Deegan fat4e ppt_ch09

9-1
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
PPTs to accompany Deegan, Financial Accounting Theory 4e
FINANCIAL ACCOUNTING THEORY
Craig Deegan
Slides written by Craig Deegan
CHAPTER 9
Extending corporate
accountability: the incorporation
of social and environmental
factors within external reporting

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Learning objectives
9.1 Have some knowledge of the history of social and
environmental reporting.
9.2 Be aware of the meanings attributed to social,
environmental, sustainability and triple bottom line
reporting.
9.3 Be aware of various, and sometimes competing,
perspectives about the responsibilities of business.
9.4 Be able to provide an explanation of the relationship
between organisational responsibility and organisational
accountability.
9.5 Be aware of the relationship between accounting and
accountability.
continued

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Learning objectives (cont.)
9.6 Understand the various decision phases pertaining to
sustainability reporting (these being: why report? to whom to
report? what to report? how to report?).
9.7 Be aware of various theoretical perspectives that can
explain why organisations might voluntarily elect to provide
publicly available information about their social and
environmental performance.
9.8 Be aware of some research that explores stakeholders’
demand for, and reaction to, social and environmental
information.
9.9 Be able to explain the concept of sustainable development
and be able to explain how organisations are reporting their
progress towards the goal of sustainable development.
continued

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9.10 Have some knowledge about the global problem of climate
change and be aware of some issues associated with
accounting for climate change.
9.11 Be able to identify some of the limitations of traditional
financial accounting with respect to enabling users of
reports to assess a reporting entity’s social and
environmental performance.
9.12 Be aware of the organisation known as the Global
Reporting Initiative (GRI) as well as have knowledge of the
GRI’s Sustainability Reporting Guidelines.
9.13 Understand the meaning of ‘integrated reporting’ and be
aware of the reporting guidance being developed by the
International Integrated Reporting Committee (IIRC).
continued

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9.14 Understand some of the problems associated with
accounting for the externalities being generated by an
organisation.
9.15 Understand the meaning of, and the reason for
undertaking, social audits.
9.16 Be aware of how various corporate governance
mechanisms can be used to improve an organisation’s
social and environmental performance.
9.17 Understand the role of personal social responsibility in
addressing ongoing social and environmental issues
confronting society and the planet.

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Introduction
• In recent years there has been increasing focus
upon sustainable development and sustainability
reporting
• Sustainability reporting (and CSR reporting)
represents a departure from the economic focus
that was traditional in external reporting
• A review of the Global Reporting Initiative’s
Sustainability Reporting Guidelines provides
insight into the types of social, environmental and
economic information that could be disclosed in a
sustainability report
continued

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Introduction (cont.)
• The terms ‘sustainability reporting’, ‘Corporate Social
Responsibility Reporting’ and ‘Triple Bottom Line
(TBL)’ reporting are often considered to be
synonymous
• Strictly speaking however, sustainability reporting
would require more than simply providing
information against social, environmental and
economic indicators
• Sustainability reporting would also address how
current activities are impacting the abilities of future
generations to satisfy their own needs

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What is Corporate Social
Responsibility (CSR)?
• There will be different views about the meaning of CSR. The
general view is that an organisation that embraces CSR is
considering the interests of a broader group of stakeholders
rather than just shareholders alone
• A useful definition of CSR is provided by the Commission of
European Communities (Promoting a European Framework for
Corporate Social Responsibility, 2001, p. 6):
…a concept whereby companies integrate social and
environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis.
Being socially responsible means not only fulfilling legal
expectations, but also going beyond compliance and investing
more into human capital, the environment and the relations with
stakeholders.

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CSR reporting
• CSR reporting is a process whereby an
organisation publicly discloses information about its
interactions with, and impacts upon, the various
societies and environments in which it operates.
• The nature of this reporting can vary widely
between organisations, and across time.
• In part, the variations in reporting across different
organisations will be due to different perspectives
of accountability being embraced (that is, different
views about who the organisation is responsible to,
and for what aspects of performance it is
responsible for).

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CSR reporting and sustainability reporting
• CSR reporting includes ‘social reporting’ and ‘environmental
reporting’.
• Social reporting and environmental reporting are both also
considered to be components of ‘sustainability reporting’.
• Sustainability reporting would also include reporting about
economic performance.
• Sustainability reporting is defined in the GRI Sustainability
Reporting Guidelines (2011) as:
– a broad term considered synonymous with others used to
describe reporting on economic, environmental, and social
impacts.
• Any consideration of sustainability reporting requires a definition of
sustainable development. Sustainable development was defined
in the Brundtland Report (1987) as development that has the aim
of:
– Ensuring the needs of today’s world are met while at the same
time ensuring that the ability for future generations to meet
their own needs is not compromised.

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Social reporting
• Social reporting – which is a component of
CSR/sustainability reporting – provides information
about such things as:
– labour practices and decent work performance (e.g.
occupational health and safety, training and education,
diversity and opportunity);
– human rights performance (e.g. non-discrimination, freedom
of association and collective bargaining, child labour and
indigenous rights); and
– product responsibility performance (e.g. customer health
and safety).

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Environmental reporting
• Environmental reporting – also a component of
CSR/sustainability reporting – could include the
provision of information about such items as:
• materials usage;
• energy usage;
• water usage;
• emissions, effluents and waste;
• compliance with environmental regulations; and
• use and impact of transport.

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Sustainability reporting
• As we have already indicated, sustainability reporting involves
the production of information about the social, environmental,
and economic performance of an organisation.
• The leading guidance document on sustainability reporting is the
Sustainability Reporting Guidelines issued by the Global
Reporting Initiative (GRI).
• GRI (2013) defines sustainability reporting as:
…the practice of measuring, disclosing, and being accountable to
internal and external stakeholders for organizational performance
towards the goal of sustainable development. ‘Sustainability
reporting’ is a broad term considered synonymous with others used
to describe reporting on economic, environmental, and social
impacts (e.g. triple bottom line, corporate responsibility reporting).
A sustainability report should provide a balanced and reasonable
representation of the sustainability performance of a reporting
organization—including both positive and negative contributions.

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Responsibilities of business
• Moves to provide information about social and
environmental performance, whether through reports
that are labelled as sustainability or CSR reports (or
similar), implies management of these organisations
consider they have an accountability for social and
environmental performance, as well as economic
performance
– not a view held universally
• There is increasing community pressures for
organisations to make a commitment to sustainable
business practices, and corporate reporting is
responding to this pressure
continued

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Responsibilities of business (cont.)
• If sustainability becomes part of the expectations
held by society, it must—consistent with legitimacy
theory—become a business goal
• Providing information about social and environmental
performance will increase the trust a community has
in the organisation

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How does an entity determine
its responsibilities?
• What do its relevant stakeholders consider
business responsibilities to be?
• Based on personal judgement of the management
involved as to who are the relevant stakeholders
• Has implications for the information disclosed
• Perceived responsibility and accountability go
hand in hand

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Accountability
• This is a very important concept in terms of the profession of
‘accounting’ and CSR
• The concept of accountability and the practice of accounting
should be considered together
• The broader our notion of ‘accountability’, the broader the
types of ‘accounting’ that we would embrace
• If we believe we are only accountable to our shareholders
(a shareholder primacy perspective), then we might restrict
our accounting to ‘financial accounting’

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Accountability (cont.)
• However, if we accept that we have an accountability
to a broader group of stakeholders for aspects of
performance that include social and environmental
aspects, then we are likely to disclose information
about our social and environmental performance
Accountability can be defined as the duty to:
1 undertake certain actions (or to refrain from taking
actions) in accordance with the expectations of a
group of stakeholders; and
2 provide a reckoning or account of those actions to
the stakeholders

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Side issue: are students of accounting
sufficiently taught about ‘accountability’?
• So, accountability is central to the practice of
accounting
• But how many students are exposed to an
examination of ‘corporate accountability’ as part of
their accounting education?
• Logically, how can you study ‘accounting’ without
firstly exploring ‘accountability’ and its link with
accounting?

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To whom is business
responsible?
• Many organisations are making public statements
that their responsibilities extend beyond their
shareholders to encompass communities in which
they operate and society as a whole
• If sustainability is truly embraced then responsibility
is also owed to future generations
• If an organisation accepts a responsibility for the
sustainability of its business practices, then it should
produce an account of its responsibilities—it should
provide a sustainability report

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Stages of sustainability
reporting
• Stage 1: why report?
– relates to management’s motivations
• Stage 2: to whom to report—who are the
stakeholders?
– tied to managerial motivations for reporting—if motivations
are based on managerial reasoning then disclosures could
be aimed at powerful stakeholders
• Stage 3: what to report?
– involves dialogue with identified stakeholders
• Stage 4: what format for the disclosures?
We will consider each of these stages in turn.

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Stage 1: why report?
• Different accounting theories will provide alternative
explanations about why an entity might decide to
report social and environmental information
• We should remember that most social and
environmental reporting is voluntary (an interesting
issue in itself given the high level of regulation for
financial reporting), therefore we can use various
positive theories to explain or predict the voluntary
decision to report
• As we appreciate, different theories make different
assumptions and therefore will tend to give different
explanation of the reporting phenomena

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Theories to explain ‘why report?’
social and environmental disclosure
• Legitimacy Theory and social contract
– disclosures linked to providing evidence that entity is
complying with the expectations of society
• Stakeholder Theory
– disclosure depends on expectations of powerful
stakeholders if the managerial perspective of Stakeholder
Theory is embraced
• Accountability Model
– an acceptance of a responsibility to report continued

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Theories to explain ‘why report?’ social
and environmental disclosure (cont.)
• Institutional Theory
– organisations will adopt particular practices – including
disclosure practices – because of institutional pressures
• Positive Accounting Theory
– disclosure depends on positive wealth implications
 consider submission of the Business Council of Australia on
pages 423 and 425 of the text

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‘Why report?’ and its links to
views about the responsibility of
business
• Consider the views of Milton Friedman—reporting is not about
responsibilities; rather, it is about enhancing business
profitability
– ...there is one and only one social responsibility of business,
to use its resources and engage in activities designed to
increase its profits as long as it stays within the rules of the
game, which is to say, engages in open and free
competition, without deception or fraud
• A broader view of business responsibilities would accept that
regardless of the impacts on profitability, stakeholders have a
right to know about the social and environmental implications of
an organisation
• Where do we think corporations sit in terms of the above
views?

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Differing views of business
responsibility
• Friedman
– rejected the view that corporate managers have any moral
obligations
– stated that ‘the business of business is business’
– responsibility to increase profits as long as stays within the rules
– this view often seems to be held by the media which appears to
applaud profitable organisations
• Alternative view
– organisations earn their right to operate in the community
– artificial entities that society chooses to create
– organisations do not have an inherent right to resources
– consequently accountable to society for how it operates
– societal expectations may exceed profitability

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Differing views of business
responsibility (cont.)
• Anita Roddick, founder of the Body Shop, made the following
statement (2007):
In terms of power and influence, you can forget the church, forget
politics. There is no more powerful institution in society than
business, which is why I believe it is now more important than ever
before for business to assume a moral leadership. The business of
business should not be about money, it should be about
responsibility. It should be about public good, not private greed.
• Consider how Roddick’s view contrasts with Milton Friedman or
with the statement made by the Business Council of Australia
(2005). The BCA stated:
The litmus test for any activity or responsibility is whether the
performance of that activity or responsibility can reasonably be
seen to be contributing to the growth of shareholder value.

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Stage 2: to whom to report?
• If managers are motivated by a desire to increase
shareholder value then reporting will be aimed primarily
at satisfying the expectations of powerful stakeholders
• If, by contrast, managers adopt a broader ethical
perspective then disclosures would be aimed at
stakeholders impacted by the operations of the entity—
but still cannot address all information needs, so some
prioritisation will be necessary
• It is emphasised that the decision about to whom to
report is directly related to the previous issue of ‘why
report?’ One cannot be considered in isolation from the
other

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Stage 3: what to report?
• First of all, establish that there is a demand for
information
• Identify information needs through dialogue with
stakeholders
• Negotiate a consensus among competing
stakeholder needs and expectations

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Stage 4: how to report?
• Conventional financial accounting does not appear to
provide a foundation for social and environmental
disclosures
• Reporting various social, environmental and economic
indicators (also referred to as TBL reporting) is an
alternative, although it is not the same as sustainability
reporting. A true sustainability report would consider such
issues as the carrying capacity of the eco-system,
impacts on future generations and so forth
• An attempt can also be made to place a cost on the
externalities of business

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How to report? Limitations of
traditional financial reporting
• To this point we have talked about CSR reporting and
associated motivations for reporting—but what frameworks
should we use? Should we use our traditional financial
reporting approaches?
• As accountants, we are familiar with generally accepted
financial accounting practices. Do these practices hinder
corporate accountability?
continued

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How to report? Limitations of
traditional financial reporting (cont.)
• For a number of reasons to be discussed below, our financial
reporting practices are not terribly useful for reporting CSR
information. Some of the problems relate to:
– the objective of general purpose financial reporting;
– considerations of materiality;
– the definition of the elements of financial reporting;
– the practice of discounting future cash flows;
– issues of reliable measurement and probability;
– focus on short term results; and
– the entity assumption.
We will now consider each of these issues in turn

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The objective of general purpose
financial reporting
• IASB Conceptual Framework, paragraph OB2 states:
– The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to
present and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. Those
decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of
credit.
• No explicit consideration is given to the needs of a broader
group of stakeholders or to the provision of information that is
non-financial in nature
• In terms of the information needs or expectations of other
stakeholders, paragraph OB 10 of the IASB Conceptual
Framework further clarifies the issue by stating:
– Other parties, such as regulators and members of the public other
than investors, lenders and other creditors, may also find general
purpose financial reports useful. However, those reports are not
primarily directed to these other groups.

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Considerations of materiality
• Materiality as applied by financial accountants
may not be a relevant criterion for the disclosure
of social and environmental performance data
• Social and environmental performance is quite
different from financial performance and typically
cannot be quantified in monetary terms

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Definition of the elements of
financial reporting
• The way we define the elements of accounting acts to exclude
the recognition of many social and environmental costs and
benefits
• For example, the IASB Conceptual Framework currently
defines an asset as:
A resource controlled by the entity as a result of past events and
from which economic benefits are expected to flow to the entity.
• ‘Control’ is a central attribute of the asset definition. If a
resource is not controlled by an organisation, then it cannot
be considered to be that organisation’s asset (meaning that its
consumption or use will not be considered to be an expense
of the reporting entity) continued

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Definition of the elements of financial
reporting (cont.)
• For financial reporting purposes, expenses are defined as
follows (IASB Conceptual Framework):
expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
• Again, given that the recognition of assets relies upon
control, then environmental resources such as air and water
are shared and not controlled by the organisation and hence,
cannot be considered to be assets. Therefore, their use
and/or abuse are not considered ‘expenses’ from a financial
reporting perspective
continued

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Definition of the elements of financial
reporting (cont.)
• Further, the way we recognise expenses means that many actions
which create social costs actually have positive benefits for
reported profits
• For example, if we slash jobs, it will reduce wage expenses and
increase profits. Yet at the same time, social costs in terms of the
unemployed will increase—but these would be treated as
externalities and not recognised by the reporting entity
• Similarly, if an organisation releases greenhouse gases without
financial penalty (for example, it does not incur carbon taxes), then
this will have no negative impact on reported profits, but will
nevertheless contribute to global warming. This accounting
anomaly occurs because the atmosphere is not ‘controlled’ by the
reporting entity and therefore its use, or abuse, is not an expense
of the entity (as no ‘asset’ has been consumed)

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The discounting of future cash
flows
• There is a general requirement (e.g. IAS 37) that liabilities
that are payable beyond 12 months must be discounted to
their present value. This is in accordance with general
economic theories that promote the discounting of future cash
flows
• However, the implication is that it can make the future
obligations—such as obligations for site remediation—almost
disappear because of the discounting
• Therefore, there may be little discouragement to undertaking
activities now that create remediation obligations many years
later. Current costs are effectively being ‘discounted away’
and effectively shifted to future generations
• Hence, this is another instance where our traditional ways of
doing financial accounting do not necessarily sit well with
quests towards sustainability

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Issues of ‘reliable
measurement’ and ‘probability’
Pursuant to the IASB Conceptual Framework, the recognition
of the elements of financial reporting (these being assets,
liabilities, income, expenses, equity) requires that:
a. it is probable that any future economic benefit associated
with the item will flow to or from the entity; and
b. the item has a cost or value that can be measured with
reliability.
Many environmental costs and related obligations cannot be
measured reliably and their probability is often questioned.
Some researchers have argued that issues associated with
‘probability’ and ‘measurability’ are used opportunistically by
organisations to justify not recognising various environment-
related obligations

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Focus on short term results
• As we would appreciate, the focus of the media is typically on
the annual, or perhaps at times on the half-yearly and quarterly,
financial results of an entity
• As accountants, we do tend to emphasise short-term (annual)
performance through our practices of dividing the life of the
asset up into somewhat artificial periods of time
• Managers are also often rewarded in terms of measures of
performance such as annual profits
• This can have the effect of discouraging us from making long-
term investments in new technologies (including those that will
provide longer-term social and environmental benefits)
• This acts to dissuade us from investment expenditure in more
sustainable modes of operation that might not generate positive
financial results for many years

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The entity assumption
• The entity assumption is a cornerstone of financial reporting
• It requires the ‘accounting entity’ to be treated separately
from its owners, other organisations, and stakeholders
• Therefore, if something does not directly impact the
organisation itself in terms of its financial position or financial
performance, then it is ignored by financial accounting
• This is not consistent with moves towards sustainable
development which requires organisations to consider their
impacts on the environment and current and future
communities
• So concluding this section on the limitations of generally
accepted accounting principles … are generally accepted
accounting principles the right vehicle for ‘broad-based
accountability’. Arguably not. But, what is better?

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How to report? The Global
Reporting Initiative
• Whilst there is no regulation requiring organisations
to produce a stand-alone sustainability (or CSR)
report, many organisations do
• By far, the most commonly used framework adopted
on an international basis is the Sustainability
Reporting Guidelines released by the Global
Reporting Initiative (GRI).
• The Global Reporting Initiative (GRI) was
established in 1997
• The GRI Sustainability Reporting Guidelines is the
most comprehensive framework for ‘how to report’
that is currently available

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The GRI Sustainability
Reporting Guidelines
• We now have version 4 (referred to as G4) which was
released in 2013.
• The Sustainability Reporting Guidelines are supplemented by
Sector Supplements, which contain indicators for individual
industry sectors.
• The GRI Guidelines are presented in two parts, these being:
– Reporting Principles and Standard Disclosures
– Implementation Manual
continued

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The GRI Sustainability Reporting
Guidelines (cont.)
• These parts are freely available on the GRI’s website. The
first part of the Guidelines, the Reporting Principles and
Standard Disclosures, contains Reporting Principles,
Standard Disclosures, and the criteria to be applied by an
organisation to prepare its sustainability report ‘in
accordance’ with the Guidelines. Definitions of key terms
are also included
• The second part of the Guidelines, the Implementation
Manual, contains explanations of how to apply the
‘Reporting Principles’, how to prepare the information to be
disclosed, and how to interpret the various concepts in the
Guidelines. References to other sources, a glossary and
general reporting notes are also included
continued

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Guidelines (cont.)
• Organisations that apply the guidelines, and that make a
specific claim to be ‘in accordance’ with the Guidelines, are
required to select one of two ‘in accordance options’.
• This represents a significant change from the previous version
of the Guidelines. Previously the GRI had established a self-
assessment system wherein organisations could rank
themselves from A to C on the basis of the extent to which the
guidelines have been adopted.
• Reflecting the new approach, page 8 of the G4 Sustainability
Reporting Guidelines states:
– The Guidelines offer two options for an organization to prepare its
sustainability report ‘in accordance’ with the Guidelines. The two
options are Core and Comprehensive. These options designate
the content to be included for the report to be prepared ‘in
accordance’ with the Guidelines. Both options can apply for an
organization of any type, size, sector or location continued

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Guidelines (cont.)
• Organisations that are applying the GRI Guidelines are required to
produce what are referred to as ‘standard disclosures’ – which are
divided into general standard disclosures and specific standard
disclosures. They are also and are required to disclose information
relating to various performance indicators. The general standard
disclosures relate to:
– Strategy and Analysis;
– Organizational Profile;
– Identified Material Aspects and Boundaries;
– Stakeholder Engagement;
– Report Profile;
– Governance; and
– Ethics and Integrity.
• The specific standard disclosures relate to:
– Disclosures on Management Approach; and
– Indicators. continued

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Guidelines (cont.)
• The Disclosures on Management Approach referred to above
(under the specific standard disclosures) is intended to give the
organisation an opportunity to explain how the economic,
environmental and social impacts related to material Aspects
are managed
• The sustainability performance indicators which are
required to be disclosed pursuant to the guidelines are
organised under the categories of:
– economic performance,
– environmental performance and
– social performance
 (with the social indicators being further subdivided into labour practices
and decent work performance indicators, human rights indicators,
society indicators, and product responsibility performance indicators)

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Integrated reporting
• Another relatively recent development to the CSR
reporting arena is integrated reporting
• Initially, looked like a very exciting project
• The International Integrated Reporting Committee
(IIRC) was created in 2010 and is a joint Initiative of
The Prince’s Accounting for Sustainability Project
(A4S) and the GRI
• The aim was initially identified as:
– to create a globally accepted framework which brings
together financial, environmental, social and governance
information in a clear, concise, consistent and comparable
format —put briefly, in an ‘integrated’ format
continued

9-49
Integrated reporting (cont.)
• The website (www.theiirc.org) identifies the mission
of the IRRC:
…. create the globally accepted International <IR>
Framework that elicits from organizations material
information about their strategy, governance, performance
and prospects in a clear, concise and comparable format.
The Framework will underpin and accelerate the evolution
of corporate reporting, reflecting developments in financial,
governance, management commentary and sustainability
reporting. The IIRC will seek to secure the adoption of <IR>
by report preparers and gain the recognition of standard
setters and investors.
Hmmmmm ….. What about other stakeholders??
continued

9-50
• According to the IRRC website, objectives for an integrated
reporting framework are to:
– support the information needs of long-term investors, by showing
the broader and longer-term consequences of decision-making;
– reflect the interconnections between environmental, social,
governance and financial factors in decisions that affect long-term
performance and condition, making clear the link between
sustainability and economic value;
– provide the necessary framework for environmental and social
factors to be taken into account systematically in reporting and
decision-making;
– rebalance performance metrics away from an undue emphasis on
short-term financial performance (e.g. ‘profits’); and
– bring reporting closer to the information used by management to
run the business on a day-to-day basis.
continued

9-51
• The IIRC released its Consultation Draft of the International <IR>
Framework in April 2013. The intention is to release a completed
framework in 2015
• The draft framework released as part of the Consultation Draft is a
principles-based document rather than being one that stipulates lists of
required disclosures
• A review of the Consultation Draft reveals a number of interesting (and
some worrying) aspects to the guidelines, some of which are discussed
below. According to page 8 of IIRC (2013), Integrated Reporting is
defined as:
– A process that results in communication by an organization, most visibly a
periodic integrated report, about value creation over time.
• The above definition is interesting because the focus seems to be on
‘value creation’ rather than on accountability. This will be of concern
to many people who had hoped that the emphasis of Integrated
Reporting would be to increase the transparency of companies to a
broad group of interested stakeholders – many of which are not directly
interested in ‘value creation’ continued

9-52
• The IIRC also emphasises the centrality of ‘materiality’ to the
reporting process. IIRC (2013, p. 21) states:
– An integrated report should provide concise information that is
material to assessing the organization’s ability to create value in
the short, medium and long term.
– A matter is material if, in the view of senior management and
those charged with governance, it is of such relevance and
importance that it could substantively influence the assessments
of the primary intended report users with regard to the
organization’s ability to create value over the short, medium and
long term.
• When we consider the intended audience of integrated
reports, IIRC (2013, p. 8) states:
– An integrated report should be prepared primarily for providers
of financial capital in order to support their financial capital
allocation decisions.
• Oh no! We have the same ‘shareholder primacy’ perspective
being applied yet again!! Is this really the right approach to
adopt in the pursuit of sustainability? continued

9-53
• A particularly interesting aspect of the Consultation Draft is that it
makes reference to six different types of capitals. According to
IIRC (2013, p. 11):
– All organizations depend on various forms of capital for their
success. In this Framework, the capitals comprise financial,
manufactured, intellectual, human, social and relationship, and
natural, although this categorization is not required to be adopted
by organizations preparing an integrated report.
– the capitals are stores of value that, in one form or another, become
inputs to an organization’s business model. They are increased,
decreased or transformed through the activities and outputs of the
organization in that they are enhanced, consumed, modified,
destroyed or otherwise affected by those activities and outputs
 for example, an organisation’s financial capital is increased when it
makes a profit, and the quality of its human capital is improved when
employees become better trained
continued

9-54
• In relation to changes in capital, it is further stated (IIRC, 2013, p. 12):
– Although organizations aim to create value overall, this may involve the
diminution or destruction of value stored in some capitals, resulting in a net
decrease to the overall stock of capitals.
• Natural capital (the environment) is defined in the Consultation Draft as
(IIRC 2013, p. 13):
– All renewable and non-renewable environmental resources and processes
that provide goods or services that support the past, current or future
prosperity of an organization. It includes:
 air, water, land, minerals and forests biodiversity and eco-system health.
• Again, there are some broader philosophical issues to consider. As we
can see from the above definition of ‘natural capital’, the environment
seems to be considered on the basis to which it supports ‘past, future
or current prosperity of an organisation’. Many people would question
whether the environment should be considered in such an
organisation-centric manner.
• Referring to the environment as part of ‘capital’ also seems to promote
a view that it can be ‘drawn down’ to support growth in other capitals.
continued

9-55
• Again, there are some broader philosophical issues to consider
• As we can see from the above definition of ‘natural capital’, the
environment seems to be considered on the basis to which it
supports ‘past, future or current prosperity of an organisation’
• Many people would question whether the environment should
be considered in such an organisation-centric manner. Is not
this one of the very reasons that the planet has the
environmental and social problems that it currently has?
• Referring to the environment as part of ‘capital’ also seems to
promote a view that it can be ‘drawn down’ to support growth in
other capitals. Again, this view that the environment can
justifiably be utilised and degraded in exchange for economic
gains is a major contributory factor to our current global
problems
continued

9-56
• We could provide further comment on the IIRC Consultation
Draft as released in 2013 but suffice it to say that the draft will
be disappointing to many people who initially hoped that
integrated reporting would provide improvements in the social
and environmental accountability of corporations
• Like the GRI’s Sustainability Reporting Guidelines, the draft
IIRC Framework has also explicitly adopted various financial
reporting conventions (including materiality – which in the <IR>
document is linked to ‘assessing the organization’s ability to
create value’, reliability, completeness, consistency,
comparability)
• Coupled with this, and as already noted, the IIRC also notes
that 'an integrated report should be prepared primarily for
providers of financial capital in order to support their financial
capital allocation assessments' (IIRC, 2013, p.8)
continued

9-57
• This primary focus on the information demands of capital
providers, the linkage of materiality to ‘creating value’, and the
adoption of key financial reporting conventions does not, at
least in the minds of some concerned parties, indicate that the
future of <IR> provides much hope in terms of extending the
accountability of organisations in terms of the various non-
financial aspects of their operations
• Again, the adoption of key financial reporting conventions
counters any real likelihood of providing a useful framework for
broad-based accountability
• There are also concerns that the process being undertaken by
the IIRC has already been captured by large scale corporate
interests who see this form of reporting as being more about
enhancing corporate value, rather than increasing transparency
continued

9-58
Externalities—what are they and
how do we report them?
• A ‘true’ sustainability report would disclose information about
various social and environmental ‘costs’ including those
relating to externalities
• An externality can be defined as an impact that an entity has
on parties that are external to the organisation where such
external parties did not agree or take part in the actions
causing, or the decisions leading to, the cost or benefit
• Externalities can be positive or negative
• Prices paid for goods and services typically do not reflect
externalities, meaning that the cost of many products is
‘understated’
• Government intervention can occur so as to place a cost on
externalities—for example, carbon taxes. This acts to
internalise some costs that were previously unrecognised

9-59
Monetising environmental costs and
benefits – accounting for externalities
• As we have already discussed, financial accounting
typically ignores social and environmental impacts,
therefore experimental approaches to full-cost profit
calculation are being developed
• Market prices do not reflect the scarcity of resources
involved or harm resources cause
• Perception that all costs associated with the
production of goods or services (including use of ‘the
environment’) should be reflected in the price of the
goods or services – the practice of ‘under-pricing’ the
environment leads to over use and damage to the
environment
continued

9-60
Monetising environmental costs and
benefits (cont.)
• If done comprehensively this would involve some
life-cycle analysis
– consideration of the inputs and outputs from raw material
acquisition to disposal
• Often referred to as ‘true prices’

9-61
A ‘sustainable cost’
calculation
• A number of researchers are attempting to develop
approaches to place a cost on the social and environmental
impacts of organisations – still very experimental
• For example, Gray and Bebbington (1992, p.15) state:
– … sustainable cost can be defined as the amount an
organisation must spend to put the biosphere at the end of the
accounting period back into the state (or its equivalent) it was in
at the beginning of the accounting period. Such a figure would be
a notional one, and disclosed as a charge to a company’s profit
and loss account. Thus we would be presented with a broad
estimate of the extent to which the accounting profits had been
generated from a sustainable source … our estimates suggest
that the sustainable cost calculations would produce the sort of
answer which would demonstrate that no Western company had
made a profit of any kind in the last 50 years or so.

9-62
Alternative approaches to social and
environmental reporting—the example of
Baxter International
• We have suggested that generally accepted financial reporting
principles are not very useful in increasing corporate
accountability. As an alternative framework we have introduced
the GRI Framework,
• It is also useful to consider various innovative approached
being adopted by certain organisations.
• One such approach is that taken by Baxter International – See
page 466 of textbook
• Approach is innovative but still reasonably conservative
• Ignores any externalities caused by the business, and only
includes costs and benefits directly related to cash flows
• But attempts to demonstrate that by explicitly considering the
environment, actual cost savings can be made
• Still applies the usual ‘entity assumption’

9-63
BSO/Origin
• Places a notional value on the environmental costs
imposed on society
• This value is then deducted from profits (calculated
using financial accounting methods) to determine a
measure referred to as ‘sustainable operating
income’
• Although consider many externalities, ignores many
eco-justice considerations required to pursue
sustainability

9-64
Landcare Ltd
• Seeks to determine the notional costs that would be
incurred if the organisation was to have zero
environmental impact
• Sustainable cost: the amount which must be spent to
put the biosphere at the end of the accounting period
back into the state it was at the beginning
• Sustainable cost calculation involves two elements
– costs required to ensure inputs have no adverse
environmental impacts
– costs required to remedy any environmental impacts that
arise

9-65
Watercare services
• Identifies the additional costs that would need to be
incurred if the organisation was to meet the social
and environmental standards that it believes are
appropriate
• Interesting approach to reporting – see pages 469 to
471 of the textbook

9-66
PUMA
• From 2012 it commenced producing its Environmental Profit &
Loss (E P&L) account wherein it places a financial value on its
use of 'natural capital'.
• The E P&L seeks to quantify not only PUMA's direct
environmental impacts, but those of its suppliers too. The
methodology relies heavily upon the use of various estimation
techniques.
• See pages 465 and 466 of the textbook
• From the discussion of some of the alternative reporting
approaches we should understand that reporting information
about corporate social and environmental performance can be
an interesting exercise wherein some level of experimentation
is to be encouraged

9-67
Climate change
• We will now move our focus on to the important social
and environmental issue of Climate Change
• Climate change represents one of the biggest risks to
the planet (and to businesses)
• Climate change occurs because of an effect referred to
as the ‘greenhouse effect’
• The ‘greenhouse effect’ describes how natural gases in
the earth’s atmosphere allow infrared radiation from the
sun to warm the earth’s surface. These gases prevent
heat escaping from the earth’s atmosphere. Human
actions are increasing the concentrations of these gases,
creating global climate change
continued

9-68
Climate change (cont.)
• There are various accounting issues here, for
example:
– How do we account for (measure) emissions?
– How do we account (financially) for assets and liabilities
associated with schemes such as ‘cap-and-trade’
schemes?

9-69
Cap-and-trade schemes
• Cap-and-trade schemes are designed as a market-based
approach to dealing with carbon emissions
• The concept of an emission trading market is based on giving
carbon a price per tonne so that products can be more fully
costed and the costs of emissions be internalised
• Under a cap-and-trade system (such as the European Union
Emissions Trading Scheme), ‘allowances’ or ‘credits’ are used
to provide incentives for companies to reduce emissions by
assigning a monetary value to pollution
• The ‘cap’ phase of the program begins when a government or
regulatory body establishes an economy-wide target for the
maximum level of specific emissions permitted by companies in
a specified time frame. Then, a specific number of emissions
allowances equal to the national target are allocated (or
auctioned) to participating companies based on a formula that
generally includes past emissions levels

9-70
Cap-and-trade schemes (cont.)
• The ‘trade’ aspect of the program occurs when a company’s
actual emissions are greater or less than the amount covered
by its owned allowances. Companies that emit less than their
target will have excess allowances; those that exceed their
target must acquire additional allowances. Additional (or
excess) allowances can be purchased (or sold) directly
between companies, through a broker, or on an exchange.
Excess allowances can often be 'banked' and used to satisfy
compliance targets in subsequent years
• A cap-and-trade system acts to internalise costs that would
otherwise be treated as externalities and therefore, ignored by
financial accounting (refer to previous slides on externalities
and the definition of the elements of financial reporting)

9-71
Accounting for assets and liabilities
arising from a ‘cap-and-trade’ system
• There will be numerous financial accounting issues associated with
cap-and-trade systems
• For example, should the emission rights be considered as intangible
assets?
• Decisions also need to be made about such issues as:
– how the emission rights shall be measured?
– Whether increases and decreases in the value of emission rights (for
example, their fair value) should be recognised in profit or loss?
– how and when to account for impairments of emission rights?
– When to recognise expenses associated with emissions?
– Whether the value of emission rights granted by government should be
included within income in the period of granting, or systematically
recognised as revenue over the compliance period?
– When to recognise liabilities when emissions exceed the permits that are
held? continued

9-72
Accounting for assets and liabilities arising
from a ‘cap-and-trade’ system (cont.)
• Previous lectures/chapters have explored factors that
would motivate managers to support or lobby for
particular accounting methods
• Previous lectures/chapters have also explored
theories to explain what might motivate regulators to
support particular accounting approaches

9-73
Cap-and-trade schemes: some
other issues
• At a more general level, does it make sense to use a cap-and-trade
system to combat climate change?
• We can also reflect upon the European Union Emission Trading
Scheme – which is an example of a cap-and-trade scheme
• To many people, this appeared to be a strange situation of using the
very instrument that created the problem (the market) to then try to
solve the problem
• This issue aside, the prices of the ‘pollution rights’ have fluctuated
widely thereby creating much uncertainty for organisations considering
whether to invest in cleaner technologies, or to buy pollution rights
• For example, the price of a permit to emit a tonne of carbon dioxide hit
a peak of €32 in April 2006 but hit a recent record low of €2.81 per
tonne in April 2013
• There are also the issues associated with having a ‘right to pollute’
being considered as an asset that sits in a balance sheet – that does
look strange, doesn’t it?

9-74
Accounting for actual
emissions
• Apart from accounting issues associated with placing valuations on
emissions rights, and so forth, there are also accounting issues
associated with measuring actual physical emissions
• Various frameworks have been developed to measure emission
levels and offsets, one such framework being the Greenhouse Gas
Protocol.
• Emissions are often reported in three categories:
– Scope 1—Emissions directly occurring from sources owned or controlled
by the organisation (e.g. from company owned vehicles)
– Scope 2—Indirect emissions generated in the production of electricity and
consumed by the organisation
– Scope 3—Other indirect emissions that are a consequence of the activities
of the institution but occur from sources not owned or controlled by the
organisation (e.g. emissions related to air travel)

9-75
Social auditing
• In this lecture and in a previous lecture we explored the need for
organisations to be aware of, and to comply with, community
expectations
• A Social audit involves stakeholder-based engagement with the aim of
determining whether the organisation is perceived to be operating in
accordance with stakeholder expectations and where improvements in
performance are considered necessary
• The results of a social audit will often form the basis for information
presented in a Social Report, or in the social reporting component of a
Sustainability Report
• Organisations can do social audits to try to ensure that they are
maintaining high ethical standards (for example, consider The Body
Shop’s use of social audits), or they can be used after social problems
have already become known (e.g. consider Nike’s early use of social
audits)

9-76
Examples of social auditing
standards
• Released in 1998 by Social Accountability International
– SA8000
– focuses on issues associated with human rights, health and safety, and
equal opportunities
• In 1999 the Institute for Social and Ethical Accountability launched the
standard AA1000
– concerned with the processes of setting up and operating social and ethical
accounting and auditing systems
– currently, the AA1000 series consists of:
 The AA1000 Accountability Standard (AA1000APS) provides a framework for an
organisation to identify, prioritise and respond to its sustainability challenges.
 The AA1000 Assurance Standard (AA1000AS) provides a methodology for
assurance practitioners to evaluate the nature and extent to which an organisation
adheres to the Accountability Principles.
 The AA1000 Stakeholder Engagement Standard (AA1000SES) provides a framework
to help organisations ensure stakeholder engagement processes are purpose driven,
robust and deliver results.

9-77
The role of corporate governance in
improving corporate social and
environmental performance
• Whilst a great deal of this lecture has focused on
externally-oriented issues, such as public reporting, we
will conclude the lecture by briefly considering internal
factors – in particular – corporate governance
• If an organisation is serious about maintaining high levels
of social and environmental performance, then its
corporate governance system should reflect this aim

9-78
The role of corporate governance in
improving corporate social and
environmental performance (cont.)
• Governance mechanisms might include:
– stakeholder engagement mechanisms (such as routine social
audits);
– board structures that include environmental managers;
– implementing a rigorous environmental management
accounting system;
– environmental policies that are clear and well communicated;
– executive rewards linked to sustainability-related KPIs (we
could perhaps question an organisation’s commitment to
sustainability if we found that senior managers were rewarded
solely on the basis of financial performance-related KPIs);
– policies of social and environmental evaluation for all major
capital investment decisions;
– waste management policies; and
– supply-chain audits.

9-79
Personal social responsibility
• Whilst this lecture has focused on CSR, we should not ignore our own
responsibilities – our personal social responsibilities (PSR)
• We all make choices that will either increase or decrease our own
contribution to various social and environmental outcomes
• Rather than relying solely on CSR and/or the government, we must also
consider PSR which would require ongoing judgments, such as the
necessity for particular travel and the mode of travel being used, how
much energy we consume, how much waste our activities are generating,
how social and environmental responsibilities were embraced by the
suppliers of our clothing, and so forth
• The emphasis here is that tackling important issues such as climate
change and poverty alleviation requires ‘the community’ to also embrace
the need for change and not to simply rely upon (or blame) organisations
for the necessary improvements
• One can also argue for PSR on the grounds that asking for CSR
becomes a way of ‘passing the buck’—evading personal responsibility for
‘doing good’ continued

9-80
Personal social responsibility (cont.)
• As Chandler (2010) states:
– Let’s get beyond the idea that firms are inherently evil. Such a
perspective does not absolve firms of responsibility, but recognises
that for-profit organizations add considerable social value in
producing products and services that are in demand. It also
recognizes that the relationship between firms and society is
symbiotic and, as a result, the responsibility to ensure social
responsible outcomes is shared. In the same way that we deserve the
politicians we vote for, we also deserve the companies we purchase
from.
• Whilst this is all pretty obvious, how many of us actually embed
PSR considerations in the various decisions we make?
• Further, how do accounting and business lecturers embed
considerations of PSR within the courses they teach? What’s our
experience with this?
– arguably, because business educators have an audience of future
business leaders it is even more important that they try to increase
consciousness about the role of individual choice in addressing social
and environmental issues and problems

9-81
Concluding comments
• Social and environmental reporting is a rapidly
evolving area
• Only 20 years ago, almost no companies were
producing social and/or environmental reports
• Now many large listed companies are providing such
reports
• As concerns for global warming, social justice and
environmental protection increase we can expect this
form of reporting to continually evolve
• It is an exciting area of accounting to be involved
with!

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