Discussion of “Transparency and firm reputation
as intangible assets/liabilities: lessons from the extractive industries”
C. Richard Baker
Adelphi University
Summary:
This article uses the context of the extractive industry to develop insights with respect to
intangible assets and liabilities. The article first shows how, under pressure from external
stakeholders – NGOs and ethical funds – the extractive industry faces reputation issues.
Corruption is considered as a significant risk bearing on firms’ reputations, and a higher
transparency is supposed to reduce such risk, thus enhancing shareholder values. The authors
describe and synthesize the narratives produced by the advocates of the Publish What You Pay
coalition when they participate in the IASB due process for a standard dedicated to extractive
industries. The authors also produce evidence of a new conception of intangible assets when
participants advocate for integrating their project into the scope of IAS 38. They observed that
representations on intangible assets rely on uncertainty, a long term perspective and a distinction
between internally generated and acquired assets.
According to the authors, the main
contribution of their article lies in the links that they draw between intangible liabilities at the
industry level and the companies’ will to restore their own reputations. They provide an original
way to frame the intellectual capital debate in relation to corporate social responsibility. The
reflection leads to numerous considerations which should interest scholars in strategic
management as well as in accounting.
The article is organized into four parts:
Part 1. Accounting for extractive activities, in which the authors present an overview
of the development of accounting for extractive industries.
Part 2. Reputation and transparency, in which the authors briefly discuss their
methodology, and present some verbatim responses to the IASB’s Discussion Paper
(DP/2010/01), which called for comments on a specific question. The author’s indicate that their
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paper mainly relies on answers provided by 142 commentators who expressed their position on
the release of non-accounting information, as expressed in the tenth question of the DP: "In your
view, is a requirement to disclose, in the notes to the financial statements, the payments made by
an entity to governments on a country-by-country basis justifiable on cost-benefit grounds? In
your response, please identify the benefits and the costs associated with the disclosure of
payments to governments on a country-by-country basis."
Part 3. Transforming liabilities into assets, in which the authors discuss the concept of
intangible liabilities, which seems to be similar to contingent liabilities. The case they present
analyses the case of an industry, not a particular firm. They show how an intangible liability of
an industry – whose bad reputation could harm access to capital – leads firms to invest in
restoring reputation through transparency. These investments could be symbolic or substantive,
depending on the nature of the managers’ behavior when undertaking the restoration strategy.
When a whole industry is prone to corruption, NGOs – and their ethical fund allies – try to
require the most exposed actors to comply with specific standards. In so doing these external
stakeholders make tangible a formerly hidden liability. Such a conception sheds new light on the
intellectual capital debate, not only in terms of accounting or financial communication, but also
in terms of strategic management. The authors also quote the IASB on this point: "An entity’s
reputation may be harmed if it is perceived to be associated with, or complicit in, corrupt
government practices that have adverse social or environmental consequences. It may also be
harmed if the entity is not perceived to be ‘paying its fair share’ in exchange for extracting a
country’s natural resources. This is one of the reasons for entities voluntarily publishing
corporate social and sustainability reports" (IASB 2010, p. 153).
Part 4. Discussion and conclusions, in which the authors discuss their contributions which
they state are as follows:

With respect to the intangible asset/liabilities/intellectual capital debate, the
contribution is twofold. Through the introduction of the industry level they show how
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complex reputation is as an “asset”. Reputation easily becomes a liability (an asset
with negative value), especially when external actors take hold of ethical issues. We
also confirm the potential of intangible (or intellectual) liabilities as focus for firms’
strategies.

They highlight the links between intellectual capital and corporate social
responsibility. Compliance with the latter can be considered to be a liability because it
engages a company in costly efforts. The asset is corporate reputation. Hence they
introduce double entry accountability in an area where generally assets have no
counterparts.

From an accounting perspective, they also show how the concept of intangible assets
has become a circular one. Instead of distinguishing tangible and intangible assets by
their substance, the differentiation relies on certainty versus uncertainty, long term
versus short term or acquired versus internally generated. R&D, especially in
pharmaceuticals, has become the archetype of the intangible asset.
Comments
1.
The paper covers several different points including extractive industry accounting,
intangible assets and liabilities, intellectual capital, and corporate social
responsibility. It is not clear where the focus is. The research question should be
made very specific.
2. The methodology should be better explained. What was done? How was it done?
Perhaps some tables could be included to classify the verbatim responses according to
several categories like: name of company; type of company; positive or negative
response to question 10; only comment on non-accounting disclosure or also on
intangible assets; whether the comment was the same as Publish What You Pay
(thereby limiting credibility).
3. The presentation of the article needs to be improved. The authors should review the
organization and referencing style of a journal to which they would like to submit and
follow the instructions to authors explicitly.
4. Many of the paragraphs of the article are long and confusing. The paragraphs should
be divided into two or three smaller paragraphs each one containing only one idea.
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5. The English expression also needs to be improved, perhaps by having an English
language editor review the paper.
6. The referencing style is inconsistent and does not conform to any journal.
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