Introduction
The social and environmental dimensions of accounting theory and practice and the impact of accounting information on the decision-making processes affecting the natural environment has been increasingly given attention to by the financial reporting field. The cost of applying standards for financial reporting has long been a concern of the corporate preparers of financial information, a concern that traditionally has been expressed in demands that those who promulgate standards pay closer attention to the ‘cost-benefit ratio’. More recently, spokespersons for the corporate community have extended those demands to include a plea that possible social and environmental, consequences should be taken into account before standards are promulgated.
It seems that one can today all too easily come to take on board ways of seeing accounting and financial reporting that delimit both. A widely held current perception of accounting almost reduces it to a taken for granted, somewhat unexciting and unappealing mechanical practice that records and reports the ‘facts’ that are simply to be recorded and reported, a technical practice that almost just is. According to Gallhofer & Haslam (2003), accounting is apparently taken in this view to be virtually an asocial and apolitical practice. Such a perception is in part shaped and fostered by the portrayal of accounting and the accountant in literature, film and the media and seems to us to be of some weight at least in the public realm of the West (Fraser et al. 2000; Tew 1999). With this perception, there is thus a need to focus on social and environmental issues which the contemporary accounting field is facing in terms of financial reporting.
Social Accounting Issues
The last 4 decades have witnessed something of a take off, followed by a subsequently interesting trajectory, in the idea and practice of a social accounting (Gray & Bebbington 2001). This social accounting has been characterised as challenging conventional accounting, involving a fusion of concerns about accounting’s content, form and social role. And, on the face of it, it has been constituted in efforts to go beyond a narrow instrumentalism towards an appreciation, informed by critical reflection, of ‘what really matters’ to people, including in the governance of social organisations. The social accounting phenomenon refers to a vast set of episodes and developments that have manifested throughout the world (Gallhofer & Haslam 2003). Baruch Lev’s (1992) article suggested that corporate executives involved in financial reporting activities need to evaluate their information disclosure decisions using cost-benefit analysis, which would also take into account their corporate social responsibility (CSR). The concern is in some ways to extend critical appreciation of a number of key episodes and developments from the late 1960s onwards involving the mobilisation of social accounting. The relative emphasis upon the UK in the choice of interventions here reflects in part the current geographical location, but also the view that the UK has witnessed key contextual dynamics and some key episodes and interventions involving manifestations of social accounting that are also reflective and to some extent illustrative of more global developments.
A number of questions were raised in the UK context. Was a commitment to the maximisation of profit or shareholder wealth appropriate or sufficient in the context? Should organisations have wider social responsibilities and goals, including in respect of the ecological environment? Should they not be responsible to the public at large beyond the shareholders? Were business organisations, especially given their increasing power being as socially responsible as they might reasonably be? Have they been reflecting such social issues in their financial reporting? Such questions helped constitute a challenge for accounting including in the more global context. Another recent development illustrating the pervasiveness of the presence of business in social accounting interventions today is the Global Reporting Initiative (GRI), an example of what can be understood as the recommending of a quasi-official social accounting on a global level. Launched in 1997 by the Coalition of Environmentally Responsible Economies (CERES) in co-operation with the United Nations’ Environmental Programme (UNEP), the GRI implicates social, with emphasis on environmental, accounting.
There are forces at work, as well, providing key incentives favourable to accounting disclosure and publicity (Parker 1990). A firm that had gone public, especially if listed on the stock exchange, often deemed it easier to attract capital if publishing accounts. Further, it would often be felt that any progress in a company’s economic position would more easily translate into an increased share price with the appropriate accounting publicity. In this regard, key dimensions of disclosure content of interest to shareholders included whether assets exceeded liabilities, the size of the profit and how much of the profit was to be paid out as a dividend. Often much of it was. Further, according to Schaltegger & Burritt (2001), one of the most important issues concerning the social aspect of financial reporting is annual reports, whether variations in annual report disclosures are simply reflections of variations of communication of espoused values and behaviors or variations of values and behaviors in use. This hypothesis suggests that firms might signal their identity as socially responsible companies through the annual report. It does not imply a one-to-one correspondence between CSR performance and CSR disclosures. It merely states that, on average, companies that are perceived as having met CSR criteria will be more likely to report this information in the annual report.
Observers agree that CSR disclosure in the United Kingdom is predominately voluntary. Wolfe (1991) describes the disclosure environment: ‘Though considerable resources have been spent debating and studying it, social reporting the United States remains predominately voluntary . . . and is expected to remain so. The SEC considers that social information falls outside of its area of responsibility, unless it has material economic consequences’ (290). Similarly, Wolfe (1991) believes that, in spite of its voluntary nature, there are pressures on management to report honestly and accurately. According to the writer, ‘Increased public scrutiny, competitive forces, the independent financial press, audits and antifraud laws, potential impacts on public confidence, and moral obligation motivate corporate managers to provide honest annual report information’ (290).
Environmental Accounting Issues
Research into environmental reporting has been in existence for a decade now. Over the years, such research has been globally accepted as a vital sphere of academic advancement. Extensive research on environmental accounting in Europe is undertaken in the UK. Environmental awareness in the UK rose to prominence in the 1990s after the release of the Pearce Report in 1989 (Gray, 1990). Developments in the practice have been tremendous with numerous recommendations and guidelines being postulated to facilitate the transition of the environmental agenda into business. Amidst these developments, one needs to question whether the progress in environmental reporting has really benefited humankind. At one point in time, firms were primarily accountable to their shareholders. As a result, developments in accountability were focused on fiscal responsibility, and the area of financial accounting was created as a means to hold firms fiscally responsible. These systems, however, said nothing about the social performance of the firm. Starting in the 60s, numerous stakeholders including shareholders, employees, consumers, local communities, government, and other businesses have grown to hold corporations accountable for their social performance, as well as their fiscal performance. As the accountability requirements have increased, so have the number of programs designed to hold firms accountable.
One force with strong counter hegemonic dimensions that continued to grow in spite of the broader political changes, bolstered by the weight of scientific opinion, was environmentalism, particularly in terms of a focus on sustainability. Capturing many people’s attention, to some extent this exerted a similar kind of pressure on business and governments to that engendered by the earlier social responsibility and related movements. The problematic actual and potential ecological impacts clearly cut across the boundaries of given nation state contexts, notably in the case of global warming. Thus developments and movements were further encouraged to think and act globally (Gallhofer & Haslam 1997). As some forms of environmentalism and sustainability also stressed the case for wider social responsibility, these broader concerns began to return to a higher level on the agenda of corporate concerns (Gray & Bebbington 2001). International findings in Karim & Rutledge’s (2004) book suggest that a vacuum exists between theoretical developments in environmental reporting and the actual practice of disclosure, predominantly in corporate annual reports. In the absence of specific guidelines and due to the voluntary nature of environmental reporting, companies have seized the opportunity to use environmental disclosure as a public relations exercise. With this finding, executives involve with financial reporting are suggested by experts to realise that there are hidden environmental costs in the accounting system of their firms which must be reported in their financial statements for the public to be aware of. Following is an illustration of how these costs are enveloped in a firm’s systems.
Figure 1. Environmental Costs in the Management Accounting System[1]
While it is accepted that the environmental accounting discipline has moved from its initial days of cajolery to a more realistic agenda for business in the new millennium (Gray 2001 and Gray & Bebbington 2001), it is hoped that an improvement in environmental reporting through changes in accounting standards, corporate law, and stock exchange listing requirements coupled with mandatory guidelines could improve present levels of environmental disclosure. Increased research in environmental accounting should be directed toward investigating the relationship between mandatory environmental reporting and actual environmental disclosure in corporate annual reports. It is also hoped that such developments would ensure that environmental reporting is used as a tool to disseminate useful information to parties affected by a company’s environmental performance rather than being used as an alternative advertising campaign that would encourage capitalist motives of profit making at the expense of environmental issues.
Conclusion
Because many environmental and social problems result from resource allocation choices, it is important that those with concerns in this area are able to use to best advantage the information that corporations provide. Views of accounting that go beyond the prevalent perception and at least have begun to indicate accounting’s social and environmental location and the relevance of social and environmental deliberation over it have not only manifested in academia but have gained some purchase in society more generally. In short, these views equate to the construal of accounting in negative terms, even though the practice is scarcely explicitly challenged. Accounting is not uncommonly associated with the like of fiddling the books, fraud and a general lack of humanity.
Whilst accounting information has many shortcomings, it can be used as a tool in achieving and supporting improved environmental and social outcomes. The central issue is whether financial accounting and reporting should be a scrupulously neutral exercise, self-disciplined to measure and report social and environmental activities as objectively as possible in order to provide information that can be used with confidence as a basis for making business decisions. Or should it be directed instead by concern for the social and environmental health of the even society at large? In other words, should the primary concerns of accountants and accounting standard setters be the reliability and objectivity of reported information, or should they focus first on the possible environmental and social consequences of the information? That question, of course, raises others regarding the nature and uses of information in general.
References:
Fraser, I, Gallhofer, S, Haslam, J & Sydserff, R 2000, ‘Dickens and accounting history: towards a critical appreciation’, paper presented at the British Accounting Association Annual Conference, Exeter, April.
Gallhofer, S & Haslam, J 2003, Accounting and Emancipation: Some Critical Interventions, Routledge, New York.
Gallhofer, S & Haslam, J 1997, ‘The direction of green accounting policy: critical reflections’, Accounting, Auditing and Accountability Journal, vol. 10, no. 2, pp. 148-174.
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[1] Adapted from: http://www.pwc.com/extweb/service.nsf/ded5e6fd896f4384802571480057ae90/1211fe286669bba18525692e0004fad5/$FILE/EnvironmentalAccountingFeb98.pdf.
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