serves the role to enhance the creditability of sustainability reporting and reduces information asymmetry which brings advantage to the investors and stakeholders ( Cuadrado-Ballesteros et al., 2017). Systematic assurance process is able to project satisfying level of assurance to the content and quality while stakeholders have become more demanding for the information they require ( KPMG, 2008).

Sustainability assurance can generally be backed by three main theories, i.e. stakeholder theory, legitimacy theory and institutional theory ( Smith et al., 2011). The primary relationship of stakeholders in this study would be the firms, assurers and the other users of sustainability reporting. However, stakeholder theory cannot clearly explain the context as it is unable to cater the complex relationship among the stakeholders and the firm itself ( Key, 1999). Stakeholder theory alone is unable to conceptualise the robust institutional matters and the dynamic environment ( Smith et al., 2011). Legitimacy theory on the other hand can be generally divided into two streams, namely managerial legitimacy and institutional legitimacy ( Suchman, 1995). Managerial legitimacy is currently used in explaining the use of impression management. It is found that to overcome external pressure, legitimacy acts as a strategic corporate response towards the pressure ( Deegan, 2002). By gathering the opinions of various stakeholders, it has been found that impression management tactics are much reflected in sustainability reporting and it has become a disguised achievement of legitimacy, deteriorating the decision making of stakeholders ( Diouf & Boiral, 2017). As there is lack of stakeholder influence and regulatory requirement in Malaysia for firms to legitimize themselves ( Elijido-Ten, 2008), stakeholder theory and legitimacy theory is not sufficient to explain the use of assurance to overcome the impression management issue.

Therefore, in this research, institutional theory is utilized to explain how assurance may impact on the legitimacy driven impression management employed in the mandatory sustainability reporting. Under the mimetic isomorphism as well as normative isomorphism, sustainability assurance tends to provide creditability to the content of sustainability reporting and therefore should reduce the impression management level. This study will first explore the impression management level of the audited sustainability reporting produced by the companies in Malaysia, followed by looking at the relationship between the sustainability assurance and impression management level of the company.