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CONTEMPORARY ISSUES IN ACCOUNTING THOUGHT

SOME CHALLENGES TO EXISTING ACCOUNTING PRACTICE


CORPORATE SOCIAL REPORTING

OBJECTIVES
Following this group of sessions you should be able to;

Evaluate the basis of traditional accounting practice


Investigate various questions raised by alternative or more extensive reporting
arrangements
Identify and criticise research approached adopted to deal with some of these
questions.

SOME BACKGROUND
The challenge to existing accounting practice comes from a range of perspectives. Critical
writers (e.g. Tinker see later) are critical of the underlying basis of accounting practice,
although even writers from this perspective such as some of Sikkas work, recognise that
some form of accounting is required but the use of the accounting and its relevance to
particular stakeholders is often challenged.
Other writers (as you will see) are more pragmatic, and suggest that broadening of
accounting to encompass social and environmental issues, can be done from within existing
managerial structures (although even these writers have been concerned about managerial
capture of what is referred to here as SEA.
A third group (Adams for example) reject concerns about managerial capture. Adams
argument is that other critics are focusing too much on managerial dominance over what is
published and not enough on what is published and its impact.
You will notice here that there are disagreements in the literature about three things:
What is considered to be real in broader accounting practice (ontology)
What might be appropriate and how do we know about it (epistemology)
Its relevance and impact (some elements of teleology here)

WHAT IS THE TRADITIONAL FOCUS OF ACCOUNTING?


According to Gray (2006) Financial reporting is essentially consequentialist
It focuses on the results of reporting rather than on its production
Its assumed basis of decision making is rational (and utilitarian)
Some key assumptions of this perspective are:

Gray,

Financial description is provided for all items and (almost) anything that cannot be
expressed in financial terms is excluded.
There is a focus on specified (priced) economic events.
Rules are applied to defined organisations or accounting entities.
Providing information to specified users of that information
Owen and Adams (1996) Accounting and Accountability Prentice Hall

ACTIVITY
Provide an example from your study of financial accounting to support the statements
above.

IS THIS A PROBLEM?
Accounting traditionally focuses on the economic needs of investors. If we read the
statement of principles produced by the Accounting Standards Board (ASB) (you find a
similar framework from the International Accounting Standards Board (2009) IASB) we can
see how its focus is broadly as described above.
Company law (at least in anglo/saxon countries) supports this. Company law embodies how
accounting statements and additional information will be produced and so this reinforces the
emphasis on particular measures of performance. Gray (2006) argues that this produces
hegemony in accounting practice ie it allows some groups to dominate and determine the
relationships and decisions that take place.
Some economic approaches provide support for this e.g. Milton Friedman provides a
cogent argument in support the focus on financial matters (see Friedman, 1970)
However, recent economic events challenge the emphasis on particular approaches to
measurement that emphasise short term gain whilst transferring risk to others. The recent
crisis off the cost of the US following the leaking of oil might be an example of how public
concern can be raised by particular events.

LOVE CANAL

One writer who explored some of these issues is Tinker - see Tinker, T. (1985) Paper Prophets
Holt, Rinehart and Winston
You can watch a video on Love Canal in Youtube. http://www.youtube.com/watch?
v=kzwacZZe5yk

EXERCISE
Hooker Chemical were able to dispose of toxic waste in Love Canal because there was no
cost incurred by them for doing so
Would reporting on the disposal of waste (for example) have made any difference?
What does this focus ignore?

SHOULD COMPANIES REPORT ON A WIDER RANGE OF PERFORMANCE?


Before reading on to the next section you might want to think about your own response and
decide why you are making that response.

SOME RESPONSES
Yes it is appropriate to do so to meet the needs of stakeholders (a deontological response)
see Owen and Gray for examples of this)
Yes companies may benefit by focusing on the wider impacts of their activity (see Adams
(2007) and for example Marks and Spencer annual report 2009 (perhaps a consequentialist
approach)
No it is inappropriate to report on activity not required by law (eg Friedman)
No it does not add any value
See the CSEAR website (listed in references) for examples and further references

WHAT IS SOCIAL ACCOUNTING AND REPORTING?


This can be approached in a variety of ways but in several places Gray has suggested this is

a formal account
prepared and communicated by an organisation
about social and environmental aspects of the organisations activities
and communicated to the internal and external participants of the organisation
prepared voluntarily or compulsorily

see Gray and Bebbington (2001)


Gray et. al. (2009) suggest a more fluid approach by referring to it as a signifier ie a term
that points to the signified (and one which has no fixed meaning) as a way of getting around
the alternative debates in this area.
SHOULD ACCOUNTANTS BE INVOLVED?
Of course one question we might ask is even if we think that more information should be
provided, should it be the accountants who provide it? Two arguments are often put
forward.
Accountants are responsible for publication of information and so could contribute to greater
transparency.
Accountants already gather information through complex systems and already have skills
(see Gray and Bebbington, 2001; Adams, 2007).
Some that I might want to add are:
Accountants already act as part of the regulation process through their role as auditors
The availability of more information should benefit the function of existing capital markets.
This is primarily a pragmatic argument but relates to the assumption that all information will
have an impact on individual share prices and so the availability of information should
improve price setting.
May contribute to other benefits

EXERCISE
What are the potential benefits of focusing on environmental and social issues?

HOW DO COMPANIES JUSTIFY THEIR ACTIONS?


Gray, Owen and Adams (1996) provide a helpful summary of how SEA might be used to
legitimise behaviour (from Lindblom see also Magness, 2006 for further information). The
main ways in which companies legitimate behaviour are:

Correct public understanding of performance


Alter expectations of performance
How performance has improved
Direct attention away from performance

LEGITIMACY
You should also consult theoretical discussion developed earlier by Deegan (2002) and
others (Wilmshurst and Frost (2000)) to help you to understand this.
Legitimacy approaches can be used as a criticism of SEA. The problem with several of the
discussions in the accounting literature is that the definition of legitimacy and the extent to
which it can be evidenced is not clearly articulated. Milne and others have criticised this
approach and have been also critical of attempts to explain legitimacy by focusing on
content analysis which broadly attempts to measure the volume of information provided.
An alternative view is provided by Magness (2006) who attempts to provide a quantitative
approach to the discussion in relation to mining company information production in Canada
following a mining accident.
Whilst a helpful addition to knowledge the approach does seem a little flawed as it focuses
on a rather small sample.
To understand how many companies report on broader aspects of their performance you
might also wish to consult company reports eg BP, Daimler-Benz and Marks and Spencer.
Some companies have gone further (see CSEAR site for more examples), and have
attempted to measure a range of non-financial inputs and outputs eg volumes of raw
materials; valuable product produced; waste products (including CO 2); water consumed and
cleaned up. These examples are rather limited and the focus has tended to be on processes
and activities rather than inputs and outputs.

ACTIVITY
You should take two of the accounts referred to above (or another you are interested in, and
compare the level and nature of information produced that you consider being social or
environmental in nature. Also note how the information is presented is it part of the
normal operating statements or separate for example?

LIMITATIONS
Gray et. al. (2009) provides a helpful summary of some of the issues relating to SEA
research and so what we know.
They note
A substantial focus on reporting and legitimacy
A focus on private sector
Failure to adopt new approaches
Adams (2007) also raises some issues about approaches actually challenging some of the
focus of Gray, particularly on management issues.
Owen (2008) highlights problems in the development of social and environmental
accounting, and suggesting that economic values predominate and there have been few if
any changes to decision making practices. This perhaps leads to the next question raised.

TO WHAT EXTENT DO VOLUNTARY APPROACHES WORK?

Several attempts have been made to develop schemes to extend the range of reporting
practices. The Global Reporting Initiative provides one of many opportunities to develop a
voluntary approach to reporting
Most focus on sustainability. You might want to question what this means and why there
is a focus on one aspect of activity and not others.
Much of the work of Gray has been focused on voluntary initiatives. Adams (2007) questions
their usefulness.
However one example worth considering is the work done by Traidcraft in 1990s and
reported upon more recently by Dey (2007). This paper deals with the impact of particular
types of reporting and provides a helpful guide to some of the problems of reporting for
example, choosing the right things to measure is a common problem in performance
management. In the case of Traidcraft, choices changed behaviours but was influenced how
changes in the policy of the organisation took place.
The study is supportive of the views expressed by Adams (2007) that it is important to
observe practices of broader accounting practice rather than to focus on external issues or
managerial capture. Nevertheless appropriation of the information generated by SEA might
be a problem.

APPROPRIATION
Owen et al (2000) and Gray (2006) are two examples of concerns about appropriation of SEA
by management
Adams (2007) questions whether this concern is valid.

WHAT ISSUES MIGHT BE RAISED BY SEA AND WHAT DIFFICULTIES MIGHT BE


EXPERIENCED?

Unexpected change (see Dey (2007) writing about Traidcraft PLC) can arise
There are problems in determining what should be published (see eg Deegan, 2002)
There are difficulties arising from measurement (see eg Milne, 1991)
Internalisation of external values (see Hopwood, 2009)
Measuring performance at the level of the entity (Gray, 2006)

You may be able to think of more difficulties of your own. For example what about differing
priorities in different countries?

SOME OPPORTUNITIES
It is not all doom and gloom however.
Gray et. al. (2009) also suggest areas for exploration that might provide some valid
investigation.
Another area that we do not have time to cover is social audit. Traidcraft again is one of the
examples here but we have seen reviews of organisations often carried out by interest
groups outside of organisations. We have seen a renewal of a focus on social audit (see

Owen, 1992) but Owen et. Al. (2000) again expressed concern about the involvement of
professional accountancy firms in the process.
Broadening investigation in other accounting locations such as the public sector or
developing economies is also important.
Hopwood (2009) refers to developments in accounting for pollution and carbon transfer (of
course using accounting practice to internalise costs and benefits).
REFERENCES
Adams, C. (2007) Engaging with organisations in pursuit of improved sustainability
accounting and performance Accounting, Auditing & Accountability Journal, Vol. 20 No. 3,
pp. 333-355
CSEAR http://www.st-andrews.ac.uk/management/csear/
Deegan, C. (2002) The legitimising effect of social and environmental disclosures a
theoretical foundation Accounting, Auditing & Accountability Journal, Vol. 15 No. 3, pp. 282311.
Dey, C. (2007) Social accounting at Traidcraft plc Accounting, Auditing & Accountability
Journal, Vol. 20 No. 3, pp. 423-445.
Gray, R. H. (2006) Social, environmental and sustainability reporting and organisational
value creation? Whose value,? Whose creation? Accounting, Auditing and Accountability
Journal 19, 6, pp 793-819
Gray, R. and Bebbington, J. (2001) Accounting for the Environment 2nd ed Paul Chapman
Gray, R., Dillard, J., and Spence, C. (2009) Social Accounting Research as if the World
Matters Public Management Review Vol. 11 Issue 5 545573
Hopwood, A. G.(2009) Accounting and the environment Accounting, Organizations and
Society 34 433439
Institute of Chartered Accountants in England and Wales (2004) Sustainability: the role of
accountants ICAEW http://www.icaew.com/index.cfm?route=117162
International Accounting Standards Board (2009) Framework for the Preparation and
Presentation of
Financial Statements http://www.iasb.org/NR/rdonlyres/4CF78A7B-B237-402A-A031709A687508A6/0/Framework.pdf [accessed 10.11.2010]
Magness, V. (2006) Strategic posture, financial performance and environmental disclosure
Accounting, Auditing and Accountability Journal 19, 4, pp 540-563
Milne, M.J., 1991. Accounting, Environmental Resource Values, and Non-market Valuation
Techniques for Environmental Resources: A Review. Accounting, Auditing & Accountability
Journal, 4(3),.
Owen, DL, Swift, T. A. Humphrey C. and Bowerman, M. C. : (2000) The new social audits:
accountability, managerial capture or the agenda of social champions European Accounting
Review, Vol.9 (1), pp.81-98
Owen, D. (2008) Chronicles of wasted time? A personal reflection on the current state of,
and future prospects for, social and environmental accounting research Accounting,
Auditing & Accountability Journal Vol. 21 No. 2 pp. 240-267
Parker, L.D. (2005), "Social and environmental accountability research: a view from the
commentary box", Accounting, Auditing & Accountability Journal, Vol. 18 No.6, pp.842-60.
Tinker, T. (1985) Paper Prophets Holt, Rinehart and Winston
Wilmshurst T. D. and Frost, G. R. (2000) Corporate environmental reporting - a test of
legitimacy theory Accounting Auditing & Accountability Journal, Vol. 13 (1), pp. 10-26.

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