ORGANIZATIONAL RESISTANCE TO CHANGE: THE FASB AND
ENVIRONMENTAL ACCOUNTING
Janet Luft Mobus, PhD
Assistant Professor of Accounting
Business Administration Program
University of Washington, Tacoma
1900 Commerce St.
Tacoma, WA 98402
USA
Phone - (253)692-5810
email - jmobus@u.washington.edu
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ORGANIZATIONAL RESISTANCE TO CHANGE: THE FASB AND
ENVIRONMENTAL ACCOUNTING
ABSTRACT
Organizational resistance to change using the context, process and content of
environmental disclosure standard setting by the Financial Accounting Standards Board (FASB)
is examined. The process is one of discourse as developed by Habermas and applied by
Biesecker, Kesting, and Renn. The content of environmental disclosure requirements mandated
by the Securities and Exchange Commission (SEC) are reviewed by way of contrast to the
actions of FASB.
The study is motivated by literature on organizational behavior that predicts
organizational responses to demands for change (Pettigrew, 1987; Miller and Friesen, 1980a,
1980b; Laughlin, 1991), and relies on Laughlin’s (1991) model of change. Organizational
behavior is further informed by the theory of discourse, which plays a role in internally devising
the organizational response to demands for change.
The response by US professional accounting standard-setting organizations to demands
for expanded environmental performance disclosure is characterized as one of form over
substance.
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INTRODUCTION
During the mid 1990’s, accounting standard-setters in the US debated the extent, nature,
and form of environmentally related disclosures. Financial reporting largely addresses disclosure
of remediation-cost exposure resulting from status as a potentially responsible party (PRP) on
Superfund sites. However, estimates of compliance costs under other statutes (e.g., Resource
Conservation and Recovery Act, the Clean Air Act, and the Clean Water Act) are also substantial.
Therefore, establishing reporting standards for current operations affected by these other statutes
is also appropriate. Also ignored thus far by accounting standards is reporting of remediation
efforts undertaken voluntarily by firms (i.e., not resulting from PRP status).
There is evidence of demand for expanded financial reporting disclosure of
environmental performance. This demand comes from various interest groups ranging from
broad-based public interest to explicit demands by institutional investors. Rockness and
Williams (1988) surveyed managers of mutual funds with socially responsible investment
objectives. Environmental concerns were the single largest target area of concern within these
funds. The results of their survey made it clear that there is a dirth of reliable information on
environmental performance. One consequence is the inconsistent evaluations of firms’
environmental performance by managers who must garner evaluative evidence from ad hoc
sources.
In 1992 the Investor Responsibility Research Center (IRRC) conducted focus groups and
administered a survey instrument to representatives of investment managers, public and private
pension funds, banks, insurance companies, universities and church foundations interested in
environmental practices of portfolio companies. Participants voiced the opinion that
environmental issues “are among the most important challenges companies will need to address
in the future”. They view relevant environmental information as critical to assessing portfolio
performance. Among the themes running through the focus groups comments are: corporations
should be cognizant of what compliance records suggest to stakeholders, the results of
environmental audits should be an important source of information to stakeholders, and
environmental reporting should convey not only factual information (e.g., emissions) but also the
firms’ guiding principles and commitment to environmental stewardship. The research findings
identified specific information that is considered important in making investment decisions.
Environmental liabilities and environmental expenditures were the most highly sought financial
information from the survey participants. The most highly ranked environmental expenditure
information is penalty information and capital spending information. Participants comment that
a correlation between compliance with environmental statutes and environmental policy is an
important cue. While U.S. GAAP somewhat addresses contingent liability reporting through the
AICPA’s Statement of Position 96-1, it is wholly silent on reporting environmental expenditure
information and/or compliance information.
Kreuze, Newell and Newell, (1996) provide evidence that the size of the pool invested in
socially responsible funds is substantial and growing. The consistency and reliability of relevant
environmental reporting is again raised in this work.
Given evident demand for environmental performance disclosure from recognized
constituents, the reluctance of accounting standard-setters to develop substantive reporting
standards is characterized as resistance to demands for change. This resistance to expanded
disclosure is examined from the perspective of the organizational behavior literature that
discusses organizational change and resistance to change. Relevant factors that predict change
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and resistance to change are explored in describing the FASB response. The FASB responses are
also examined from the broader perspective of Habermas’ discourse for social action applied
against the backdrop of the FASB mission.
The Financial Accounting Standards Board (FASB) is the organization in the United
States responsible for developing financial reporting standards. The authority to develop these
standards has been delegated by the Securities and Exchange Commission (SEC) which retains
ultimate oversight authority. For more than a decade and a half there has been demand by a
broad cross-section of corporate stakeholders for relevant financial reporting of environmental
performance. Although the SEC has adopted substantive reporting requirements for
environmental performance for firms whose securities are publicly traded, the FASB has not
incorporated equivalent reporting requirements into GAAP.
The SEC mandates environmental performance disclosures in Section 103 of Form 10-K
by requiring disclosure of administrative and judicial actions brought against firms by the
Environmental Protection Agency (EPA) (or other environmental regulatory enforcement bodies)
for violation of regulatory statutes. These actions may result from Superfund site exposure, or
they may result from current operations. In addition, discussion of the impact of environmental
regulations on operations must be discussed in Management’s Discussion and Analysis (MD&A).
These disclosure requirements were incorporated into Accounting Series Release 306 (ASR) in
1982. In contrast, GAAP remain within the confines of contingent liability reporting promulgated
by FAS 5 applied to environmental uncertainties - largely PRP status under the Superfund laws.
The paper is organized in four sections, with the Introduction representing the first. The
second section is a review of the organizational behavior literature as it relates to organizational
change and organizational resistance to change. The role of discourse and a Habermasian
definition of rational behavior during the process of discourse is presented. A brief introduction
of discourse applied in economic and sociological settings is provided as a link between
Habermas’ philosophy of social action and accounting standard setting. Section three discusses
the evidence of demand for environmental performance disclosure in the US. Evidence of
pressure applied to the FASB for changes in environmental accounting standards is presented,
the outcomes of FASB efforts are reviewed. The context and content of environmental reporting
development are described in organizational terms consistent with Laughlin’s (1991) model of
organizations. The discourse that has ensued in producing FASB responses is also examined.
Section four includes conclusions and further questions raised by the research.
LITURATURE REVIEW
Organizational Behavior
An important theme in the organizational literature is the resistance with which
organizations respond to changes in their environments (operating environments, not ecological
environments) (Miller and Friesen, 1980a). Miller and Friesen find several basic tenets upon
which organizational adaptation can be predicted. Among these tenets is that momentum is a
dominant factor, and reversals of the direction of the organization, or in the direction in which
demands for change take the organization are relatively rare.
The direction of response to demands for change is materially affected by organizational
ideologies that focus the organization and its members toward commonly held “world views”.
These world views are often built around reinforcing models that make the direction of past
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responses the likely direction of future responses. The result is that future directions look
strikingly similar to existing directions. The trajectory of choice for the future is the existing
trajectory along which the organization is already committed. This commitment to directions
that already guide the organization arises both from the shared vision of where the organization
should go and from the momentum of operations that this vision has created. The authors
conclude that in studying the natural resistance of organizations to change, the tendency toward
momentum is a primary factor.
Organizations develop adaptive patterns that they reuse (Miller and Friesen, 1980b).
Over the long run, organizations develop a sort of equilibrium with their surroundings that leads
to fairly stable responses to demands for change. Miller and Friesen (1980b) conclude that this
set of common response patterns becomes the predictable response to future demands for change.
The organization is depicted as in continuous fluctuation between periods of equilibrium (no
impending demands for organizational change) and periods of demand for change requiring an
organizational response. The response to the state of disequilibrium, where an organizational
response is required, is likely to be the familiar pattern of response(s) used on prior occasions.
Pettigrew (1987) extends this line of research by examining continuity and change
simultaneously; and looking at factors both internal and external to the organization as sources of
organizational change. The approach of the research is to see important changes of the
organization in terms of the links between the content of change and 1) the (internal and external)
context in which the change takes place, and 2) the process by which the organization adapts to
demands for change.
Pettigrew sees significant organizational change occurring within a “complex analytical,
political and cultural process” that successfully challenges the core beliefs held within the
organization. He finds these core beliefs provide the frame of reference by which individuals and
groups within the organization understand changes in the internal and external environments of
the organization. In this Pettigrew’s research supports Miller and Friesen’s findings. Pettigrew
goes on to find that there are enormous difficulties in breaking down such core beliefs once a
pattern of links between content, context and process becomes embedded in the organization; and
examines conditions under which this is successfully accomplished.
The results of a long-term organizational case study leads Pettigrew to conclude that
organizations go through periods of revolutionary change and evolutionary change. Before
radical shifts in organizational content and process can occur, ideological shifts have to take
place – the core beliefs must be successfully challenged. Periods when the core beliefs have not
been successfully challenged by alternate views are poor internal contexts in which to expect
change of a radically different nature. Rather, change in these periods will continue along the
trajectory defined by the existing momentum of the organization.
The external context of the organization also plays a role, and there are factors that will
facilitate or thwart ideological shifts within the organization. The existing dominant ideology is
“likely to be rooted in the idea systems that are institutionalized” in the industry in which the
organization operates – the external organizational context. Radical shifts within the
organization will be retarded by reinforcement of the existing dominant ideology of the external
operating environment.
On the other hand, changes in the organization’s external context represent a chance to
connect new processes and content within the organization to problems newly recognized by the
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outside world. Therefore, shifts in outer context can facilitate ideological shifts within the
organization.
Pettigrew concludes that successfully challenging and replacing dominant ideologies is a
long-term conditioning process. The challenge for substantive change is “anchoring new
concepts of reality, new issues for attention, and new ideas for debate and resolution”. This may
be the result of rhetorically creating a perspective that is consistent with the desired direction of
change, while at the same time utilizing changes in the external environment as a legitimizing
context.
While significant insights on the role of context in organizational response are gained
from the foregoing literature, Laughlin (1991) contributes important views on the process and
content of responding to demands for change. This is viewed from a model for organizations that
incorporates intangible as well as tangible aspects, as shown in Figure 1 (Laughlin 1991, 211).
The ideologies that orient the organization and its members reside in Level 1. The interpretive
schemes of an organization may not be articulated, but they “operate as shared fundamental
(though often implicit) assumptions about why events happen as they do and how people are to
act in different situations” (Ibid., 212). The design archetypes “are the intervening variable
between the higher level values and the tangible sub-systems and are intended to guide the design
of the latter to express the perspective of the former” (Ibid.)
Figure 1 here
Laughlin describes a range of responses of organizations to pressure for change. The
implicit preferred choice is for an issue to lack sufficient force to require any response, allowing
the organization to maintain its state of inertia. If the force for change is too strong to ignore,
some kind of response will be required by the organization. There is a hierarchy of responses
available to the organization, representing increasingly greater deviations from the initial state of
inertia. Some responses are more desirable to the organization than others. The organization
will attempt to respond to the force for change via the preferred response paths, should
conditions that unfold in the process of the discourse permit. It is possible, however, that the
course of the discourse can force change on the organization and less preferred paths of response
may be required.
Two levels of response exist within the hierarchy of response options: first-order change
and second-order change. First order changes are termed ‘morphostatic’ changes and they
represent the ability of the organization to respond to forces of change in form rather than
substance. Morphostatic changes leave the interpretive schemes of the organization intact.
There are two types of morphostatic responses: rebuttal and reorientation. A rebuttal response is
characterized as a response by the organization that declares the issue lacking the imperative for
organizational change. A reorientation response is characterized as a recognition by the
organization for the need to change (i.e. the force for change cannot be successfully rebutted), but
the change undertaken is superficial. Smith (1982) describes morphostatic change as “making
things to look different while remaining basically as they have always been” (pp. ). Of these two
morphostatic change responses, rebuttal is preferred over reorientation, as it requires the
organization to diverge least from its initial state.
Second order changes require the organization to alter its essential core of operating and
are termed morphogenetic changes. Morphgenetic changes represent responses to forces for
change that are so strong that the objectives of the organization (with regard to the specific issue
of interest) are successfully altered. The interpretive scheme is altered by these changes. There
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are also two levels of morphogenetic response available to organizations, and one is preferable to
the other. The two levels of morphogenetic change response are colonization and evolution.
Laughlin describes colonization as fundamental change coercively imposed on the organization.
The implication is that forces outside of the organization have a preference for responding to the
issue of interest that is contrary to the preference of the organization, and these external forces
have the power to insist on organizational adaptation. Colonization is a less preferable
organizational response than evolution, which represents a voluntary adaptation of the
organization. Evolutionary change springs from the restatement of the internal values of the
organization and results from the process of open discourse on the specific issue of interest.
Table 1 presents Laughlin’s framework of organizational change as summarized by Gray et al.
(1995, 216).
Table 1 here
Habermasian discourse
Habermas’ theory of social evolution relies on the process of discourse to develop
solutions to controversial issues. Discourse is a method of argumentation whereby relevant
claims can be debated with the goal of problem solution and/or social progress. Discourse is a
method of process. Habermas’ concept of rational behavior extends beyond consideration just of
means, or instrumental rationality (e.g., efficiency, utility maximization), to include the
cooperative development of ends. He explains rational behavior as reflected in participation in
discourse (Habermas 1984, 18):
Anyone participating in argument shows his rationality or lack of it by the
manner in which he handles and responds to the offering of reasons for or
against claims. If he is “open to argument”, he will either acknowledge the
force of those reasons or seek to reply to them, and either way he will deal with
them in a “rational” manner. If he is “deaf to argument”, by contrast, he may
either ignore contrary reasons or reply to them with dogmatic assertions, and
either way he fails to deal with the issues “rationally”.
Empirical evidence shows discourse is instrumental in developing solutions to economic
allocation problems (Kesting 1998, 1054). Kesting explored the role of discourse in three
separate economic environmental conflicts in which resource allocations were made. He used
rules of discourse based on Habermas’ work and developed by Renn (1995) and Biesecker
(1997). He concludes that discourse is a productive means of allocating resources in the context
of contentious allocation decisions, and that it serves as an effective economic mechanism of
coordination (Kesting 1998, 1074). Because it plays a role in the allocation decisions of
economic actors, discourse is an appropriate process for accounting standard-setting which is
dedicated to such decisions and decision makers.
CONTEXT, PROCESS AND CONTENT OF RESPONSE TO DEMANDS FOR
ENVIRONMENTAL REPORTING STANDARDS
Discourse plays an important role in the formation of consensus and/or conflict resolution
both within organizations and between organizations and their external environments. In the
case of the organization(s) setting accounting standards, the process of responding to demands
for changed (or new) standards relies heavily on discourse. A typical procedure for developing
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standards includes formation of a task force to develop a statement of the problem. This
statement (often in the form of a Discussion Memorandum) is issued for public airing. An
Exposure Draft may follow wherein the preliminary version of the standard is proposed and
arguments are presented in support. The Exposure Draft is, again, released for public response
(Laughlin and Puxty 1983, 461). During these developmental periods, research reports may also
feed the discourse. Finally, on the basis of the preceding steps in the process of discourse, the
content of response is formulated and a standard or position is issued.
The context of accounting standard setting is treated at some length in the critical
accounting literature (e.g., Lowe, et al 1983, Merino and Neimark 1982, Laughlin and Puxty
1983, Wildavsky 1994). The social and political contexts of accounting are subjects of inquiry,
in addition to the economic context. The context of accounting as a tool of the modern U.S.
capitalistic economy dominates the FASB, and represents the governing ideology that orients the
organization, as illustrated in the Mission Statement:
Accounting standards are essential to the efficient functioning of the
economy because decisions about the allocation of resources rely heavily
on credible, concise, and understandable financial information. (FASB
1998).
It is to be expected, therefore, that the development of accounting standards will take
place within an interpretive scheme that is permeated with the values and norms of this
economically instrumental framework. Environmental reporting is potentially incongruent with
this framework because it often exceeds the boundaries of the normal internal or external
exchange transactions traditionally recognized in the accounting model. In addition, corporate
environmental performance is the subject of an often-contentious public debate. Environmental
activists seek to hold corporate entities responsible for a wide range of environmental impacts,
and public interest groups seek more transparency and disclosure of environmental performance.
Within academe, green accountants also suggest broadening the traditional accounting
framework to incorporate recognition in accounts of environmental ‘transactions’ (Gray, et al
1993). It is expected that the FASB will resist demands for environmental reporting standards
that seek to serve ends so alien to the constructs and values of its interpretive scheme.
There is evidence of demand for expanded environmental reporting from investors constituents recognized as having legitimate information claims. A growing pool of funds
identify socially responsible investments as the primary investment objective (Rockness and
Williams 1988, 397; Kreuze, et al 1996, 37). Corporate environmental performance is high on
the list of concerns and information needs of these users of financial information. Further,
information on environmentally related financial reporting needs and preferences is provided
through focus groups and surveys of institutional investors (IRRC 1992). Investors rate
environmental liabilities, environmental expenditures, penalty information, and capital spending
information the most important financial information that companies should present. Corporate
environmental policies and programs are the most important non-financial information needed.
In addition, investors want to know whether there is a correlation between corporate
environmental goals and accomplishments. Finally, information on compliance with local, state
and federal regulatory statues is an important concern to investors. Again, there should be a
correlation between corporate environmental policy and objectives, and regulatory compliance
(Ibid., v). The foregoing stands as part of the public discourse placing demands on the FASB for
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expanded environmental reporting. It represents an explicit demand by users of financial
statements for expanded environmental reporting.
Environmental reporting issues were added to the FASB agenda via the Emerging Issues
Task Force on three occasions between 1989 and 1993. EITF 89-13 dealt with asbestos removal
costs. The major issues were whether to capitalize or expense these costs, and whether they
represented extraordinary expenses. EITF 90-8 dealt with whether to capitalize or expense
environmental contamination costs. EITF 93-5 is the most comprehensive of the environmental
reporting projects, and addressed accounting for environmental liabilities. This project was
incorporated in and effectively nullified by the issuance of Statement of Position (SOP) 96-1 by
the American Institute of Certified Public Accountants (AICPA), the trade association of
professional accountants in the United States. SOP 96-1 was issued as an Exposure Draft in June,
1995, and issued as a Statement of Position following due process in 1996. The major issue in
this SOP is the application of FASB 5 Contingent Liability treatment to environmental
remediation projects. Remediation projects largely result from designation as a Potentially
Responsible Party (PRP) on Superfund cleanup sites, and arise from actual or probable legal
liability.
All of the environmental reporting responses by FASB have been narrow technical
applications of existing reporting requirements. The broader public interest issues of reporting
corporate environmental performance and the specific preferences of legitimated constituents
have not found their way into the standard setting process. Environmental disclosure issues are
subordinated to account recognition issues by FASB staff, and are portrayed as (almost)
hopelessly fraught with uncertainty. “[I]t follows therefore that questions of disclosure depend to
a large degree on the outcome of questions of recognition…” (Johnson 1993, 123). In light of
the expressed information preferences of investors, this seems to contradict the spirit of the
purpose of disclosure “to describe unrecognized items”, “to provide information to help investors
and creditors assess risks and potentials of both recognized and unrecognized items” (Reither
1997, 102).
Where in Laughlin’s typology of response to demands for change is this organizational
posture cast? Defining the issues very narrowly as recognition of environmental costs and
obligations permits organizational rebuttal of calls for disclosure of broader issues. Prescribing
reporting requirements that define environmental reporting as another case for application of
FASB 5 treatment reorients the rhetoric of the discourse. It permits the appearance of financial
reporting that is responsive to a social issue without changing the content of that reporting. Form
wins over substance. These responses are consistent with morphostatic responses where the first
preference is no response and the second preference is superficial response.
FASB standard setting has ignored the information preferences of users in developing
environmental reporting standards. This could be understood as an organizational defense
against attack by parties interested in radical change, if the only demands for environmental
disclosure emanated from groups with no recognized legitimacy. Indeed, a defense might be to
question whether we want to upset the capitalist apple cart in favor of ill-defined alternatives
(Wildavsky 1994, 480). But demand for environmental disclosure comes from sources which the
FASB identifies as having legitimate information needs. Users with impeccable legitimacy
credentials are seeking environmental reporting information: investors - and institutional
investors, at that.
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Resistance to demands from this quarter can be understood as organizational failure to
deal with an issue whose borders extend beyond the traditional framework of financial reporting.
The issue challenges the interpretive scheme of accounting standard-setting organizations. The
responses have been, predictably, those which require the least diversion from the established
pattern of existing standards, even though this cheats on the stated mission and goals of the
organization.
The weak correlation between the need for information on contemporary issues of broad
public interest, and the responsiveness of accounting standard-setters has been the subject of
periodic Congressional inquiry for over two decades. FASB has recently been criticized for the
low level of public participation in standard setting (GAO 1996, 4-5). User’s need are ignored in
spite of their declared importance in the mission and goals of the organization, and in spite of
the open discourse process of standard setting. The lack of public participation in environmental
reporting standard setting, and the dogmatic reasoning displayed in the discourse show the FASB
to be “deaf to argument”. The claims for environmental information disclosure have either been
ignored or dismissed with dogmatic assertions that “most questions about disclosure must
necessarily await the outcome of questions about recognition” (Johnson 1993, 123). These
responses indicate irrational behavior in a discourse dedicated to problem solution or progress
(Habermas 1984, 18).
CONCLUSION
Several conclusions can be drawn from this analysis. First, environmental reporting
needs to be more responsive to user needs. Thus far, environmental standard setting has been a
repackaging of existing reporting standards with the term ‘environmental’ inserted at strategic
points in the discourse. This is consistent with morphostatic change using a reorientation
response strategy. Second, without substantive expansion of environmental reporting standards
public confidence in responsive standard setting by the accounting profession weakens. This
continues to provide fodder for charges (like those made by the GAO) that standard setting lacks
a balanced perspective in meeting user needs.
There have been calls within academe, as well, for reporting standards responsive to
matters of broad public interest for well over two decades (Parker, 1986). Environmental
reporting is currently one such broad-based issue. Standard-setters responses have not
acknowledged or incorporated into serious discourse the information preferences of recognized
constituents. The response of professional standard setting bodies has been predictable from the
organizational behavior view, and disappointing from the perspective of the credibility of those
same institutions. The sincerity of the discourse is sacrificed to organizational inertia.
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Figure 1
Organizational Design Archetype
Level11
Level
Beliefs, Values and Norms
Interpretive
Schemes
Intangible
Level
Level2
Mission/Purpose
Level 3
Metarules
Le
Balance/coherence
Design
Archetype
Organization Structure, Decision
Processes, Communication System
Tangible
Table 1
Laughlin’s typology of organizational change
No change
(i) Inertia
First order change
(morphostatic)
(ii) Rebuttal
(iii) Reorientation
Second order change
(morphogenetic)
(iv) Colonization
(v) Evolution