BA606 FINANCIAL ACCOUNTING

1
BA606 FINANCIAL ACCOUNTING

• Professor Garry Carnegie
• Lectures 21 22

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Lectures 21 and 22 Accounting for corporate
social responsibilities

• Introduction
• Social responsibility and the maximisation of
  shareholders wealth
• Methods of accounting for and reporting corporate
  social responsibilities

3
Introduction

• Corporate social responsibility (CSR) is
  increasing commanding attention in the media, the
  markets and in society in general
• CSR has been broadly interpreted and is generally
  thought to relate primarily to identifying and
  assessing the impacts of a companys operations
  on the welfare of society
• Society may be local, state, national or
  international communities
• Its meaning varies across countries and cultures

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Introduction

• Socially responsible activities result from
  putting into place effective policies and
  procedures to ensure an entity is an acceptable,
  ethical citizen
• These activities include attitudes towards, and
  resultant practices associated with, customers,
  employees, government, the environment and the
  wider community

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Introduction

• In a global CEO survey (2002), there was
  considered to be three broad levels of
  responsibility
• - an internal focus on a healthy and safe
  working environment and an external focus on
  acting responsibly towards all stakeholders (the
  main tier)
• - an orientation towards shareholder value,
  environmental performance and support for
  community projects
• - charitable contributions and external
  endorsements

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Introduction

• One of the key matters under CSR is to deliberate
  upon the extent to which entities are responsible
  to society for all costs of their operations,
  such as pollution of the environment
• From an accounting perspective, our prime focus
  is upon methods of accounting for and reporting
  corporate social responsibilities

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Social responsibility and shareholder wealth

• Literature on the theory of the firm and on
  financial management strongly supports that the
  objective of the firm is to maximise shareholder
  wealth
• For a listed corporation, this translates to the
  maximisation of the companys share price
• Investment, financing and dividend decisions are
  made to achieve this aim

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Social responsibility and shareholder wealth

• This rationalist interpretation of the role of
  the firm has been repeatedly challenged in recent
  times as being too narrow and entities are
  increasing expected to act in a more socially
  responsible manner
• Opinions vary as to what this means and how this
  good feeling is operationalised for
  effectiveness

9
Social responsibility and shareholder wealth

• Should socially responsible activities be
  undertaken if they are not regarded as consistent
  with the shareholders best interests?
• Best interests may be viewed as short-term or
  long-term
• Socially responsible activities may involve
  corporate reputational issues

10
Social responsibility and shareholder wealth

• Management will often find it hard to justify the
  costs of socially desirable, if not socially
  essential projects, purely on financial grounds
• Such costs may be justified, however, on the
  grounds of enlightened self-interest, such as
  under a strategy to maintain organisational
  legitimacy

11
Social responsibility and shareholder wealth

• There are three key motivations for voluntarily
  undertaking corporate social responsibility
  activities
• - Enlightened self-interest
• - Stakeholder management
• - Corporate legitimacy

12
Social responsibility and shareholder wealth

• Enlightened self-interest
• This phrase relates to those costs that are
  incurred by an entity which appear to be
  motivated by a desire to promote societys best
  interest, but which are also incurred in the hope
  of generating benefits for the entity that exceed
  those costs
• Corporate philanthropy often falls into this
  category

13
Social responsibility and shareholder wealth

• Stakeholder management
• Stakeholder theory suggests that an organisation
  is part of the wider environment with complex and
  dynamic relationships with its many stakeholders
• A stakeholder is anyone who is affected by the
  continual push by entities of all types to
  achieve their objectives

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Social responsibility and shareholder wealth

• Stakeholders include groups and individuals such
  as environmentalists, consumer advocates, media,
  government and global competitors
• Stakeholder theory suggests that a key role of
  management is to assess the importance of meeting
  stakeholder demands in order to achieve the
  entitys strategic objectives

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Social responsibility and shareholder wealth

• Stakeholder importance derives from the capacity
  to control resources that an entity requires to
  use in order to achieve its objectives
• Corporations are required to strategically manage
  relationships with important stakeholders in
  order to continue to have access to key resources
• CSR reporting is seen to be undertaken as part of
  a stakeholder management strategy

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Social responsibility and shareholder wealth

• Corporate legitimacy
• Under legitimacy theory, the relationship between
  an entity and society is subject to a social
  contract
• Broadly, the implied social contract provides
  that, so long as an entity is operating in ways
  which are consistent with societys values, the
  entitys legitimacy and ultimately its survival
  are assured

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Social responsibility and shareholder wealth

• The legitimacy of an entity is called into
  question when that entity infringes or even
  breaks its social contract
• In other words, the behaviour of the entity does
  not match societys expectations of appropriate
  behaviour
• This disparity creates threats to corporate
  legitimacy, known as legitimacy gaps
• Consider the case of Arthur Andersen where the
  firm irreparably broke its social contract

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Social responsibility and shareholder wealth

• There are three ways to close a legitimacy gap
• - change corporate performance and activities to
  conform with social standards
• - change external expectations about corporate
  performance
• - direct attention away from the legitimacy gap
  or reinforce managements responsiveness to
  social and environmental issues

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Social responsibility and shareholder wealth

• There is support for the contention that an
  unless the benefits of a socially responsible
  activity flow to an entity and exceed the costs,
  then legitimate reasons exist, from an entitys
  point of view, not to act in a socially
  responsible manner
• Accordingly, social costs arsing from an entitys
  activities tend to be borne by the rest of the
  community

20
Social responsibility and shareholder wealth

• The internalisation of social costs makes an
  entity more conscious of them and, accordingly,
  includes them (rather than excludes them) with
  other costs in decision making

21
Social responsibility and shareholder wealth

• Internalisation of certain social costs can occur
  in three key ways
• Imposing increased costs on entities which tend
  to shirk their responsibilities
• Entities may jointly undertake socially
  responsible activities
• Governments may command entities to act in
  particular socially responsible ways

22
Accounting and reporting methods

• Accounting for corporate social responsibilities
  is unregulated in Australia
• The other related legal requirement is found in
  sec 299(1)(f) of the Corporations Act 2001 with
  respect to Directors Reports
• Accounting for such responsibilities is,
  therefore, unregulated and what accounting and
  reporting takes place is undertaken on a
  voluntary basis

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Accounting and reporting methods

• Possible reasons for accounting for such
  responsibilities are as follows
• - Cost benefits analysis for internal decision
  making
• - Cost disclosure for product differentiation
  purposes
• - Enlightened self-interest/stakeholder
  management/corporate legitimacy

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Accounting and reporting methods

• Early corporate social responsibility reporting
  trends in Australia are reviewed by H, P P, pp.
  998-999
• Impetus for change and recent reporting practice
  are addressed by H, P P, pp. 999-1002

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Accounting and reporting methods

• Key methods of accounting are as follows
• - Descriptive performance reporting
• - Quantitative reporting
• - Full cost reporting
• - Triple bottom line reporting

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Accounting and reporting methods

• Descriptive performance reporting
• Such disclosures are the most commonly made by
  entities
• They appear in a stand-alone report
• Take the form of an inventory of CSR
• Typically contains good news
• May be regarded as the smiling faces approach
  to CSR

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Accounting and reporting methods

• The inventory commonly includes
• - Physical resources and environmental
  contributions
• - Energy
• - Human resources
• - Product or service contribution
• - Community involvement
• - Other

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Accounting and reporting methods

• Problems with this approach
• - The list of headings and related issues is
  virtually limitless
• - Difficulty in obtaining benchmarks by which to
  compare and contrast an entitys performance
• - Captured by marketing departments and reflects
  a feel good (i.e. soft) approach

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Accounting and reporting methods

• Quantitative reporting
• Reporting is based on attempts to quantify an
  entitys social and environmental interactions
• An entity may, for example, attempt the quantify
  the environmental impacts of its products over
  their life cycles
• Review Figure 30.4, H, P H, pp. 1006-1007

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Accounting and reporting methods

• Full cost reporting
• Such systems are intended to include in
  accounting and economic numbers all the
  potential/actual costs and benefits including
  environmental and social externalities
• Ideally, reported profit is adjusted to reflect
  costs and benefits which would normally sit
  outside the limits of the reporting entity

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Accounting and reporting methods

• Various approaches used in full cost experiments
  from the 1970s include
• - Early full cost experiments
• - Maintenance cost approach
• - Asset valuation approach
• - Damage cost approach

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Accounting and reporting methods

• Impediments to implementing a dependable full
  cost social responsibility reporting system
  include
• - Measurement of financial values
• - Data availability
• - Additivity of measurement unit
• - Reliability of measurement
• - Suitability of certain estimates

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Accounting and reporting methods

• Triple bottom line reporting (TBL reporting)
• Given concerns relating to each of the above
  methods, attempts have been made to incorporate
  qualitative, quantitative and financial data into
  a single accounting method
• Known as triple bottom line or sustainability
  reporting, the focus is widen to embrace the
  economic, environmental and social performance of
  entities
• Otherwise known as the three Ps people,
  profit, planet

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Accounting and reporting methods

• Economic bottom line refers to the traditional
  bottom line as well as to issues relating to the
  long-term sustainability of an entitys costs, of
  the demand for its product, profit margins and so
  on

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Accounting and reporting methods

• Environmental bottom line encompasses the
  sustainability of the entitys use of natural,
  renewable or substitutable resources and its
  restoration performance

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Accounting and reporting methods

• Social bottom line is concerned broadly with
  social capital with a focus on human capital,
  such as in the form of public health, skills and
  education, and more generally with societys
  health and wealth creation capabilities

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Accounting and reporting methods

• TBL reporting involves disclosing a range of
  qualitative, quantitative and financial data
  about an entitys economic, environmental and
  social performance to key stakeholder groups
• The information reported typically includes a
  range of performance indicators
• Aim is to derive a range of benchmark indicators
  across time and across entities

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Accounting and reporting methods

• The Global Reporting Institute (GRI) guidelines
  for TBL reporting are
• - Vision and strategy
• - Profile
• - Governance structure and management systems
• - GRI content index
• - Performance indicators

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Accounting and reporting methods

• For a useful guide to TBL reporting, see the
  Group of 100 web site http//www.group100.com.au/
  publications/G100_guide-tbl-reporting2003.pdf
• For general information, also see Wikipedia
  http//en.wikipedia.org/wiki/Triple_bottom_line

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Accounting and reporting methods

• The implementation of a TBL reporting approach to
  CSR is an incremental process, dealing with the
  complex and contestable issues involved in
  attempting to effectively integrate economic,
  environmental and social performance measurement
  into a single report