Answers to Chapter 14 Review Questions
Question 1
One feature of recent decades has been the emergence of a view of the company as a “corporate citizen” with responsibilities towards, and answerable to, a broader community of “stakeholders” such as employees, local communities and interest groups. One of the consequences of this, it is argued, is that companies should both act responsibly and report more extensively on their activity. From this has emerged the notion of Corporate Social Responsibility (CSR) and its reporting.
CSR is best understood as a mindset predicated upon notions of good corporate citizenship and transparency. It re-asserts the role of accounting in the broader context of accountability, seeking to devise and articulate a view of the company as an entity answerable to those whose resources it consumes, whether labour, environment or quality of life.
Thus, whereas the traditional accounting model champions the priorities of capital, i.e., wealth and profit, CSR seeks a broader frame of reference. It envisages both quantitative and qualitative measures of expression and attempts to capture the “true” cost of corporate activity to the local and global community. For instance, where the current accounting model does not allow for reporting on issues such as the risk of loss of employment or unethical business practices, CSR would deem it imperative that these be identified and reported on.
The fact that the CSR agenda is increasingly impacting the governance, disclosure and regulatory agendas points to its likely longevity.
Question 2
The corporate report was seminal in arguing that, as part of their “public accountability” function, economic entities of “significant size” (which it did not quantify) had a responsibility to report to a variety of users. As a consequence the report envisaged the publication of an annual report that not only provided financial information but was also sufficiently comprehensive that it sought to describe an organization’s broader set of relationships and activities. While including basic financial statements such as the balance sheet and profit and loss account, it was envisaged that such a report would also include narrative elements and various descriptive statements.
Although the recommendations of the corporate report were not implemented at the time, it did succeed in laying the foundation for discussion and research into the nature and role of CSR. It is no coincidence that the current debate articulates many of these same objectives.
Question 3
Proponents of the CSR agenda point out a number of deficiencies in the traditional accounting model. Amongst these are:
· The prominence given to the requirements of users such as shareholders;
· The relative failure to provide information to other stakeholders;
· The overdependence on financial measures;
· The failure of the traditional model to protect against large corporate failures;
· The fact that those who have ultimately borne the cost of many market failures have been taxpayers and pensioners;
· The limited disclosures made in relation to environmental sustainability.
Question 4
The triple bottom line (TBL) approach seeks to measure profits under three headings – financial, social and environmental. It is supported by those who argue for a more transparent and extensive reporting culture that recognizes the broader impact of profit-making entities as they consume vast resources, many of which are irreplaceable.
As an accounting technique and disclosure paradigm, it encourages companies to compute and report their results in a manner that recognizes a broader set of responsibilities than that typically attaching to commercial entities.
Question 5
The whole concept of CSR derives from the notion of the company as a corporate citizen. For instance, CSR emphasizes both the rights and responsibilities of corporations. Under this umbrella, companies are required to appraise investment opportunities with an eye to sustainability and their legacy to future generations.
In effect, CSR has the effect of prompting companies to consider a broader range of stakeholders and how corporate activity can be reconciled with the common good. Some companies, such as the Body Shop attempt to actively formulate their future strategies with these ideas in mind.
The triple-bottom-line concept emphasizes this broader range of concerns by encouraging companies to assess and disclose their performance under a more holistic template.
Question 6
In challenging companies to acknowledge and address the rights of a broader range of interested parties, stakeholder theory speaks directly to parallel initiatives on the part of accounting and governance regulators to reform and extend the reporting culture. Thus, at a time when the reporting model is being significantly impacted by various risk and governance agendas, CSR offers the potential for companies to address some of these concerns, for instance by formulating and supporting the triple-bottom-line reporting paradigm.
Increased CSR might well, therefore, be one of the consequences of the “perfect storm” faced by accounting and corporate regulators seeking to address the combined governance, risk and egalitarian pressures of the political and commercial world.
Question 7
Environmental concerns constitute one of the most immediate and significant global threats of the twenty-first century. In a regulatory context it raises issues relating to disclosure, sustainability and wealth distribution. Significantly, these are concerns that accounting is reasonably well equipped to deal with.
Over the last two decades accounting academics and regulators have sought to engage with the environmental accounting agenda. While this has been a slow and sometimes painful process, some progress has been made. Indeed, it is possible to say that in developing some mechanisms by which a company might internalize previously externalized costs, accounting has begun to offer a means by which investments and commercial activity might be reappraised.
Allied to more tangible successes in formulating various disclosure templates, accounting finds itself in a position to further influence, albeit marginally, the broader environmental debate.
The result is that companies that were previously able to “externalize” such costs, i.e., to impose the burden of bearing such destruction or depletion on the local environment or community, or even customers, in the case, for example, of environmentally suspect products such as asbestos, are now being forced to internalize such costs, i.e., to develop accounting procedures that see them incur the costs of their activities.
Question 8
Sustainability is a particularly important concept in both CSR and the broader “green” agenda. Sustainability essentially refers to the extent to which human activities impact upon the various forms of capital that exist, and points to the need to assess activity in the context of the renewable or finite nature of resources consumed. CSR adopts sustainability as a central concept, seeking to measure and recognize corporate activity through this prism – for instance in the case of the triple bottom line, where sustainability underpins a fuller understanding of the individual parts.
Question 9
The six “capitals” are:
· financial,
· manufactured,
· intellectual,
· human,
· social and
· relational.
The inclusion of a more diverse and inclusive range of capitals allows a much more explicit articulation of the value paradigm. An integrated report (IR) sets out clearly how an entity’s strategy, governance structure and performance link to value creation. Its intention, therefore, is to explain to providers of these capitals how their investment links to value enhancement (or otherwise). This broader frame of reference means that there is an immediate incorporation of the concerns of a wider group of stakeholders: value is understood in a more holistic manner and the inputs underpinning the strategic imperatives of the business are more clearly represented.
Question 10
The strategic report will lead to several very significant additional disclosures, for instance, in relation to risks, strategy and future prospects. Though not intended to address issues such as supply chain and sustainability, the new report will allow those entities engaging fully, to disclose and articulate corporate strategy and concerns in relation to some very significant issues that relate to CSR. One example would be employee welfare in industries where there are widely acknowledged health and safety concerns that MNEs now genuinely want to address (even if only because to do otherwise will lead to exposure championed by social media!).