Why Should Ethical, Social and Environmental Accounting and Reporting be Practiced by All Companies - Term Paper Example

Ethical, Social and Environmental Accounting and Reporting Table of Contents Table of Contents 2 Introduction 4 Ethical Accounting and Reporting 4 Current Practices of Ethical Accounting and Reporting 5 Benefits of Ethical Accounting and Reporting 5 Limitations of Ethical Accounting and Reporting 6 Objective of Ethical Accountants 6 Social Accounting and Reporting 6 Current Practices of Social Accounting and Reporting 7 Benefits of Social Accounting and Reporting 8 Limitations of Social Accounting and Reporting 8 Environment Accounting and Reporting 9 Users of Social, Ethical and Environmental reports 9 Objective of Environmental Auditors 11 Current Practices of Environment Accounting and Reporting 11 Benefits of Environmental Reporting 12 Limitations of Environmental Reporting 12 Conclusion 13 References 13 Introduction Accounting is the system of recording and summarizing financial statements for a particular financial year. The financial statements are very informative and must provide a true and fair view. This helps to ascertain the correct financial standing of a company in the market. Social and ethical accounting provides quality assurance to the stakeholders and the management. The accounting procedure conducted by the auditor needs to be true and should comply with the accounting principles. While preparing the financial reports of an organization, the auditor should bear in mind the following: 1. Integrity- Auditors should be preparing reports with honesty and integrity. The reports should not contain any false information. 2. Objectivity- Auditors should be fair, honest, intelligent, impartial and free from conflicts of interest. 3. Judgment- They should be judicious while preparing the reports and should be able to identify whether the report is financially misstated or not. 4. Clarity- Auditors should have a clear state of mind. The relevant information should be clearly stated. There should be a clear communication of financial information. 5. Confidentiality- The auditors should maintain confidentiality. They should not engage in disclosure of information. Ethical Accounting and Reporting Ethical accounting is a conglomeration of business ethics and accounting concepts. When the business organization makes commitment to business ethics and complies with the business accounting policies, it is said that the organization is following the concepts of ethical accounting concepts and policies (Keen, n.d.). The ethical accounting is done by an “ethicist”. An ethicist has earned a doctorate degree in the field of scientific discipline or philosophy. They know the intricacies of business through studies in business ethics. The ethicist provides a non accounting perspective while an accountant provides financial perspective (Keen, n.d.). They help in ascertaining whether the business organization is complying with the ethics and business standards of the company. Most companies have established mission statement but not ethical standards. An ethicist helps in drafting and implementation of ethical codes. The management has to make sure that the employees follow the ethical standard and codes. Majority of the companies are enforcing their own ethical standards. Violation of these ethical standards leads to serious consequences for the employees (Keen, n.d.). Current Practices of Ethical Accounting and Reporting In the United States of America, the Ministry of Finance makes strong attempts to help investors receive full disclosure of information with respect to the security issues (The International Accounting Standards Board, 2008). Restrictions have been imposed by the Japanese Ministry of Finance (securities markets are regulated by the Japanese Government) to prohibit insider trading in banks. The Japanese firms are allowed to register for public bonds (The International Accounting Standards Board, 2008). Germany has less stringent laws related to disclosure of information. Weak accounting regulations have weakened the policies related to the disclosure of information. Earlier, the laws did not even prohibit insider trading but now they are thinking of incorporating strict regulations related to insider trading (The International Accounting Standards Board, 2008). Benefits of Ethical Accounting and Reporting The professional ethical accountants help in distinguishing between right and wrong practices. It gives a true and fair view (Javeed, n.d.). The professional ethical accountants create a moral discipline among the entire management system and employees (Uşurelu, V.I. et al., 2010). Limitations of Ethical Accounting and Reporting The ethical accounting can be done only by a professional accountant who is educated and experienced. The availability of professional accountants is very less (Javeed, n.d.). It is not practiced by all organizations; following ethical code of conduct depends upon the nature and character of the employees and managers of the organization. Objective of Ethical Accountants The main objectives of ethical accountants are: Recognition of fictitious and premature assets. Accurate reporting of assets/liabilities. Identification of errors in Profit and Loss account (Uşurelu, V.I. et al., 2010). Social Accounting and Reporting Social accounting helps in understanding the effect of organizational activities on the environment. Social accounting helps the organization in understanding its duties towards the environment. The government itself shapes the social accounting process according to its stated regulatory policies. Corporate Social Responsibility indicates an organization’s conscience. Many organizations fulfil their social duties and responsibility towards the society and environment. This ensures that the organization follows the norms and ethical standards implemented by the government. For Example, Kellogg’s ensures their contribution towards the society and environment. They have launched the “Breakfast for Better Days” initiative. This initiative focuses on donating one billion servings of cereal and snacks to families worldwide by the end of the year 2016 (Kelloggs, 2013). There are various social accounting models available, which were developed by many theorists, the most popular model is known as “Scottish model”, which was tested by John Pearce of Community Enterprise Consultancy and Research, in the early years of the nineteenth century. The five stages of accounting included: Introducing Social Accounting The Foundations The Nuts and Bolts Social Book-keeping Preparing and Using the Social Accounts The Social Audit and Reporting (Holdaway, 2005). The Scottish model provides a comprehensive framework based on key values and is value driven. Current Practices of Social Accounting and Reporting In Queensland, Maleny Credit Union is a small non-government organization which has 5000 open members and 13 staff. The core business of the organization is to provide ethical financial services. This company has adopted the social accounting and reporting methods. In 2003, it published the Sustainability and Financial Annual Report which contained social, ethical and environment principles followed by the company (Holdaway, 2005). The companies which follow the social accounting methods are listed below. Figure 1 : This figure shows the list of various companies which follow Social Accounting Methods. (Source : Holdaway, 2005) Benefits of Social Accounting and Reporting There is an increased awareness about the norms and policies of social accounting and reporting. There is an increased activity in relation to development of socio-friendly and ethical products and services. A document verified by the government leads to the increase in the goodwill of the company. Limitations of Social Accounting and Reporting Confusion in understanding the policies of social accounting. Sourcing of information becomes difficult for most of the companies (Holdaway, 2005). There is an issue of time and money (Holdaway, 2005). The knowledge of social accounting cannot be easily imparted to the stakeholders. This issue needs to be addressed by the managers of the company (Holdaway, 2005). Environment Accounting and Reporting Financial accounting is concerned with preparation of Profit and Loss accounts and Balance sheets which help in determining the financial position of the company. Environmental reports of the company comprise of the environmental policies implemented by the company. It also constitutes of the environmental measures taken by the company. The company should be accountable to the society for using the natural resources (Pramanik, 2002). The main components of the environmental report are: Data which affect the impact of an organization on utilizing the natural resources. Cost which is incurred by the organization to utilize the natural resources of the environment is known as “Societal cost” (Pramanik, 2002). Data which includes prevention measures taken by the organization to prevent Environmental degradation. Cost which is incurred by the organization to prevent environmental degradation is known as “Private cost” (Pramanik, 2002). Users of Social, Ethical and Environmental reports The reports are used by resource providers, constituents, oversight bodies, government and the management of the company. They use this environment information for diversified needs. The various kinds of resource users are mentioned below: 1) Resource providers include investors/owners of the company, lenders, suppliers and other trade creditors. This information helps to determine the present state of the natural resources. Ethical accounting firms are interested to know whether their company is investing in environment friendly activities. 2) For the allocation of resources, government would need the environmental report. 3) In certain countries, Environmental Clearance Certificate (ECC) is a mandatory certificate which is to be attained by all the companies. This makes it easier for the government and common people to fetch the data (Pramanik, 2002). 4) In the year 1990, 23 percent and in the year 1993, 22 percent of the people residing in UK were surveyed. These people claimed that they did not purchase goods from those companies who did not take any initiative for protecting the environment (Pramanik, 2002).This proves that companies which follow environment protection measures are popular among the common people. 5) There is a separate environment report prepared by the auditors of the company. Figure 2 : This figure shows the various sources of Environmental Reports (Source: Naimon, 1996) The survey conducted by KPMG in 1999 indicates that 35 percent of the companies which topped the list of the Fortune magazine, published environment reports (Pramanik, 2002). These companies constituted of industrial, mining, pharmaceuticals and chemical producing sectors. Objective of Environmental Auditors The auditors try to identify and understand the impact of the environmental laws on the society and organization. They perform various kinds of activities like: 1) Environment impact assessment 2) Environment survey 3) Environmental monitoring, review and surveillance 4) Environmental investigation 5) Independent attestation of environmental information (Pramanik, 2002). These activities lead to a systematic process of obtaining and evaluating the evidence regarding the environment protection activities performed by the organization. Current Practices of Environment Accounting and Reporting Global Reporting Initiative (GRI) was introduced by the Australian government. It is a set of guidelines that identifies and detects the loopholes in the policies of those organizations which do not comply with the guidelines of GRI. Most of the organizations have to follow the guidelines of GRI. This ensures that the company is moving towards the right direction. In Australia, British Petroleum (BP) is one of the largest energy groups which has its business spread across 100 countries in the world and employs over 100000 employees. They have been regularly providing input into the GRI initiative. They published their first environmental report in the year 1990. It was the first Global Environment report published by a company. The report was known as “Triple bottom line report”. BP believed that achieving excellence in the environmental activities leads to stability and consistency of performance among the employees (Holdaway, 2005). The objectives and content of the report is mentioned below: Figure 3: This figure shows the contents of the environmental report published by BP Company (Source : Holdaway, 2005) In the United Kingdom, social accounting policies have been adopted by various organizations in the past 15 to 20 years. Companies in the UK have been contributing towards the environment and have been changing the methods and policies along the way (Holdaway, 2005). Benefits of Environmental Reporting The cultural change in the office brings about an improved cultural atmosphere and improves the job satisfaction of the employees. Improved relationships with environment community groups, government organizations and government stakeholders. Increases the reputation of the company. Limitations of Environmental Reporting The limitations of these reports are as follows: 1. Effective reporting does not mean effective performances (Holdaway, 2005). 2. It is still in its nascent stage in most parts of the country. 3. Implementation of these policies does not necessarily mean that the management and employees follow these policies and codes. 4. Lack of accounting definitions in these accounting principles. 5. The focus was on the implementation of the accounting methods and not on the impact of these methods. 6. Lack of an organized and systematic body or department to track down whether the rules and regulations are being implemented and followed. Conclusion The use of ethical, social and environmental accounting and reporting should be practiced by all organizations. This ensures a cleaner environment and a congenial working atmosphere. This is a positive initiative and should be adopted by all small or big organizations. This ensures that the organizations are working in adherence to the environmental laws and regulations. Ethical standards implemented by the management of the organization. The employees become motivated and disciplined. References Holdaway, M.G., 2005. Social Accounting — Australian Stories from a Social Accounting Practitioner. [online] Available at: [Accessed 23 February 2013]. Javeed, A., n.d. Are Ethics Important for Professional Accountants ? [online] Available at: < http://www2.accaglobal.com/pdfs/international/pakistan/2955050> [Accessed 23 February 2013]. Keen, B., n.d. Ethical Accounting Practices. [online] Available at: < http://www.21stcenturyaccounting.com/uploads/Ethical_Accounting_Procedures.pdf> [Accessed 23 February 2013]. Kelloggs, 2013. Share Breakfast Now. [online] Available at: < http://www.kelloggs.com/en_US/share-breakfast.html.html> [Accessed 23 February 2013]. Naimon, J.S., 1996. Environmental Reporting and Third Party Statements. [online] Available at: < http://www.gemi.org/resources/TPS_112.pdf> [Accessed 23 February 2013]. Pramanik, A. K., 2002. Environmental Accounting and Reporting. New Delhi: Deep and Deep Publication. The International Accounting Standards Board, 2008. Accounting Principles, Ethics and Regulation. [online] Available at: < http://homepages.rpi.edu/~tealj2/acct04.pdf> [Accessed 23 February 2013]. Uşurelu, V.I. et al., 2010. Accounting Ethics - Responsibility versus Creativity. [online] Available at: < http://upet.ro/annals/pdf/20100337.pdf> [Accessed 23 February 2013]. Read More