Sofia Tziortzi, BSc Accounting and Finance student at Warwick Business School and winner of the CoBS 2020 CSR article competition, journeys into the world of accounting, CSR and sustainability to unlock the powerful potential of an unsung hero – the accountant.
From Bean Counters to Change Makers: How Accounting Can Save the World by Sofia Tziortzi.
It has been widely argued that if one were to solve the grand challenges in the world, accounting would not be the way forward (Gray, 2010: 50). However, insights from academics, business practice and even His Royal Highness the Prince of Wales, suggest otherwise. In addition, applying accounting rationale to analyse businesses’ responses to the current coronavirus pandemic can also reveal how accounting can save the world.
Businesses from the alcohol, cosmetics and even automotive industries are increasingly utilising their resources and expertise to provide much-needed hand sanitizers and antivirus gear. Consider the classic exercise of the firm faced with the short-term decision of accepting an order from a new customer at a lower price, that is featured in virtually all accounting textbooks.
Solving the exercise requires a calculation of the contribution yielded by the order and a consideration of additional factors like spare capacity. Equally, in this case, firms from the aforementioned industries have the required inputs for hand sanitizers and antivirus gear, the spare capacity, and possibly workers they wish to retain after the pandemic is over.
Additionally, being a good Samaritan pays off. While corporate social responsibility is partly motivated by altruism, it is also motivated by improved reputation and brand image (Ditlev-Simonsen & Midttun, 2011; Graafland & Mazereeuw-Van der Duijin Schouten, 2012). In this case, there is another motivator: the sooner the pandemic is over, the sooner business as usual will resume.
What these translate to is higher profit, the single accounting figure that businesses take pride in the most. While this interpretation of companies’ response to the coronavirus may simply be my accounting knowledge playing tricks with me, accountants have devised more formal tools to respond to the world’s problems, which do not stop here.
People and the planet – Humanity’s grandest challenges in 2020
Health issues, like the Zika virus and Ebola, hunger, modern slavery, human trafficking, conflict and displacement, unemployment, poverty, corruption and income inequalities are a mere example of the wicked problems faced by the world today that are hidden under the shadow of COVID-19. Admittedly, accounting is complicit in some of these problems.
By quantifying financial results and making profit emblematic of success and survival, accounting may often direct unethical or unsustainable behaviour, if it results in higher profitability. It is therefore no wonder that the ILO reported a figure of 152m children aged 5-17 years old in child labour in 2017, as it translates to a small cost on companies’ statements of profit or loss.
Equally, accounting is behind many large corporate collapses, such as Enron and more recently, Carillion, which have caused massive social consequences, like unemployment. Although the term “bean counters” portrays accountants as being devoid of any creativity, as the IASB has suggested, accounting is “as much of an art as a science” (IFRS Foundation, 2015: 5), perhaps the most creative art of all.
Lastly, research conducted by the Global Footprint Network suggests that never have we been closest to our planetary boundaries than now. Carbon Dioxide emissions have risen by 60% between 1990 and 2016, according to data by the Global Footprint Network and research conducted at the Climate Accountability Institute suggests that one third of carbon emissions are directly related to the activities of just 20 fossil fuel firms.
In 2015 the United Nations set 17 Sustainable Development Goals, as part of the 2030 Agenda for Sustainable Development, that aim to tackle the grand challenges outlined above. As the UN 2030 Agenda suggests, sustainability is an urgent need if we are to preserve our planet for future generations and no one else plays a more pivotal role in achieving it than governments and corporations.
Accounting – the missing piece of the puzzle?
In the 1990s, media and policy discussions revolved around environmental protection and sustainability as well as the role of accountants in these pursuits (Gray, 1990; Cooper, 1992). In 2004, His Royal Highness the Prince of Wales launched the Accounting for Sustainability project (A4S), recognising the key role that accountants play in achieving sustainability. Why accountants though?
Achieving sustainability requires a realisation that corporations do not operate in a vacuum, but are part of a dynamic ecosystem whereby their actions directly affect the planet and people, while also shaping the future of both. As A4S and the ICAEW (2004) explain, in order to be aware of their impact on the wider ecosystem and devise plans in response to it, corporations need the vital input of accountants.
Moreover, as investors and other stakeholders are becoming increasingly interested in issues of sustainability (Hartzmark & Sussman, 2019), accountants’ expertise is required to report on the company’s performance in this area. With professional judgement as its primary asset (Wagner, 1965), the accounting profession trains agile practitioners who can quickly respond to changing trends and challenges, without the quest towards sustainability being an exception.
Saving the world one step at a time: measurement, reporting and assurance
According to the ICAEW (2004), accountants have 3 critical roles in promoting sustainability: measuring related items, reporting them and providing assurance to stakeholders as regards these metrics. These duties generally fall under the terms “social and environmental reporting” and “sustainability reporting”. In essence, both terms convey an integration of the financial or economic sustainability of a company, with its social and environmental sustainability.
Sustainability reporting is voluntary and there is a plethora of practices for companies to choose from. Despite being voluntary, however, it is completed by the majority of multinationals and SMEs, to meet the information needs of their stakeholders. The proliferation of sustainability reporting among companies has also led to new types of accountants being born – environmental and social accountants – working alongside financial accountants.
Sustainability reporting encompasses a range of methods that utilise financial accounting techniques to provide a quantitative measure of an entity’s sustainability (Gray, 2010). An example is the “sustainable cost” calculation (Gray, 2010; Deegan & Unerman, 2011), the calculation being derived from the financial accounting concept of capital maintenance.
This concept suggests that profit is the excess income after the company’s capital has been maintained. Similarly, a sustainable organisation is one which maintains man-made, renewable and critical natural capital over an accounting period (Gray, 2010). The sustainable cost is then the amount that would need to be spent, based on the company’s operations, to be sustainable (ibid.). This amount should be deducted from the company’s profit to give a measure of “real profit” that takes into account the externalities produced by the company.
Another tool that has recently attracted corporate attention is the Environmental Profit and Loss (EP&L) account. This is a distinct document complementing the Statement of Profit or Loss. It subtracts figurative costs from revenues that reflect the company’s effect on the environment, alongside financial costs and revenues, to arrive either at an environmental profit or loss (Arena, Conte & Melacini, 2014).
A profit would suggest that environmental revenues, such as cost savings from implementing environmentally friendly processes exceed negative externalities to the environment by the company (ibid.). In 2011 Puma published its first EP&L alongside its annual report and has subsequently been followed by other companies, such as Kering Group, the parent company of several luxury fashion brands, like Gucci and YSL.
Apart from being used as a reporting tool, an EP&L can also serve management accounting functions, by providing information to measure environmental performance and inform decision-making to control a firm’s impact on the environment. Arena, Conte and Melacini (2014) consider how the EP&L can be used as a metric for managerial performance and compensation, encouraging managers to make environmental-friendly decisions. Alternatively, a balanced scorecard is a management accounting tool that can be used to align sustainability with a company’s overarching strategy and measure managerial performance (Figge et al., 2002).
Furthermore, Ratnatunga (2014) argues that management accounting can prove invaluable to both organisations but also governments, by “costing life” – meaning attaching quantitative costs to air pollution, water and food. For instance, in an organisational, or even governmental context, management accountants can calculate the cost of carbon emissions from current practices, in order to inform investment decisions in response to these costs.
In addition, clean air and supply of water are both essential for companies to continue operating, at least in the foreseeable future, which is the assumption underpinning the going concern concept. Management accountants can calculate costs associated with the depletion of these natural supplies, such as loss of productivity. By doing such calculations, management accountants will not only provide information to steer corporate, but also government policy to promote sustainable development.
Moreover, as corporations are becoming increasingly engaged with the 17 UN SDGs, the accounting profession has united to help organisations integrate the SDGs in their strategies, measure their impact towards them and report their performance. Accounting researchers have engaged in SDG-related accounting research, while the Big Four are assisting companies to navigate the SDGs (PwC, 2016; Bebbington & Unerman, 2018).
Lastly, professional accountants can provide assurance on the sustainability reports prepared by companies by verifying them and issuing an independent report (ICAEW, 2004). For instance, the report on sustainability performance and metrics issued by Tiffany & Co, which operates in an industry with a controversial supply chain, in 2018, was audited by PwC.
Real Improvements or simply greenwashing?
A key limitation of any effort at sustainability reporting is that it is voluntary and as such, it is not regulated, unlike financial reporting (Deegan & Unerman, 2011). Several organisations and institutions like A4S and the Global Reporting Initiative (GRI), have sought to offer a solution to this by developing sets of guidelines for sustainability reporting.
Nevertheless, with several alternatives from which to choose from, there is little consistency and hence comparability in the way firms report their performance in terms of sustainability. Added to this, the numbers included in the EP&L, as well as the sustainable cost rely heavily on judgement and are often arbitrary. It is therefore difficult for stakeholders to compare companies in terms of how sustainable they are and make their relevant decisions.
Additionally, many of the tools outlined above, such as the EP&L and the computation of sustainable costs convey an environmentally-centred view of sustainability. Nevertheless, as the UN SDGs and Gray (2010) suggest, sustainability and sustainable development encompass much more than that. Furthermore, Gray and Milne (2002) have suggested that sustainability reporting follows the entity concept, since it considers sustainability through the lens of the reporting entity.
But, as they point out, sustainability requires an aggregate consideration of economic activity and thus an individual company’s efforts at becoming more sustainable are not particularly meaningful. This is already changing though as concepts like the circular economy and systems thinking are increasingly gaining popularity with companies, encouraging them to consider their footprints in both the upstream and downstream parts of their value chain.
In the end accounting for sustainability is not perfect, but it is a step in the right direction if the world is to be preserved for future generations. Accounting is all about accountability and accountability is not fully possible without accounting. Accountants provide the metrics that make organisations accountable for their environmental and social footprints and hence drive decision-making both by organisations and their stakeholders. What these formal mechanisms often overshadow, however, is the immense inherent power of accounting to stimulate corporate action, which has been extensively studied by critical accounting theorists.
While this action may not always involve producing hand sanitizers to help stop the spread of a pandemic, it is in the hands of the profession to minimise the negative effects associated with accounting. The accounting profession has evolved, is evolving and will continue to evolve in the future. It is therefore not a question, but rather a matter of time before accountants become synonymous with change makers and are widely recognised as the hidden forces behind the functioning not only of the capital markets, but also the whole world.
- Link up with Sofia Tziortzi via LinkedIn
- Read a related article: Understanding triple capital accounting
- Discover Warwick Business School
- Learn more about Sofia’s BSc Accounting and Finance programme at Warwick Business School.
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