Exploring the Influence of Accounting Reporting Complexity on ESG Disclosure

Abstract

This study investigates the impact of accounting reporting complexity on the quality of environmental, social, and governance (ESG) disclosures, examining both the individual components of ESG reporting and the overall ESG score. Using a sample of 5146 firm-year observations from U.S.-based companies between 2012 and 2021, the study finds a significant negative impact of accounting reporting complexity on both environmental and overall ESG disclosures. This suggests that firms with complex financial reporting structures may be more likely to limit their sustainability-related disclosures, whether due to resource constraints, managerial discretion, or the difficulty of integrating ESG data within an already intricate reporting framework. The study also finds a weaker and only marginally significant negative effect of accounting complexity on social and governance disclosures, indicating that these dimensions may be less susceptible to the challenges posed by complex financial reporting. The findings are analyzed through the combined lenses of agency theory and information manipulation theory (IMT). Complex financial reporting frameworks create conditions conducive to the selective presentation of ESG information, as shareholders and other stakeholders often lack the capacity to verify every data point. From an agency theory standpoint, managers already possess deeper knowledge of firm operations, and intricate accounting systems further expand their discretion in deciding which details to highlight or suppress, limiting outsiders' ability to evaluate true sustainability performance. Meanwhile, information manipulation theory emphasizes how such complexity enables managers to shape disclosures in ways that amplify favorable outcomes while obscuring less impressive results. Consequently, reporting complexity heightens information asymmetry and increases monitoring costs, complicating the disclosure of critical ESG-related data and diminishing the transparency and credibility of sustainability reporting. The practical implications underscore the need for firms to address the transparency challenges posed by complex reporting structures by adopting standardized ESG reporting frameworks that ensure greater comparability and clarity. These findings also highlight the importance for policymakers and regulators to consider the role of financial reporting complexity when designing sustainability reporting guidelines.