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Copyright 2009 McGraw-Hill Australia Pty Ltd

PPTs t/a Deegan, Financial Accounting Theory 3e
Financial Accounting Theory
Craig Deegan
Chapter 9
Extended systems of accountingthe
incorporation of social and environmental factors
within external reporting
Slides written by Craig Deegan
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Learning objectives
In this chapter you will be introduced to:
various perspectives of the responsibilities of business
explanations of the relationship between organisational
responsibility and organisational accountability
the relationship between accounting and accountability
various theoretical perspectives that can explain why
organisations might voluntarily elect to provide publicly
available information about their social and environmental
performance
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Learning objectives (cont.)
some recent initiatives in social and environmental
accounting
the concept of sustainable development and how
organisations are reporting their progress towards the
goal of sustainable development
the relationship between sustainability and eco-efficiency
and eco-justice issues
some of the limitations of traditional financial accounting
in enabling users of reports to assess a reporting entitys
social and environmental performance
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PPTs t/a Deegan, Financial Accounting Theory 3e
Introduction
In recent years there has been increasing
discussion about sustainable development and
triple bottom line (TBL) and sustainability reporting
TBL reporting is reporting that provides information about
the economic, environmental and social performance of
an entity
Sustainability reporting represents a departure
from sole economic focus that was traditional in
external reporting
A review of the Global Reporting Initiatives
Sustainability Reporting Guidelines provides
insight into the types of social, environmental and
economic information that could be disclosed in a
sustainability report
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PPTs t/a Deegan, Financial Accounting Theory 3e
Introduction (cont.)
The terms sustainability reporting and TBL reporting
are often considered to be synonymous
Strictly speaking however, sustainability reporting
would require more than just TBL reporting and it
would question three separate bottom lines given
sustainability would require social, economic and
environmental aspects to be considered together
Sustainability reporting would also address
specifically how current activities are impacting the
abilities of future generations to satisfy their own
needs. Current TBL reports do not address such
issues
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Responsibilities of business
Moves to provide information about social and
environmental performance, whether through
sustainability or TBL reports, 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
Increasing community pressures for organisations
to make a commitment to sustainable business
practices, and corporate reporting is tending to
respond to this pressure
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PPTs t/a Deegan, Financial Accounting Theory 3e
Responsibilities of business (cont.)
If sustainability becomes part of the expectations
held by society, it mustconsistent with legitimacy
theorybecome a business goal

Providing information about social and
environmental performance will increase the trust
a community has in the organisation
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PPTs t/a Deegan, Financial Accounting Theory 3e
Sustainability
Brundtland Report placed sustainability on the
business worldwide agenda

Sustainable development defined as:
development that meets the needs of the
present world without compromising the ability of
future generations to meet their own needs (World
Commission on Environment and Development,
1987)

Inter-generational and intra-generational equity
central to the agenda
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Sustainability (cont.)
Should organisations be responsible for the
sustainability of their business practices?

Will they embrace this responsibility in the
absence of specific legislation?
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
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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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Accountability
The duty to provide an account (not necessarily
financial) or reckoning of those actions for which
one is held responsible

Two responsibilities or duties
responsibility to undertake certain actions
responsibility to provide an account of those actions
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PPTs t/a Deegan, Financial Accounting Theory 3e
To whom is business responsible?
Many organisations making public statements that
responsibilities extend beyond shareholders to
encompass communities in which they operate
and society as a whole

If sustainability embraced then responsibility 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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PPTs t/a Deegan, Financial Accounting Theory 3e
Stages of sustainability reporting
Stage 1: Why report?
relates to managements motivations
Stage 2: To whom to reportwho are the
stakeholders?
tied to managerial motivations for reportingif
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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PPTs t/a Deegan, Financial Accounting Theory 3e
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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PPTs t/a Deegan, Financial Accounting Theory 3e
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
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PPTs t/a Deegan, Financial Accounting Theory 3e
Theories to explain why report? social
and environmental disclosure (cont.)
Institutional Theory
organisations will adopt particular practices because of
institutional pressures

Positive Accounting Theory
disclosure depends on positive wealth implications
consider submission of the Business Council of Australia on
page 394 of the text
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Why report? and its links to views
about the responsibility of business
Consider the views of Milton Friedmanreporting
is not about responsibilities; rather, it is about
enhancing business profitability

A broader view of business responsibilities would
accept that regardless of the impacts of
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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PPTs t/a Deegan, Financial Accounting Theory 3e
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 held by the mediaapplauds 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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PPTs t/a Deegan, Financial Accounting Theory 3e
Differing views about 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 Roddicks 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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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Stage 2: To whom to report?
If managers overwhelmingly motivated by the
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
entitybut still cannot address all information
needs, so some prioritisation will be necessary
It is emphasised that the decision of whom to
report to is directly related to the previous issue of
why report? One cannot be considered in
isolation from the other
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
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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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Stage 4: How to report?
Conventional financial accounting does not appear
to provide a foundation for social and
environmental disclosures
Triple bottom line 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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PPTs t/a Deegan, Financial Accounting Theory 3e
How to report? Limitations of
traditional financial accounting
For the following reasons, financial accounting is
not seen as a useful vehicle for promoting social
and environmental disclosures

Financial accounting focuses primarily on the
information needs of those involved in resource
allocation decisions. By contrast, sustainability
concerns all stakeholders

The notion of materiality tends to preclude the
reporting of social and environmental information,
given the difficulty in quantifying costs
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PPTs t/a Deegan, Financial Accounting Theory 3e
How to report? Limitations of traditional
financial accounting (cont.)
Reporting entities frequently discount liabilities to
present value, which tends to make future clean-
up expenditures appear trivial

Financial accounting adopts an entity assumption
where the entity is treated as distinct from its
owners and other stakeholders
transactions not directly impacting the entity are ignored
ignores externalities caused by the reporting entity, some
relating to social and environmental implications of the
entitys operations
sustainability and the entity assumption are mutually
exclusive
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PPTs t/a Deegan, Financial Accounting Theory 3e
Expenses are defined to exclude the recognition of
any impacts on resources not controlled by the
entity
that is, and simplistically stated, the recognition of
expenses in part relies upon the using up of assets
assets are defined in terms of control, hence if
something is not controlled such as the environment -
then it is not an asset of the reporting entity
therefore, the use or abuse of the environment is ignored
from a financial accounting perspective (unless fines are
imposed)
Externalities caused by the entity cannot be
reliably measured, and so typically are not
recognised given the recognition criteria provided
in such documents as the IASB Framework
How to report? Limitations of traditional
financial accounting (cont.)
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PPTs t/a Deegan, Financial Accounting Theory 3e
How to report? Triple Bottom Line
Reporting
Triple bottom line reporting refers to the disclosure
of information about the social, economic and
environmental performance of an entity
But is the bottom line metaphor appropriate
can social and economic impacts be measured
through a bottom line?
Seems to indicate that we must manage all the
bottom lines in a similar mannerappropriate?
Seems to suggest that social, economic and
environmental performance are separate to one
anothernot really the case in practice
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How to report? Relevance of
measures such as GDP
Performance of governments is related to outputs
of systems of national accounts
e.g. gross domestic product (GDP)

Does not consider issues of resource efficiencies
or equities with how resources are distributed

Experiments taking place to green GDP
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How to report? The Global Reporting
Initiative
Global Reporting Initiative (GRI) established 1997
The GRI Sustainability Reporting Guidelines is the
most comprehensive framework for how to report
that is currently available
Third versionG3released in 2006
Made up of various core and additional
performance indicators
Not mandatory and hence many organisations are
selective about what information they select for
disclosure
Apart from the GRI, a number of other
organisations have produced reporting guidelines
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PPTs t/a Deegan, Financial Accounting Theory 3e
Monetising environmental costs and
benefits accounting for externalities
As we have already discussed, financial
accounting typically ignores 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
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PPTs t/a Deegan, Financial Accounting Theory 3e
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
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PPTs t/a Deegan, Financial Accounting Theory 3e
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 companys
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.
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
Alternative approaches to social and
environmental reportingthe example of
Baxter International
Approach most conservative of those considered
in the textbook

Ignores any externalities caused by the business,
and only includes costs and benefits directly
related to cash flows

Attempts to demonstrate that by explicitly
considering the environment, actual cost savings
can be made

Still applies the usual entity assumption
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PPTs t/a Deegan, Financial Accounting Theory 3e
BSO/Origin
Place 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
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PPTs t/a Deegan, Financial Accounting Theory 3e
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
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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
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PPTs t/a Deegan, Financial Accounting Theory 3e
Social auditing
Purpose of social auditing is for an organisation to
assess its performance in relation to societys
requirements and expectations

Results form the basis of an entitys publicly
released social accounts, which in themselves are
often incorporated into a triple bottom line or
sustainability report

Consider the Body Shops social performance
report which is based on their social audit
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PPTs t/a Deegan, Financial Accounting Theory 3e
Social Auditing Standards
Released in 1998 by the Council on Economic
Priorities (US body)
SA8000
focuses on issues associated with human rights, health
and safety, and equal opportunities

In 1999 ISEA launched standard AA1000
concerned with the processes of setting up and operating
social and ethical accounting and auditing systems
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Copyright 2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Deegan, Financial Accounting Theory 3e
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