Page 6 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.83, # 1, 2026, pp. 4-19

2. LITERATURE REVIEW
Research on non-financial reporting and assurance has evolved from a niche (Gray,
Owen & Adams, 1996) to a future field of accounting and finance (Kolk & Pinkse,
2010). More recently, the topic gained significant interest as it was emphasized by
other similar reviews (Horani et al., 2025). To understand the context of sustainability
auditing, we must first analyze why companies started reporting voluntarily, what are
the credibility problems identified in the literature, and how auditing has been
positioned as a solution.

2.1. Theoretical Frameworks of Voluntary Reporting
Previous research sets several major frameworks describing the voluntary disclosure
regarding the environmental, social, and governance issues.
Legitimacy Theory: This is probably the most frequently cited theory in social and
environmental reporting research (Deegan, 2002; Suchman, 1995). The theory posits
that organizations operate within a “social contract” with society. To maintain their
legitimacy, companies must demonstrate that their actions are in line with societal
norms and expectations. ESG reporting is therefore a strategic tool through which a
company manages public perception, including to the employees (Beushe et al.,
2024), and responds to social pressures (Patten, 1992; Dowling & Pfeffer, 1975).

Stakeholder Theory: This theory aligns company’s strategy with the fact that the business
generates various benefits and impacts for different stakeholders, and should do it in a
ethical manner (Freeman, 1984; Schaltegger et al., 2019). However, Henriques (2010)
debates upon the impact of the companies at a social and environmental level.
Sustainability reporting becomes a vehicle for transparency and dialogue, through which
the firm fulfills its information obligations to these diverse groups.

Signaling Theory: Companies with superior sustainability performance have an
incentive to “signal” this quality to the market in order to differentiate themselves
from less performing competitors (Verrecchia, 1983). In a market with information
asymmetry, where investors cannot easily distinguish between "green" and
"greenwashing" firms, detailed and credible, subsequently audited reporting acts as a
costly and difficult-to-imitate signal (Connelly et al., 2011; Healy & Palepu, 2001).

2.2. The Credibility Crisis: Greenwashing and Information Asymmetry
While the above theories explain the motivation for reporting, they do not guarantee
its quality. The literature has identified a potentially important problem:
“greenwashing”. The term describes the discrepancy between a company’s positive
environmental communication and its actual performance (Marquis, Toffel & Zhou,
2016; Lyon & Maxwell, 2011).

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