Chapter 9 – New System of Accounting

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
Objectives of the social and environmental reporting proess –the “WHY”
 A narrow view of business responsibilities
 A broader view of businss responsibilities
Identifying stakeholder – the “WHO” stage
Identifying stakeholder information needs and expectations –the
 Stakeholder demands for and reactions to S & E information
 Identifying information needs through dialogue with stakeholders.
Negotiating a consensus among competing stakeholder needs and
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
Accounting for externalities
 Sustainability accounting
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.
3. 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.
The Brundtland 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
Why would an entity decide to disclose publicly information about its
social and environmental performances?
Various theories applied to explain why organization 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.
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.
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
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.
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
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 own and 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
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
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
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
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
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
The underlying theory used in many of these studies is the
Efficient Market Hypothesis – share market price react to social
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
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
stakeholders that their organization’s policies and actions accord with
the social, environmental reporting being 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
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
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:
a. Financial accounting focuses on the information needs of those parties
involved in making resource allocation decisions.
b. 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.
Another issue that arises is that reporting entities frequently discount
liabilities. This tends to make future expenditure less significant in the
present value.
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.
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)
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.
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
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’.