Are sustainability disclosures fraudulent?

Abstract

Firms’ financial statements have a well-established set of guidelines for their preparation, presentation, review, and release to the general public. In addition, there has been a great deal of research concerning the sections of the report that are more important. For instance, the net income figure is extremely important and therefore auditors will focus their review procedures to ensure the veracity of this number. In contrast, the procedures used to prepare and release information about a firm’s sustainability activities and its socially responsible performance are not nearly as formal as those for financial statements. There is increasing evidence that stakeholders do use this corporate socially responsible (CSR) information to make decisions concerning their interactions with firms. However, it is not established which specific information in the broad range of a firm’s CSR disclosures is most critical for the different decisions made by stakeholders. The combination of a lack of a well-established reporting framework and a lack of agreement on the most important attributes describing the firm’s sustainability activities makes it difficult to determine whether a material misstatement of CSR activities has occurred. This paper looks at the incentives to disclose favorable CSR information and omit unfavorable CSR information, situations in which this might have occurred, and finally how these disclosures might be viewed as fraudulent.