Key Role of Social Accounting - Essay Example

Key developments in social accounting s Submitted by s: Introduction Social accounting, which is also referred to associal and environmental accounting or non-financial reporting is a process that entails communicating the environmental and social impact of the economic actions of companies to specific interest groups in the society and the entire society. Social accounting is usually used in the context of corporate social responsibility or business even though organizations such as charities and government agencies can also take part in social accounting (Sale, Salter and Sharp, 2007, p. 119). Additionally, this form of accounting can also be used together with community based monitoring. Typically, social accounting stresses the idea of corporate accountability and has been defined in this context as an approach to reporting of the activities of a firm that stresses on identifying socially appropriate behavior, acknowledging the people to whom the company is answerable for its performance socially and development of suitable measures as well as reporting methods. It is a significant step towards assisting companies to develop autonomously CSR initiatives that have demonstrated to have more effectiveness compared to those that have been mandated by the government (Crane and Matten, 2007, p. 170). In most cases, social accounting is a collective term that is employed in describing a wide field of practice and research so the usage of narrower terms in the expression of particular interests is therefore not uncommon. For instance, environmental account may particularly denote the research or practices of accounting for the effects of an organization on the natural environment. On the other hand, sustainability accounting is employed in the expression of quantitative analysis and measuring of economic and social sustainability (Thomas and Lamm, 2015, p. 191). J R Hicks originally introduced the phrase social accounting into the field of economics in 1942 and he defined it as nothing else apart from accounting for the entire community or nation in the same manner that private accounting refers to accounting for one organization. According to Hicks, social accounting can also be referred to as national income accounting and is a means of presenting the inter-connections between various sectors of the economy in a statistical manner for a comprehensive understanding of the economic environment of the environment. It is an approach that can be used to study the structure of economic bodies and can be used as a means of presenting information concerning nature of the economy with the aim of understanding its success of the past and the present and to get the guiding principle for state policies that have an influence on the economy. However, the range of studies that is described collectively by the term social accounting embraces the categorization of economic activities as well as the application of the collected information in the operations of economic systems. In short, social accounting provides a statistical description of economic activities of various sectors of the whole community that demonstrates their common connection while providing a structure for analysis (Spence, 2007, p. 867). Environmental accounting It is typically a subclass of social accounting focusing on environmental performance as well as cost structure of a company. In principle, it defines communication, presentation and preparation of information associated with the interaction between the natural environment and the organization. Even though environmental accounting is usually done on a voluntary basis as self-reporting by organizations, most of the NGOs are usually under pressure to be accountable to the environment. Accounting for effects on the environment may take place within the financial statements of a company through connecting with commitments, liabilities and the contingencies that are meant for remedying contaminated lands or other financial anxieties that may originate from pollution (Cullen and Whelan, 2015, p. 3). This from of reporting usually demonstrates the financial issues that arise from laws that affect the environment through describing reporting of quantitative and comprehensive environmental data in the non-financial segments of yearly reports or other environmental reports. Various aspects may be accounted for in these reports including the degree of pollution from emissions, utilized resources, or the wild habitat that has been damaged or reclaimed (Burritt, Hahn and Schaltegger, 2002, p. 5). Typically, the larger organizations put more emphasis on eco-efficiency in their reports in reference to reducing the use of energy and resources as well as the production of waste per unit of the product or service (Bebbington, 2001, p. 16). A detailed picture accounting for all the inputs and outputs as well as waste created by the company must not automatically arise. Although organizations can regularly demonstrate huge successes as far as eco-efficiency is concerned, their ecological footprint, which approximates the effects on the environment, may move in an independent manner subject to changes in output (Parker, 2000, p. 47). There are laws for obligatory environmental reporting in existence in various countries including, Netherlands, Denmark, Korea and Australia (Bebbington and Larrinaga-González, 2008, p. 705). In mid-2012, the coalition government in the UK declared the introduction of compulsory carbon reporting that required all the companies in the UK that were listed in the main market of the London stock exchange to make reports of their greenhouse emissions on a yearly basis. The Deputy Prime minister made the confirmation that the regulations on emission reporting were to be effected in April 2013, but the date was later postponed to October the same year. On the other hand, the UN has been greatly engaged in adoption of environmental accounting practices particularly through “Environmental Management Accounting Procedures and Principles” which is a publication of the United Nations Division for Sustainable development. Developments in social accounting Traditional accounting or management accounting cannot meet the information needs of the corporate stakeholders of an organization (Milne, 1996, p. 136). Workers, suppliers, financial investors, communities and customers are among the examples of stakeholder groups whose informational needs have inspired the revival of social accounting. In the seventeenth century, royal families commissioned early corporations for particular public purposes including opening of trade routes or the provision of ferry, postal and banking among other specific services. It was easy for the agents of the royal families to monitor the manner in which the small corporations were abiding by the commissioned promises and thus did not need any formal performance reports. Nevertheless, the investors employed independent agents to track and monitor the operations as well as provide accounting services. As companies became larger in terms of reach and complexity, some form of performance measure was required to satisfy both internal and external users. Therefore, a report to shareholders was embraced by default since it was the sole formal reporting existed at the time. However, internal managers were not comfortable with this insufficient approach to the measurement of performance and therefore came up with management accounting through which the management received custom reports while the external users only accessed the predominantly extraneous stakeholders report. During the early twentieth century, these management reports were eventually incorporated into financial accounting. During the course of the twentieth century, financial reports monopolized the field but today, corporate performance has ceased being founded on the manner in which the corporation achieves its purpose, instead, it is based on the bottom line of the stakeholders. Contemporary types of social accounting produced common interest for the first time in the seventies with its concepts being seriously considered by professionals and academics in the accounting field including the American Accounting Association as well as the American Institute of Certified Public Accountants and business representative bodies such as the Confederation of British Industry (Cerin, 2002, p. 48). In the eighties, a short book with the title Social Audit – A Management Tool for Cooperative Working by Freer Spreckley was produced as a design for internal organizational model for social accounting and audit especially for social enterprises that sought to evaluate their financial, environmental and social performances. This was the foundation of the social performance reports of the Shell Corporation and the Cooperative Bank in the UK and later numerous other private sector companies followed suit with social responsibility reporting. An American consultancy company, Abt Associates, is among the most mentioned early examples of companies, which experimented with the social accounting aspect. During the seventies, Abt Associates conducted various social audits that were included into its yearly reports with the social concerns it addressed including knowledge contribution, security of employment, education, productivity, environment, physical security and recreation among others. The social audit that were performed by Abt Associated revealed the performance of the company in this areas in terms of finances and there aimed at determining the net social impact of the company in the form of a balance sheet. Other instances of early applications include Laventhol and Horwath, which was at the time a reliable accounting company, as well as the First National Bank of Minneapolis that was renamed to Bancorp. Regardless of these developments, it was rare for social accounting practices to be codified into law with notable exceptions including the 2006 companies act in Britain and the bilan social in France. There was a decline in the interest in social accounting in the eighties before it reemerged in the mid-nineties partially nurtured by the increasing environmental and ecological awareness. As far as social accounting is concerned, it is imperative to note that large corporations have an effect on much more than their stockholders as in most cases, they negatively affect the environment, employee and customer safety and health as well as the adjacent communities (Lamberton, 2005, p. 9). This is the main reason why there was a flurry of activities associated with this new accounting aspect in the seventies. Accounting companies and other corporations were experimenting with reporting formats while including segments in their yearly reports that covered social performance while the professional and academic firms commissioned research into the discipline. Nevertheless, social accounting was skewed towards serving the interests of the corporation and not those of the people who used the information it provided. It developed into an instrument that was used by companies to cover up and diminish any damages that it was involved in and as a result of this exploitation and abuse by the large companies coupled with the economic recession of the early eighties, social accounting became comparatively non-existent (Danziger, 1994, p. 14). Furthermore, the big companies lost their interest along with various accounting companies and organizations including AICPA. Even though the social accounting movement appeared to be dead, the need for social accounting continued to exist (Buhr and Reiter, 2000, p. 6). Even though the movement and excitement of social accounting of the seventies has declined, groups that deal with the affairs of the environment, consumers as well as labor affairs have resuscitated a new social accounting and external and non-stockholder groups continue to demand for social impact information from companies on behalf of the public. While accounting has overlooked the stakeholders who are not stockholders, several publications provide general and meaningful information concerning the companies that affect them (Spash, 2010, p. 173). Companies are filling the gaps that have been left by the sidelining of social accounting information by the accounting profession. An example is an instance when McDonald’s was said to be serving fat-laden foods that were unhealthy and McDonald’s responded through a lawsuit and the introduction of a variety of products that were lower in fat and more nutritious. The number of organizations that are willing and attempting to put the interests of stakeholders first continues to increase with most of the appointing environmental policy officers, some definitely as a means of public relations (Caulkin, 2003). Various companies including IBM and numerous Japanese companies are famous for laying off workers while various car manufacturers including Toyota and Honda have stored their unsold cars in parking lots as a way of avoiding laying off its employees. During the late eighties, NCR emphasized on identifying its mission as the creation of value for its stakeholders and even though this they attempted to achieve this goal, in the end, their mission failed. The accounting system and culture functioned in such a manner that it deterred it from its objective since it constantly pulled the company as well as its decisions away from the value of the stakeholders towards the value of the stockholders (Unerman, Bebbington and ODwyer, 2007, p. 314). In the mid-eighties, Johnson & Johnson ultimately terminated the production of capsules and advised customers all over the country to cease taking Tylenol capsules for a short time after a woman who was twenty-three years old died two extra strength Tylenol tablets that had been contaminated with cyanide (Monks and Minow, 2011, p. 51). After rigorous and thorough reviews, the top management of Johnson &Johnson made the decision to stop selling any over the counter drugs that were in the form of capsules (Groucutt, Leadley and Forsyth, 2004, p. 80). Through this aggressive steps, Johnson and Johnson practiced stakeholder management but this action is in sharp contradiction with the actions of Ford Motors regarding the Pinto that was unsafe as well as the case of exploding tires for Firestone. Future of social accounting Executives in the corporate world have no immunity to concerns about racism, equal opportunities, damage to the environment, products that are unsafe and sexual harassment and the sensitive manager cannot carelessly agree with a bottom line ethic of accounting that considers the stockholders as the only entity that counts. Revived interest in social accounting is partly as a consequence of insistence by corporate constituencies that companies provide information to them fairly about the activities they are informed in and the manner in which the activities affect them and the companies are under a lot of pressure from these exploited stakeholders creating a likelihood for three outcomes: More regulations being continually imposed by the Federal government The corporate system falling and restoring power to the people Corporations and their executives cleaning up their own acts The first and second outcomes would result in the corporations losing their potential for service that is offered by the corporate system while the third outcome is the most appropriate solution but is against an accounting culture which tacitly denies the stakeholders interests. There is the common belief that the large corporations are not answerable to anyone, not even its own board of directors or Wall Street (Solomon, 2007, p. 186). However, corporate accountability is the core requirement to successful development of social accounting and even though accountants have not been able to lead the way in this process in previous times, presently, they have a role that is more special. They would begin by first identifying stakeholders of the company before they can identify their own informational needs (Schaltegger, Bennett and Burritt, 2006, p. 79). Management accountants usually go through this process internally; therefore, it will not be a new concept to them. Upon identification of the informational needs of different stakeholders, these needs have to be assessed and evaluated to reveal their cost-benefit. Lastly, the appropriate means of communication, such as detailed yearly corporate report, should be selected as a medium through which the information will be delivered to the stakeholders (Owen and Swift, 2001, p. 5). In cases where the information has to be conveyed urgently, television media can be used as the media for the delivery. Stakeholder accounting provides significant opportunities for research for academician as well as management accountants. Presently, a limited number of accountants are engaged in the push towards new social accounting (Schueth, 2015, p. 190). This means that more accountants are supposed to contribute more sensibly or risk being contented standing on the sidelines simply become irrelevant. Challenges in social accounting Preparing social accounts is a difficult task that poses various challenges and difficulties that include: Imputations During the preparation of social accounts, all the payments and incomes are considered in monetary terms, however, there are numerous goods and services that are extremely difficult to attribute in monetary terms (Vanoli, 2005, p. 148). Services such as those that are performed by a housewife in the home, a person who decides to paint or draw as a hobby or a teacher who teaches his own children in the house are some of the aspects that are difficult to consider in terms of money. Furthermore, numerous commodities and services exist that cannot be traded or marketed. Such include the vegetables that come from a kitchen garden and consumed within the home, rental values of a property in which the owner resides or a fraction of produce from the farm which the farmer retains for his own consumption. All this and other non-market transactions that cannot be quantified in terms of money pose challenges in the accurate preparation of accounts (Swanson, 2012, p. 139). Double counting The main challenge in the preparation of social accounts is associated with double counting. This originates from the failure to differentiate between the intermediate and final products (Hewings and Madden, 2009, p. 31). For example, the flour that is used in a bakery is supposed to be an intermediate product but the flour that is used in a household is a final product. In the same way, when the government purchases a new constructed building, it is supposed to be categorized under the economy’s consumption output. Conversely, if a private firm buys the same building, it is categorized under gross investments for the year that it was bought. Therefore, the same product can be considered as an investment and consumption when preparing social accounts (Alberini and Kahn, 2006, p. 146). These issues pose challenges when the social accounts are being prepared. Public services Another challenge entails the estimation of the number of public services in social accounts including education, the police, military and health among others (Smith, 1996, p. 172). In the same way, the contributions, which are made by multipurpose projects, cannot be included into the social accounts since they are difficult to assess their numerous benefits associated with them in terms of money. Inventory adjustments All the changes to the inventory regardless of whether they are negative or positive are supposed to reflect in the production accounts through inventory valuation adjustments (Edwards and Walker, 2009, p. 146). However, the challenge arises when companies record the inventories using their actual costs instead of the replacement costs. When there is an increase in prices, gains can be seen in the inventories’ book value. Therefore, in order to calculate the inventories of business accounts in terms of social accounting in a correct manner, inventory valuation adjustment is needed and this is a challenging aspect (Baker, 2001, p. 48). Depreciation Another challenge as far as business accounts are concerned in social accounting is the estimation of depreciation (Dawson, 1996, p. 8). For example, it is extremely challenging to approximate the present rate of depreciation of a capital asset that has a long expected life of about half a century. This difficulty is magnified further when the price of the asset changes each year and unlike inventories, in social accounting, it is extremely difficult to get value adjustment of depreciation (Mook, 2013, p. 233). Conclusion Accounting, when considered as a means of information, must provide information to various users of accurate information who include the society since generally, it has a direct interest in being aware of the social ramifications of the activities of the organization (Macintosh and Hopper, 2005, p. 401). Information that originates from social accounting is supposed to meet the requirements of the society while at the same time contributing to creation of value in the company in the process demonstrating the degree to which the organization is socially responsible and assisting in the development of tangible assets (Bebbington, Gray and Laughlin, 2001, p. 398). It should be noted that accounting elements that are intangible is a challenging process as a result of difficulties in assessment as well as feasibility of the accounting processes especially in the present laws. 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