09 Jul 2019

Accounting for the Future and the Future of Accounting

“What’s measured improves”, wrote management guru Peter F. Drucker.  This observation underscores the point that if China and other countries are to be successful in achieving improvements in air and water quality, living standards, probity and, then business and government reporting has to do a better job of measuring and reporting progress and value creation in relation to all aspects of these matters. 

Peter Drucker also noted that while the modern corporation is the greatest vehicle ever invented to maximize profit and wealth, its Achilles heel is that it lacks moral authority.  In a world where pollution is having a dramatic negative effect on the daily lives of citizens and even threatening our survival, making profits alone is no longer enough.  Thus the call is for corporations and business to protect the environment rather than being a ‘free rider’ polluting our air and water and paying nothing.  Similarly, society and regulators are increasingly calling for corporations to be mindful of the reality that they are part of society and have a responsibility to more than shareholders, but also to employees and other stakeholders, including society in general. 

This goal will not be achieved, however, unless the full extent of the problem is measured, made transparent and acted upon.  A vital starting point is to have businesses in their strategies and reporting to account for progress made in achieving not only financial goals but also other important values such as protecting the environment and being socially responsible. This is the theme of Jane Gleason-White, Six Capitals: the Revolution Capitalism has to Have or Can Accountants Save the Planet?[i]

Gleason-White argues that we are now experiencing the beginning of a second revolution in accounting, the first being the invention of double entry accounting centuries ago.  While traditional accounting was highly efficient in helping us to measure capital in terms of finances and manufacturing, it has not sufficiently accounted for new forms of wealth that have come about with the shift form an Industrial to an Information Society.  In this environment, accounting methods and reporting must also account for two new capitals--human capital and software—nerds and intellectual property—ie the new forms of wealth. 

In addition, in the 21st Century and with our growing realization of the fragility of our environment and the inter-connectedness of society, Gleason White argues our business reporting and accounting systems must also find ways to measure and account for the impact of business on the environment and the value the business adds to society. 

It is argued we require a new form of business reporting or accounting that accounts for these six forms of capital rather than merely the traditional two related to manufacturing and financial capital. Businesses in this new environment need a reporting system that enables a business to report and shareholders and stakeholder able to understand the value that the enterprise adds to shareholders and stakeholders. 

Significant moves toward this new form of accounting is seen in the notion of ‘triple bottom line’, and calls for business reports to reflect values related to: profit, people and planet. Similar notions are captured in a ‘balanced scorecard’ approach.  In the US, there is the Sustainability Accounting Standards Board (www.sasb.org/ ) which is developing non-financial reporting standards for 89 industries.

As stated on their website:

 “Sustainability accounting standards are intended as a complement to financial accounting standards, such that financial fundamentals and sustainability fundamentals can be evaluated side by side to provide a complete view of a corporation’s performance.”

Perhaps of greatest impact is the formation of the International Integrated Reporting Committee (IIRC)  (now Integrated Reporting Council: http://www.iasplus.com/en/resources/sustainability/iirc). Since 2012 an international movement to transform corporate accounting, and the rise of natural capital accounting for nations and the global economy.  The IIRC brings together a cross-section of representatives from corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors as well as civil society. It comprises a Steering Committee, a Working Group and three taskforces working on content development, engagement and communications, and governance.

On July 3, 2014 the International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) released an international framework on governance in the public sector and the IIRC released the International Integrated Reporting Framework in December 2013.

As articulated in the Framework: 

“The IIRC's vision is a world in which integrated thinking is embedded within mainstream business practice in the public and private sectors, facilitated by Integrated Reporting as the corporate reporting norm. The cycle of integrated thinking and reporting, resulting in efficient and productive capital allocation, will act as a force for financial stability and sustainability.”

The purpose of establishing IR Framework is stated as:

“…..is to explain to providers of financial capital how an organisation creates value over time. An integrated report benefits all stakeholders interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators, and policy-makers.”

Conceptually, the IR Framework is based on the notion of value creation by a firm, taking into account the six capitals and developing a process by which such value creation can be achieved, demonstrated, understood and reported in terms that shareholders, stakeholders and the public can understand.

Conclusion

While the move to integrated reporting is in its early stages it offers our best hope yet of developing a way to measure value in a way that accounts for and integrates these values into one metric based system.  While few would argue with the need for integrated reporting, putting it into practice with reliable and understandable metrics has a long way to go.  Perhaps even greater is the challenge to achieve buy-in from governments, business and the general public.  Yet, there is a case for optimism as the public, business and regulators become increasingly aware of both the need for and importance of such a mechanism to the future of the global economy and our fragile planet.

 

 

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