CHAPTER ONE

INTRODUCTION

Background of the study

Environmental reporting is an inclusive field of accounting. It provides reports for both internal use, generating environmental information to help make management decisions in pricing, controlling overhead and capital budgeting, external use, disclosing environmental information of interest to the public and to the financial community. Internal use is better termed environmental management accounting (Bartolommeo, Bennett, Bouma, Heydkamp, James and Wolters,  2000). The concept of environmental reporting was introduced in the early 1990s and since then it has rapidly gained acceptance as a means of communicating and demonstrating a company’s commitment to improving corporate environmental performance to its stakeholders (Association of Chartered certified Accountants, 2003).

The historical development of Accounting  attests to the fact that Accounting is a product of its commercial environment and rooted in capitalist ideology. Accounting has scarcely dropped the vestiges of Pacioli’s commercial capitalist era. This disposition of accounting has meant that it destroys its habitat within the ecosystem to the extent that a wide rift now exist between accounting and its environment. In the recent times,  there has been an increased awareness of the interaction between firms and environment in which they operate.  This enlightenment has been sharpened by concerns about resources depletion , resources scarcity, environmental degradation and the sustainability of economic activity have made the development of environmental accounting and reporting an area of significant interest in Nigeria. The success or failure of an organization may be determined not only by the products or services it deals with but also by the complexity of it environment.(Adediran and Alade, 2013).

Recently,  environment has become a very crucial issue not only for personal life but also for business life and hence, environmental movement and environmental reporting practices by different organizations throughout the world have gathered great momentum in recent years. Advancement and improvement of quality environment is the major issue for their activities.(Shil and Iqbal, 2005).

Since environmental pollution in the small and medium scale enterprises(SMEs) is very alarming,  it requires justifying how much they are producing environmental information in their annual reports in creating awareness among the stakeholders. The more environmental information disclosure in annual reports of SMEs, the more awareness is created regarding the environment. (Dutta and Bose, 2008)

Accounting and reporting for the environment has become increasingly relevant to enterprise because how an enterprise’s environmental performance affects its financial health is of increasing concern to investors, creditors, governments and the public at large (UNCTD, 1998).

In recent years, adverse environmental effect on economic development has become matter of great public concern all over the world. Businesses and corporations all over the world are increasingly being made to account for the impact of their activities on the environment (Adekoya and Ekpenyong, 2009). There has been an increasing need for organizations to voluntarily disclose in their annual reports activities that interface between them and the society (Ebimobowei, 2011) but this has not been the case in developing countries as Nigeria.

Uwalomwa (2011) emphasizes that the increasing demands for clear and hard facts about the environmental performance of SMEs by an increasingly well informed breed of stakeholders have made corporate environmental disclosure an essential issue of debate.

Environmental information must be disclosed without impairing the usefulness of environmental reporting. It must meet the information needs of users, good quality must be appropriately guaranteed, and comparability with previous periods and other enterprises must always be ensured.

Given the fact that corporate financial performance is related, in part, to a company’s environmental performance, stakeholders are increasingly paying more and more attention to environmental issues in a company. Investors and financial analysts need environmental information to evaluate overall performance and estimate environmental risk; governments need information to implement environment regulations; and consumers need the information to protect their own rights. As a response, many companies have taken on the responsibility for environmental reporting and disclosure, by which they can  provide information about environmental performance and sometimes corporate social responsibility and sustainable development, meeting the needs of the financial markets and at the same time providing itself with a positive environmental image. (Guo Peiyuan, 2005)

The Annual/Financial Report “is the principal way in which shareholders and others keep themselves informed on the activities, progress and future plans of a company” (Holmes and Sugden, 1998). However the assessment of the impact of environmental issues on company’s financial performance requires changes to the way companies disclose environmental issues in their Annual/Financial Reports.

1.2 Statement of the problem

According to Adekoya and Ekpenyong (2009), the inherent weakness of regulatory framework, inadequate resources for enforcing legislative requirement, insufficient environmental awareness and advocacy, absence of reputable professional bodies, environmental right groups and inadequate commitment to acceptable environmental performance by Nigerian companies have been identified as the factors responsible for poor environmental performance and reporting in Nigeria. Also, environmental accounting have no economic value, the method of estimating the social value of environmental goods and services are imperfect and often misleading. Lack of accounting standards for environmental accounting, lack of reliable industry data, and estimated values for environmental goods quantified or qualified in terms which have no fixed conversion into money  (Murthy, 2014). As productions and consumption volumes have grown following growth in global populations and economies (mainly in developing countries), resource use, energy consumption, and environmental impacts have also become serious problems. Futhermore, as the globalization of financial markets  and the development of international trade are creating complex relationships of interdependence among regions, the establishment of international cooperation structures has become an indispensable task in addressing these problems.  It is also important to know that SMEs in Ilorin metropolis are not immune to the afore mentioned challenges in their day-to-day operations. Hence, it becomes imperative to embark on a study that investigates the degree of effect of environmental reporting on the performance of SMEs in Ilorin Metropolis.

In relation to the problems identified, some research questions that emanated there from are as follows:

What are the environmental factors affecting SMEs success in Ilorin metropolis? 

Does environmental reporting influence the profitability of SMEs?

Does insufficient environmental awareness stand as an hindrance to the growth of SMEs?

In what way does environmental reporting contribute to SMEs performance?

1.3. Objectives of the study

The  main objective of this study is to evaluate the effect of environmental reporting practices and their performance on SMEs in Ilorin Metropolis, Kwara state

The specific objectives of the study are to:

     (i) identify the environmental factors affecting SMEs success in Ilorin metropolis;

     (ii) determine the relationship between environmental reporting and SMEs performance;

    (iii) determine how environmental awareness can affect the growth of SMEs; and

    (iv) examine the contributions environmental reporting have on SMEs performance.

1.4. Research Hypotheses

 The hypotheses to be tested during the course of this study are stated in null (Ho) form.

Ho1: Environmental factors do not significantly affect SMEs success

Ho2: There is no significant relationship between environmental reporting and the performance of SMEs

Ho3: There is no significant relationship between environmental awareness and the growth of SMEs

Ho4: Environmental reporting have no significant contributions towards SMEs performance

1.5. Justification for the study

This study will provide basic information on how environmental reporting practices can be carried out  to improve the performance of SMEs, how such  practices affects the performance of SMEs and also some ways of protecting the environment. Different researches have been carried out at different times in the past on environmental reporting. For instance, Gray, Javad, Power and Sinclair  (2001) examined the relation between cooperate characteristics and environmental disclosures by taking a sample of 100 UK companies drawn from the Centre for Social and Environmental Accounting Research(CSEAR). Deegan and Gordon (1996) examined the environmental disclosure practices of Australian companies revealing low voluntary environmentaldisclosure in Australia. Cunningham and Gadenne (2003) investigated whether an enhancement in environmental reporting acts as a momentum for changes in annual report disclosures behavior and concluded that environment reporting as an impetus forSMEs to include information on certain environmental issues in the annual report. This study will shed more light on the level of performance that SMEs can derive from environmental reporting. It will also investigate the degree of effect of environmental reporting on the performance of SMEs. It will also show if there is any correlation between environmental reporting and performance of SMEs.

1.6. Scope of the study

 Due to the fact that geographically Kwara State is highly populated, this work will be within the confine of Ilorin metropolis, concentrating on the growing SMEs around the metropolis. The work is however limited to the environmental reports and factors affecting the performance of SMEs.

1.7. Plan of the study

Chapter one will contain the background of the study, statement of the problem, objectives of the research study, research gap and expected contribution, hypothesis of the study, and scope of the study. Chapter two will contain the literature review, theoretical framework, and the empirical framework.

       Chapter three will contain the research design, sources of data, instrument of data collection, population of the study, the sample and sampling size. Chapter four will consist of the presentation and analysis of data. Finally, chapter five will contain summary, conclusion and recommendations based on findings.

1.8. Definition of terms

  i. Small and medium scale enterprises: A separate and distinct business entity, including cooperative enterprises and non-governmental organizations managed by one owner or more which, including its branches or subsidiaries, if any, is predominately carried on in any sector or sub-sector of the economy. (National Small Business Act, 1996).

  ii. Performance: How bad or well something is done or how bad or well something works. (Oxford Dictionary, 7th Edition) 

iii. Environmental reporting: Objective evidence of environmental conditions as a public disclosure. Focused on a firm’s environmental performance information. Very much like public statements of financial performance information. (Black’s law Dictionary.2nd Edition).