Chapter 9 –Extends System of Accounting– social and environmental factors

A.Introduction

  1. Brief overview of history of social and environmental reporting
  2. Developing notion of sustainability

Sustainability and the ‘triple bottom line’

The Brundtland Report

B.Stages of sustainablity reporting

  1. Objectives of the social and environmental reporting proess –the “WHY”stage

A narrow view of business responsibilities

A broader view of businss responsibilities

  1. Identifying stakeholder – the “WHO” stage
  1. Identifying stakeholder information needs and expectations –the“WHAT”TO DO WE REPORT’ Stage

Stakeholder demands for and reactions to S & E information

Identifying information needs through dialogue with stakeholders.

Negotiating a consensus among competing stakeholder needs and expectations.

  1. Theoretical perspectives on some social and environmental reporting procedures – the “HOW”stage

Some possible limitation of traditional financial accounting in capturing an reportng S & E performance

Triple bottom line reporting

The global reporting initative – a conceptual framework for social and environmenta reporting

  1. Accounting for externalities

Sustainability accounting

  1. Socia audit

SA8000 requirement

Chapter 9 – Extends System of Accounting – social and environmental factors

A. Introduction

1.Opening issue – Economic, environmental and social performance of the Companies

Moves towards sustainable development require organizations to explicitly consider various facets of their economic, social and environmental performance. If an entity embraces triple bottom line reporting, what does this imply about the perceived accountability of business? What sort of accounting system would enable an organization to report its social and environmental performance?

2.“Triple bottom line reporting”

Elkington (1997) defined it as reporting that provides information about the economic, environmental, and social performance of an entity. If it is properly implemented, will provide information to enable others to access how sustainable an organization’s or a community’s operations are.

  1. The Brundtland Report and Sustainability

The brief of the report was to produce a global agenda from change in order to combat or alleviate the ongoing presurres on the global environment.

TheBrundtland report clearly identified that equity issues, and particularly issues associated with intergenerational equity, are central to the sustainability agenda.

Inter-gereratinal equity and intra-generational equity issues are to be addressed – that is, the needs of all ‘of the present world” inhabitants need to be met, which requires stratgies to alleviate the provery and stravation….

More organizations are now stating explicitly that their focus is on longer run sustainablity considersations, which although having implications for near term profitability, are essential for long-term survival.

The Brundtaland Report defineds sustainable development as:

….development that meets the needs of the present world without compromising the ability of future generations to meet their own needs.

Sustainable development is not something that will be easily achieved and many consider that, at least at this stage, it is nothing more than an ideal.

Chapter 9 – Extends System of Accounting – social and environmental factors

B.Stages of sustainablity reporting

  1. Why would an entity decide to disclose publicly information about its social and environmental performances?

Various theories applied to explain whyorganization might select to voluntarily provide information about their organizational strategies and their social and environmental performance.

There are different researchers with differingviews about why companies adopt particular reporting and reporting strategies.

a Legitimacy Theory– an entity would undertake certain social activities if the particular activities were expected b the communities in which it operates. Success is contingent upon complying with the social contract.

  1. Stakeholder Theory –Management is more likely to focus on the expectations of powerful shareholders. Therefore mgt would be expected to take on those activities expected by the powerful stakeholders.
  1. Accountability Model developed by Gray, Owen and Adams–Organisations have many responsibities and with every organ. Responsibilities comes a set of right for stakeholders, including rights to information from the organ. to demonstrtes its accountability in relation to the stakeholder’s expectations.
  1. Positive Accounting Theory – This theory predicts that all people are driven by self-interest. As such, particular social and environmental activities, and their related disclosure, would only occur if it had positive wealth implications for the management involved.

Chapter 9 – Extends System of Accounting – social and environmental factors

B.Stages of sustainablity reporting (Cont’d)

Enlightened self-interest

Business organisation often justify coporate social responsibility activities in terms of te positive benefits the activities will have for the owners of the business – that is the shareholder.

The idea that doing the ‘right thing’ by the community and the environment will provide benefits to the owners is often referred to as “enlightened self-interest”.

What are the responsibilities of business?

A Narrow view of business responsibilities

The management of an organization would consider that they have accountability not only for their economic performance, but also for their social and environmental performance.

How does an entity determine its responsibilities, and perhaps more importantly, what is relevant stakeholders consider to be its responsibilities? Who is in fact are the stakeholders of an organization?

A Broader view of business repsonsibillities

If society considers that increasig profits is the overriding duty of organ. , then this factor alone may be sufficient to ensure business’s survival.

However, if society has greater expectations, then it is arguable whether an organ. that is preoccupied with profitabilitiy could maintain an existence.

Society provides corporatios with their legal standing and attributes and the authority to ownand use natural resoures and to hire employees.

Organizations draw on community resources and output both goods and services and waste products in the general environment. The organization has no inherent rights to these benefits and, in order to allow their existence, society would expect the benefits to exceed the cost to societ.

Chapter 9 – Extends System of Accounting – social and environmental factors

  1. Who are the stakeholders to which the social and environmental disclosures will be directed?

The managerial branch of stakeholder theory (refer to Chp 8)

Economically Powerful Stakeholder – it varies over time for a single organization.

For example, consumers may have considerable economic power in times of economic recession but may lose some of this power in times of economic boom.

Conversely, the semi-skilled workforce may become more economically powerful during an economic boom, if unemployment falls and a general shortage of semi-skilled workers arises.

In this case, the economically powerful stakeholders whose views of the company will seek to address in accordance with the managerial branch of shareholder Theory, may shift from the company’s consumers to its employees,

The ethical branch of stakeholder theory (please refer to Chp 8).

In contrast to the narrow foucs on economically powerful stakeholders, a much wider range of stakeholders will be considered if we follow the ethical branch of stakeholder theory.

Organizations whose corporate social responsibility and whose sustainability reporting are motivated by broader ethical considerations of reducing the negative impact (or maximising the positive impact) which the organization has on every person and entity affected by the organization’s operation might consider as stakeholders to whom the organization is accountable.

What is being emphasised is that the question about ‘who’ the social and environmental reports will be targeted at will ultimately be dependent upon management’s view about their responsibilities and accountabilities.

Understanding the expectations and pressures from stakeholders and responding effectivelyis curcial to the success of a business’s reputation and the control of possible risks.

Chapter 9 – Extends System of Accounting – social and environmental factors

  1. What types of social and environmental disclosures shall be made?

It is required to identify whether there is actually any demand among shareholders for social and environmental information.

Stakeholder demands for and reactions to social and environmental information

There are two approaches from the study of the reaction of various stakeholder groups within society do demand information about the social and environmental performance of organisation.

a.At a boarder level, there are issues for which stakeholder hold organisations responsible and accountable.

b.Another approach to determine whether people demand or react to certain disclosure is to review share price reaction to particular disclosures.

The underlying theory used in many of these studies is the

Efficient Market Hypothesis – share market price react to social disclosure.

Ingram (1978) – the share market does not react to social disclosure but the reaction is a function of the industry to which the organization belongs and the types of social disclosures being made.

Belkaoui (1976)– studied investors’ reaction to pollution disclosures and observed a positive share market reaction to firms that provided evidence of responsible pollution control procedures compared to firms that could not demostrate responsibiltiy.

From the limited evidence provided above, it would appear that investors do react to an organization’s social responsibility disclosures, and therefore the broader answer to accountable for what question is accountable for some level of social responsibility practice or impacts.

However, only identifying the stakeholder does not tell us precisely for what issues the stakeholders will hold that organization responsible and accountable.

Chapter 9 – Extends System of Accounting – social and environmental factors

Identifying information needs through dialogues with stakeholders

Managers motivates to engage in corporate social responsibility for strategic managerial economic reasons will tned to identify relevant stakeholders as being those who are able to exert the most influence over their company’s ability to generate profits.

Such managers will seek to convince these economically powerful stakeholdersthat their organization’s policies and actions accord with the social, environmental reportingbeing one of the mechanisms that may be used to convince thses stakeholders.

Conversely, with the ethical branch of stakeholder theory, maangers who seek to minimise their organization’s negative impact on a wide range of stakeholders will need to know and understand how their organization is likely to impact upon the lives of a range of stakeholders.

However, to ascertain the stakeholders’ view, needs and expectations is likely to be more prolbematic when the organization is motivated by ethcial reasoning to minimise the ogranisation’s impact on those most affected by its operation.

To overcome the difficulty in conceive of how any organisation today could engage in dialogue effectively with these stakeholders to ascertain directly their views, needs and expectations regarding current practice and polices of the organization, managers need to use a variety of channel of communciation.

Communication includes face-to-face meetings with a variety of stakeholders, questionnaire surveys, opinion polls, focus group and undertaking of social auditing.

Chapter 9 – Extends System of Accounting – social and environmental factors

Negotiating a consesus among competing stakeholder needs and expectations

First, we have to identify the stakeholders with two branches of stakeholder theory and these two branchs of stakeholder theories namely, Managerial branch and ethical branch

Where an organization is motivated to engage in these practices for strategic economic reasons, managers will usually choose to address the social, environmental and economic values and expectation of their most economically powerful stakeholders (Gray, Owen and Adams).

Conversely, following the ethical branch of Stakeholder Theory, an organization’s social responsbility and sustainability reporting is motivated by a desire to address the interests of those stakeholders upon whom the organization has the largest impact, it will need to identify and select the interest of those stakeholders upon whom the organization’s activies have the largest negative impact.

While ‘in theory’ it makes sense for organizations to provide information to meet the specific needs of the respective stakeholders – meaning a one-size-fits-all approach might not be appropraite- many organizations do nevertheless use reporting guidelines generated by particular organizaion such as the “Global Reporting Initative (GRI) to guide them on what to disclose.

Chapter 9 – Extends System of Accounting – social and environmental factors

4. How stage – theoretica perspectives on some social and environmental reporting procedures

Some possible limitation of traditional financial accounting

The percevied limitations of traditional financial accounting could include:

  1. Financial accounting focuses on the information needs of those parties involved in making resource allocation decisions.
  2. Related to the above point, “materiality” has tended to preclude the reporting of social and environmental information, given the difficulty associated with qunatifying social and environmental costs.
  3. Another issue that arises is that reporting entities frequently discount liabilities. This tends to make future expenditure less significant in the present value.
  4. Fin. Accounting adopts the ‘entity assumpution’. If a transaction or event does not directly impact on the entity, the transaction or event is to be ignored for accounting purposes.
  5. Expenses are defined in such a way as to exclude the recognition of any impact on resources that are not controlled by the entity, unless fines or other cash flow result.

“Triple bottom line reporting”

Elkington (1997) defined it as reporting that provides information about the economic, environmental, and social performance of an entity. If it is properly implemented, will provide information to enable others to access how sustainable an organization’s or a community’s operations are.

The limitation of triple bottom line reporting – Brown, Dilard and Marshall (2005) highlight several problems with implementing the “triple” report.

  1. The use of triple bottom line metaphor is severely restricting as the term bottom line conveys the impression of something which can be measured in a single number – that is in a common currency of all the income and expenses figures over a period of time. Brown demos that it is highly problematic, and probably impossible in practie to reduce all environmental impacts, or social impacts, to a common currency.

Chapter 9 – Extends System of Accounting – social and environmental factors

“Triple bottom line reporting”(Cont’d)

  1. The economic bottom line is commonly understood among managers as being a metric which should be maximised.

Brown & Dillard argue that it is difficult to apply this objective of maximisiation to nature. Even more probematic ks knowing which social metric should be maximised.

3.If it is not possible to adopt metrics which treat each of the bottom lines equally, then the notion of three separate bottom lines might give the impression that the economic social and environmental are not interconnected. Brown and Dillard believe that due to these problems in the triple bottom line concept, management and reporting on the triple bottom line is likely to result in a focus on the economic bottom line to the detriment of social and environmental sustainability.

Regarding the details of how to produce a sustainability report which will address the specific information needs of theire stakeholders, the triple bottom line reporting is not very helpful in providing guidance to organisation.

Global Reporting Initative–

A conceptual framework for social and environmental reporting

At an international level, one source of reporting guidance that has taken a dominant position in the social and environmental reporting domain is the Global Reporting Initative’s Sustainability Reporting Guidelines. These guidelines are generally accepted as representing current ‘best practice’.

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