Social and Environmental Accounting - Assignment Example

?Topic:  Social and Environmental Accounting Introduction Many stakeholders require social and environmental accounting. Accounting is defined as an art of recording, classifying, summarising and interpreting financial and non-financial data. This entire piece of definition is mostly taken into account by companies to make their financial and investment decisions. Most of the time, this piece of accounting information is used either by the managers or shareholders who are the real owners of the companies. Overtime, the users of the financial information have considerably increased ranging from social to political, environmental to ethical. Each group has its own interests; these interests are directly or indirectly affected by the activities of the companies. These stakeholders are; local communities, environmental groups such as Friends of Earth and Greenpeace, media, political and other pressure groups. Additionally, the impacts of companies’ activities have considerably increased. In the recent history, the mismanagement of oil spill in the Gulf of Mexico by British Petroleum (BP) has unmasked the dirty and unethical corporate practices exist; and their existence can seriously undermine the life of stakeholders. For example, BP is heavily fined over its mismanagement of oil spill. Is that fine going to bring back the same kind of environment that existed before the oil spill in the Gulf of Mexico? Is the damage to the environment ever being repaired to its pre-oil spill level? Can we fully understand the total impacts of the oil spill over the sea life? In this single environmental disaster at the hands of BP, the entire sea life may face a threat of extinction since it is not possible at this point of time to fully comprehend the short term and long term impacts left by this environmental disaster. On the other hand, BP is boasting of her as a socially responsible entity investing and contributing more to the social and environmental stakeholders than any other companies in the corporate world. Furthermore, the emergence of global warming and the rising global temperature have also pushed companies to come clean and go green. Many critics believe that much of the problem of the global warming is caused by the companies who use fossil fuels and other chemicals to fulfil their corporate needs. While ensuring the corporate objectives, many companies do not give much consideration to the current and potential negative effects of their activities. Due to the recent pressures from the governments, local communities and from the environmental groups, many companies produce the reports on corporate social responsibility and sustainability reporting. In which, companies mention their positive and negative impacts of their activities on social and environmental stakeholders: They try to be transparent and accountable for their activities. In their sustainability and environmental reporting, the companies also describe their current policies towards social and environmental issues. In order to show off that they care for the social and environmental stakeholders, they mention in their sustainability reporting about their current and future investments with an aim of reducing their negative impacts over society and environment. However, many critics such as Friedman (1970), find no reason to believe on their genuine and realistic resolve towards mitigating their impacts as the companies are only established to serve the objectives of their shareholders which is to increase profits for them. Their only social responsibility is to increase the wealth of their shareholders Friedman (1970); at the end of the day, they are accountable to them not to society. In the subsequent parts of this essay, first environmental accounting, and its different types are included and critical analysis is included subsequently. Environmental accounting Environmental accounting has considerably evolved and received significant attention in the field of accounting after the work of the Gray in the year of 1990(Elkington,1993). Many Global Reporting Initiative (GRI) performance indictors can be traced to validate the amount of significance received by the environmental accounting. Identification of these performance indictors is essential to properly understand the role of environmental accounting. The performance indicators are: energy, materials, water, biodiversity, emissions, effluents, waste, suppliers, products and services, compliance and transport (Global Reporting Initiative, 2002). An organisation can be environmentally evaluated by keeping in view the organisation’s role towards contaminating local and global environment. For that purpose, it is essential to understand the role of environmental accounting. Environmental accounting distinctly accounts for environmental impacts relating to company activities. It can be explained in the language of accounting and can be further incorporated into the corporate reports describing in an understandable language. In a pure accounting concept, environment related costs are accounted for with some physical units, such as waste outputs. Traditionally, accounts are prepared to help understand shareholders about current financial performance of a company; on the other hand, environmental accounting is carried out to inform stakeholders other than the shareholders. The environmental reports describe the relevant environmental issues besides disclosing current and future strategies to mitigate the impacts of the corporate activities on local and global environment. Various assumptions determine the format and content of the environmental reporting such as informing shareholders and stakeholders about the current environmental performance, the Companies Act (2006) requiring the environmental disclosure in the annual reports, covering the short term and long term impacts of business over environment. Environmental tax accounting Environmental tax accounting may differ organisation to organisation. The major cause of difference is that each organisation affects environment in different ways. For instance, a chemical factory may hit oceans or sea life with its contaminated waste; consequently, it would require such environmental tax accounting that takes into account the level of contamination contributed by the factory. On the other hand, an electricity generating unit emits green house gases and pollutes the environment; this would require a different environmental tax accounting. Furthermore, environmental tax accounting might account for the monetary effects in the financial accounts such as effect of subsidies on pollution abatement devices; payments payable or paid for carbon taxes; cost of cleaning up landfills and tax deduction. Within the same context, environmental accounting may require additional information such as insurance against current and potential environment damaging assets or contingent liabilities; and reclassification of environmental indemnity insurance. Ecological accounting Ecological accounting uses a measurement base. This measurement base helps to identify impacts of an organisation on the plants and other living creatures. Besides, various and distinct measures of quality and quantity are used to account for the impacts of the organisation over an ecological system. In addition, internal and external ecological accounting helps different stakeholders in a decision making process. Internal ecological accounting facilitating, like management accounting, collects environmental information, describing the impacts of organisational waste over ecological environment. With this information, management becomes in a position to comprehend the aggregate impact over ecology; this comprehension can be used to devise and implement such organisational policies helping to minimise the impacts over the local and global environment. Undoubtedly, the presence of ecological information guides the organisation to appropriately and efficiently use energy and avoid energy wasting activities. External ecological accounting resembles financial reporting. Although external ecological accounting accounts for different items, yet it is produced to serve the stakeholders external to an organisation. In the reports, accounting estimates of physical units impacting ecological system; are incorporated. Accounting for energy, for waste with their physical and monetary measurement can be used to highlight the organisational policy towards its negative impacts over ecology and other environmental factors. Environmental management accounting Environmental management accounting is fundamentally based on two concepts- monetary measurement of environmental management accounting and physical measurement of environmental management accounting. The former takes into the costs incurred to represent the impacts of company’s activities over environment. Simultaneously, the latter explains as an internal approach designed to highlight ecological strengthens and weaknesses of an organisation. Monetary measurement of environmental management accounting takes into account environmental budgeting and accounting for energy costs. With the help of these tools, monetary measurement of environmental management accounting provides the basis for most internal management decisions. Additionally, it measures the issue of how to treat costs and revenues and how to monitor them, contributing considerably in understanding and planning strategic and operational planning for the existing and potential environmental issues and problems. Also, it can be used to control costs and evaluate performance of departments and management as well. The physical measurement of environmental management accounting can be used to directly or indirectly control over operations and resources besides supporting in decision making. Also, it is linked to sustainability promoting ecologically sustainable development through monitoring and controlling resources. Corporate social responsibility (CSR) Corporate social responsibility has various definitions (Margolis & Walsh, 2001). However, a widely agreed definition of CSR is that it is voluntary actions of corporations, to improve social and environmental conditions; these voluntary actions are designed by the companies (Davis, 1973, Wood 1991, Wood & Jones, 1995; Waddock, 1997). Besides, CSR can be called as corporate social performance, sustainable responsible business (SRB), corporate citizenship, responsible business or corporate responsibility (wood, 1991). Gray et al., (1996) further explains that social accounting or CSR is a communication process in which organisations’ social and environmental effects are shared with particular interest groups; as a result, it increases the accountability of organisations beyond the provision of financial accounts to the shareholders. CSR has extensive area. Such as local and global environmental issues, local community, employee and consumer policies, fair trade, wealth distribution between under-developed and developed states, trade with oppressive and infamous governments. Furthermore, in such reports, an organisation provides and explains its information about company’s social impacts and social performance, which is much similar to environmental reporting. However, it may be included with annual financial reports or it could be separately published; most of the time companies such as Wal-Mart Inc. and BP upload on their websites as well. Recently, new concepts have emerged in the social accounting. Such as social responsible investment (SRI), counter accounting, community involvement schemes and so on. Social audit Just, producing CSR reports is not sufficient. The publishing of such reports does not authenticate that what organisations say they really do! A possibility of just paperwork cannot be avoided. Only producing CSR and other environmental reports does not guarantee that the organisations have become responsible and they have adopted socially responsible policies. Taking the CSR published or uploaded reports as a proof of organisations’ seriousness towards social and environmental issues will not take away the risk of window dressing on the part of organisations. These points require the use of social audit to compare and confirm whether what an organisation has published in its CSR or other reports does really exist or not. Social audit may be used to factually assess a reality. Social audit measures, understands, reports and ultimately improves an organisation’s ethical and social performance (Social audit network). Before going to embark up on a social audit, it is significant to understand objectives of social audit for a social auditor; this understanding would help the social auditor to properly carry out a process of social audit and simultaneously achieving the social audit objectives. Although, the objectives of social audit vary from organisation to organisation, yet some basic objectives must be satisfied. Following are the basic objectives: Increasing effectiveness and efficiency of local and community development programmes. Informing the members of social and local community about the impacts and social and productive services. Overhauling the financial and physical loopholes between needs and resources available for local community development. Inspecting various strategic and operational policy decisions, keeping in view the interests and points of view of all related external and internal stakeholders, particularly the vulnerable communities of local population. Forecasting an opportunity cost for stakeholders of not receiving timely access to public services. Serving above objectives requires providing a social auditor some particular rights. First, the social auditor must have a right to require clarifications over the validity and reasons for taking particular community welfare steps; for that she may ask from the implementing agency about any particular social and environmental activity, decision, scheme, income and expenditure done by the agency. Additionally, the social auditor may consider it appropriate to inspect the currently running social and environmental schemes and activities of the agency. For that kind of inspection, the social auditor must have an access to the relevant registers and documents particular to the social and community development activities implemented by the agency or a government. Business ethics The issues of moral right, duty, virtue and justice occur within the ambit of business ethics. Although these are social and personal aspects of human life, yet they are important in the corporate world as well. On the face of it, there is no direct link between the corporate world and duty, moral right, justice and virtue, but many observers believe that they need to be and must be a part of the corporate world. Business ethics can be observed in many activities of the corporate world. They can be done internally and externally as well. Internally, business ethics may be used in the relations between employee and employer. Here, it may be observed that how the employer is treating and behaving with the employees; whether he is giving them an appropriate level of salary, whether the employer overburdens the employees; how he is managing and solving the work related complains raised by the employees. Externally, company shareholder relations and company-community/public relations may find the use of business ethics. Within the context of company-shareholders, business ethics may be applied over the reporting and disclosure requirements. Business ethics require the company to report the financial and non-financial information as it exists practically rather than the way company prefers to publish. Additionally, the ethically responsible disclosure is more in talk than it used to be due to the recent unethical practices unearthed by the mega corporate scandals such as Enron and WorldCom. Prior to the collapse of Enron, the market share price of Enron was hovering around $90 and at the same time, management was boasting of her social and sustainability reporting. The entire display was masterly planned and carried out by the management of Enron that no one was ready as soon as the news of Enron filing bankruptcy under Chapter 11. The observers quote such examples and require companies to implement the best practices of business ethics in the corporate reporting and other disclosure requirements. Additionally, the company- community/public relations also require adopting the practices of business ethics. To become a part of a local community and behaving like a responsible member of the local community, the observers expect from the companies to report their current level of negative impacts being faced by the local communities as they are, besides explaining their current and future policies and investment done to mitigate these impacts. If a company does not adopts business ethics in its reporting, observers believe that the major external stakeholders suffer and pay the price in terms of losing their health, wealth, and other issues. Critical analysis of environmental reporting and accounting Companies are not established to serve social or environmental stakeholders. Shareholders expect companies to grow and fill their bank accounts under any condition! Shareholders invest in companies with the prime and basic motive of earning lucrative returns; many shareholders do not care whether a company is ethically or socially responsible. They prefer nothing but profits and returns. Even if the company is beating the drums that she has fulfilled her social and ethical requirements, at the end of the day, it would be in her commercial interests to do so. To validate this point, first, Boje’s (1998) Nike assessment, Parker (2005) and Spencer (2007) have closely monitored the ethical drama played by certain large companies at the cost of social and environmental stakeholders. David Boje has closely observed the huge discrepancies between Nike’s Code of Conduct document and its practical implementation (Boje, 1998). In the year of 1992, Nike adopted Code of Conduct, prescribing environmental and health and safety advice for its own employees. Nike claims some environmental commitment in its mission such as: developing a sustainable business with the use of innovative design, conserving resources, reducing Nike’s activities over environment, encouraging and educating employees, consumers, business partner and competitors in ecological endeavours, finally fostering a responsible athleticism and stewardship with an aim of preserving and restoring the planet’s outdoor playgrounds. These claims didn’t hold much water and proved to be a white-wash. In Vietnam, instead of using water-based solvents and glues, Nike used excessively toxic levels of benzene and toluene that also compromised the legal standards of Vietnam. Additionally, workers working in Nike’s factory exposed to toxic substances and they were not given the much needed safety gloves and masks. At the same time, workers in these factories were allowed to burn scrap rubber in boilers, which emitted green house gases and dangerously damaged the natural environment and compromised the environmental laws of Vietnam. The list of unethical practices did not end there; Ernst & Young (auditors in 1997) reported that in one of the Nike’s factory in Vietnam, the noise level seriously violated the legal standards for decibel exposure. Furthermore, pregnancy was considered to be a crime, when a woman was found to be pregnant, she was either forced to leave the job or was terminated to avoid paying maternity benefits. workers’ poor performance was considered as a sin; as a result, they were subjected to punishment such as cleaning toilets, being slapped, having their mouth taped shut, getting locked in a cage in the company compound, being forced to kneel for long periods with their arms in the air or baking in the sun. This simple description exposed the real face of Nike, what is written in the mission statement has nothing to do with the reality, on ground separate, inhumane and unethical practices were adopted. Environmental reporting is nothing more than a practice of developing corporate image in the corporate and political world. Gray and Bebbington(2001) have criticised the large companies; they say that these statements of good intentions and self-congratulatory claims are shown to develop their positive image, and it is part of their advertisement: it has nothing to do with accountability, transparency and information communication. In addition, Parker (2005) is of the view that companies do not share or disclose the challenging issues rather a comfortable disclosure is published, and at the same time, these disclosures fail to represent their actual situation. In addition, social and environmental accounting has been attractive notions for many large companies and governments and they find it to use them to promote their corporate and political agenda rather sincerely playing their constructive role for society and environment. Spence’s empirical evidence does not invalidate the presence of commercial agenda for environmental reporting (Spence, 2007). Spence carried out interviews with representatives of 25 large commercial organisations in the UK. In these interviews, interviewees were asked what are the key motives behind their decision to report and publish socio-environmental information. Majority clearly suggests that commercial imperative is pursued by publishing environmental reports. Conclusion Environmental accounting and CSR are published by large companies. Various commercial activities negatively influence and damage society and environment. Sometimes, a local community, and sometimes environment pays a price for the irresponsible and unethical attitude of companies. After the emergence of some mega environmental disasters, such as BP’s mishandling of oil spill in Gulf of Mexico, the large companies are under social and political pressure to publish their sustainability and environmental accounting reports. By publishing such reports, the companies try to communicate with stakeholders external to companies. In these reports, companies describe their commercial activities that are detrimental for environment and society. Besides slightly highlighting such commercial activities, they provide their current steps taken to minimize and control the effects. If their commercial activities are severely polluting the local and global environment, they claim that they have allocated some funds or have made some additional investment in the innovative area with an aim of reducing the impacts. Additionally, companies also highlight the future impacts of their commercial activities over society and environment. After mentioning that point in the sustainability and corporate reporting, they describe their intentions how to handle and minimise the future impacts. To silent the voices of sane members of society, companies mention that they have specified millions of dollars in that regard. However, many critical observers find it difficult to rely on these claims. The critics say the companies cannot compromise on their corporate objectives such as maximising wealth for the shareholders. Maximising wealth for shareholders is the prime objectives for which companies are established. As soon as the shareholders realised that a company is serving the society or environment at the cost of their corporate objectives, the management of that company may find it difficult to remain working for the shareholders. As a result, environmental or sustainability reporting is only a way to develop a soft and positive image, such reporting has nothing to do with practical implementation and policy. References 1. Friedman, M. (1970), “The social responsibility of business is to increase its profits”, The New York Times Magazine, September 13 1970 2. Elkington, J. (1993). Coming clean: The rise and rise of the corporate environmental report. Business Strategy and the Environment, 2(2), 42–44 3. Global Reporting Initiative (GRI). (2002). Sustainability reporting guidelines, Boston 4. Margolis, JD, & Walsh, JP 2001, ‘People and Profits? The Search for a Link Between a Company’s Social and Financial Performance. Mahwah, NJ: Lawrence Erlbaum. 5. Davis, K 1973, ‘The case for and against business assumption of social responsibilities’, Academy of Management Journal, 16: 312-322. 6. Wood, DJ, 1991, ‘Corporate social performance revisited’, Academy of Management Review, 16(4): 691-718 7. Wood, DJ, & Jones, RE, 1995, ‘Stakeholder mismatching: A theoretical problem in empirical research on corporate social performance’, International Journal of Organizational Analysis, 3(3):229-67 8. Waddock, SA, & Graves, SB1997, The corporate social performance- financial performance link, Strategic Management Journal, 18: 303-319. 9. Gray, R., Owen, D., and Adams, C. 1996. Accounting & Accountability, Prentice Hall Europe 10. Definition of social audit, [available at : http://www.socialauditnetwork.org.uk/ ] [ accessed 12 April, 2011] 11. Boje, D. (1998), “Nike, Greek goddess of victory or cruelty? Women’s stories of Asian factory life”, Journal of Organizational Change Management, Vol. 11 Issue 6 12. Parker, L (2005), “Social and environmental accountability research: A view from the commentary box”, Accounting, Auditing & Accountability Journal, 18 (6): 842-60 13. Spence, C (2007), “Social and environmental reporting and hegemonic discourse”, Accounting, Auditing & Accountability Journal, 20 (6): 855-82 14. Gray, R. and Bebbington, J (2001). ‘Accounting for the environment.’ (2e). Sage Publications, London. Read More