Critiquing Current Accounting Practice and the need for change

1. Critiquing Current Accounting Practice and the need for change Lecture 6

2. Learning Objectives • Discuss various perspectives of the responsibilities of business • Distinguish between accounting and accountability • Review various theoretical perspectives that can explain organisational voluntarily disclosure about social and environmental performance activities • Discuss the concept of sustainable development and how organisations are reporting their progress towards the goal of sustainable development

3. Introduction • Sustainability reporting addresses specifically how current activities are impacting the abilities of future generations to satisfy their own needs. • Increased provision of information about social and environmental performance, TBL or sustainability reports, implies management of these organisations consider they have an accountability for social and environmental performance, as well as economic performance • Increasing community pressures - organisations to commitment to sustainable business practices - corporate reporting is responding to this pressure

4. Introduction • If sustainability becomes part of the expectations held by society … , it must—consistent with legitimacy theory—become a business goal • Providing information about social and environmental performance will increase the trust a community has in the organisation

5. Sustainability • Brundtland Report placed sustainability on the business worldwide agenda • Sustainable development defined as: ‘… development that meets the needs of the present world without compromising the ability of future generations to meet their own needs’ (World Commission on Environment and Development, 1987) • Inter-generational and intra-generational equity central to the agenda

6. Accountability • The duty to provide an account (not necessarily financial) or reckoning of those actions for which one is held responsible • Two responsibilities or duties • responsibility to undertake certain actions • responsibility to provide an account of those actions

7. Stages of Sustainable Reporting Why Report? Who to Report? What to Report? Disclosure Format

8. Why Report? • Social and Environmental is voluntary - therefore we can use various positive theories to explain or predict this decision • Different accounting theories will provide alternative explanations • Legitimacy Theory and social contract • disclosures linked to providing evidence that entity is complying with the expectations of society • Stakeholder Theory • disclosure depends on expectations of powerful stakeholders if the managerial perspective of stakeholder theory is embraced • Accountability Model • an acceptance of a responsibility to report

9. Why Report? • Institutional Theory • organisations will adopt particular practices because of institutional pressures • Positive Accounting Theory • disclosure depends on positive wealth implications

10. Differing Views of Responsibility? Friedman Alternative View • rejected the view that corporate managers have any moral obligations • stated that ‘the business of business is business’ • responsibility to increase profits as long as legal • this view often held by the media—applauds profitable organisations • organisations earn their right to operate in the community • artificial entities that society chooses to create • organisations do not have an inherent right to resources • consequently accountable to society for how it operates • societal expectations may exceed profitability

11. Differing Views of Responsibility? • Anita Roddick, founder of the Body Shop, made the following statement (2007): In terms of power and influence, you can forget the church, forget politics. There is no more powerful institution in society than business, which is why I believe it is now more important than ever before for business to assume a moral leadership. The business of business should not be about money, it should be about responsibility. It should be about public good, not private greed.

12. To Whom? • If managers motivated by the desire to increase shareholder value then reporting will be aimed primarily at satisfying the expectations of powerful stakeholders • Ifmanagers adopt a broader ethical perspective then disclosures aimed at stakeholders impacted by the operations of the entity- still cannot address all information needs, so prioritisation is necessary • The decision of whom to report to is directly related to the previous issue of ‘why report?’ These factors cannot be considered in isolation

13. What to Report? • Identify information needs through dialogue with stakeholders • Negotiate a consensus among competing stakeholder needs and expectations • Westpac – How do we measure up? (2004) • http://www.westpac.com.au/about-westpac/sustainability-and-community/performance-reporting/stakeholder-impact-reports/

14. How to Report? • Conventional financial accounting does not appear to provide a foundation for social and environmental disclosures • Triple bottom line reporting is an alternative, although it is not the same as sustainability reporting. A true sustainability report would consider such issues as the carrying capacity of the eco-system, impacts on future generations and so forth • An attempt can also be made to place a cost on the externalities of business

15. Limitations of Financial Reporting • FA focuses primarily on the information needs of those involved in resource allocation decisions. Sustainability concerns all stakeholders • ‘Materiality’ tends to preclude the reporting of social and environmental information, given the difficulty in quantifying costs • FA adopts an entity assumption where the entity is treated as distinct from its owners and other stakeholders • transactions (externalities) not directly impacting the entity are ignored • Externalities caused by the entity cannot be reliably measured, and so typically are not recognised given the recognition criteria provided in the IASB Framework

16. How to Report? • Triple bottom line reporting • Disclosure of information about the social, economic and environmental performance of an entity • Manage all the bottom lines the same - appropriate? • All 3 are treated in isolation – not the case in practice • Global Reporting Initiative (GRI) • GRI Guidelines are the most comprehensive framework for ‘how to report’ currently available • Third version - G3 - released in 2006 • Made up of various ‘core’ and ‘additional’ performance indicators • Not mandatory and hence many organisations are selective about what information they select for disclosure

17. Accounting for Externalities • Market prices do not reflect the scarcity of resources involved or harm resources cause • Perception that all costs associated with the production of goods or services (including use of ‘the environment’) should be reflected in their price • The practice of ‘under-pricing’ the environment leads to over use and damage to the environment • If done comprehensively this would involve some life-cycle analysis • consideration of the inputs and outputs from raw material acquisition to disposal • Often referred to as ‘true prices’

18. Social Auditing • Purpose of social auditing is for an organisation to assess its performance in relation to society’s requirements and expectations • Results form the basis of an entity’s publicly released social accounts, which in themselves are often incorporated into a triple bottom line or sustainability report • Consider the following examples: • The Body Shop • Westpac Banking Corporation • Fuji Xerox Australia

19. Critical Perspectives in Accounting • Accounting research that questions prevailing social order and how accounting practices actually contribute to inequities • Focuses on the role of accounting in sustaining the privileged positions of those in control of resources (capital) while undermining or restraining the voice of those without • Critical accounting theorists seek to highlight, through critical analysis, the key role of accounting in society

20. Critical Perspectives in Accounting • Challenges the view that accounting can be construed as objective or neutral • Rejects a ‘pluralist view of society’ wherein many stakeholders have power to influence government, corporations, and so forth • Rather, power resides in the hands of a ‘small elite’ • Accounting seen as a means of constructing or legitimising particular social structures for the benefits of those that currently have wealth • Critical theorists do not seek to appear objective – they highlight the role of accounting in maintaining social structures that they perceive as unjust

21. Critical Perspectives in Accounting • Much of the critical research is informed by the works of Karl Marx • However, some critical research adopts a ‘deep ecologist’ philosophy • questions the trade-off between economic performance and ecological damage • Critical theory is an ‘umbrella term’ for a wide variety of theoretical approaches perhaps more united in what they oppose than what they agree upon (Hopper et al.1995)

22. Fall of Capitalism • Critical theorists tend to oppose aspects of the capitalist system and accounting • Emphasise that systems of accounting are built around and support the prevailing social order • Given the practice of accounting is in the hands of large corporations and accounting regulation overseen by government, accounting information will never do anything but support the current system

23. Origins of Critical Perspectives • Grounded in Political Economy Theory • ‘Political economy’ is the social, political and economic framework within which human life takes place (Gray, Owen & Adams 1996) • Based on ‘Classical’ branch - challenges the existing nature and structure of society • Explicitly considers structural conflict, inequity and the role of the State at the heart of the analysis • Highlights issues which may not otherwise be addressed

24. Critical – Disclosures of SRI • Critical theorists argue that disclosure of SRI is wasted unless accompanied by fundamental changes in how society structured • Acts to legitimise those providing the information – not challenge them • Need social reform- not more ‘accounting’ • As accounting is deemed to sustain particular social structures- introduction of new forms of accounting only help to sustain that social system • Considered wasted effort to use accounting to solve problems

25. Criticism of Critical Perspectives • Critical theorists often marginalised to a greater extent than others • Often do not provide solutions to perceived problems • inconsistent with normal training of accountants which is to provide solutions if problems are evident • Critical of accountants

26. Role of State • The State is seen as a vehicle of support for holders of capital and for the capitalist system as a whole • Securities acts throughout the world were designed to maintain the ideological, social, and economic status quo while restoring confidence in the existing system and its institutions (Neimark 1982, p.49) • Act of control • Government will take action to enhance the legitimacy of the (unjust) social system • Social disclosures seen as a means of pacifying challenges against the capitalist system where corporations are given many rights and powers

27. Role of State • Restricting the flow of information, or availability of specific types of information, seen as a means of maintaining particular organisations and social structures • Government does not operate in the ‘public interest’, but in the interests of ‘well off’ groups • Corporations typically lobby against regulation that could increase their accountability to society

28. Role of Accounting Research • ‘Mainstream’ accounting researchers are seen as providing research results and perspectives that help to legitimise and maintain certain political ideologies • e.g. anti-regulation stance and EMH during the late 1970s and 1980s matched the views of government at the time • rise of PAT consistent with political views at the time • The story of PAT can be told in such terms. Its rise was not just due to its addressal of academic threats and concerns at the time of its inception but it was also in tandem with and connected to the right wing political ideologies dominant in the 1980s (Hopper et al.1995, p.518)

29. Role of Accounting Practice • Critical theorists see conceptual frameworks as legitimising the accounting profession and of financial reports produced by reporting entities • Accountants seen as imposing their own views about which performance characteristics are important or not important • Attention is directed to particular measures (e.g. profits) through accounting

30. References • Deegan(2009) Financial Accounting Theory (3ed), McGraw Hill Ltd: Australia. • Godfrey et al. (2010) Accounting Theory (7ed), John Wiley & Sons Australia Ltd: Australia. • Scott (2009) Financial Accounting Theory (5ed), Pearson Ltd: Canada.