Free Essay On Social AND Environmental Accounting
Type of paper: Essay
Topic: Environment, Sociology, Company, Accounting, Stakeholders, Society, Theory, Performance
Corporate environmental disclosure (CED) and corporate social disclosure (CSD) refers to companies' disclosure about societal performance and environmental performance respectively. Social performance includes improving human resource-related behaviors. These methods include employees' health and well-being, employee training and development, equal opportunities, and wage discrimination issues. On addressing of customer issues, the following aspects are looked into; product labeling, compliance with products laws, communication practices, customers' health safety, and customers' complaints. It also pinpoints human rights issue such as removing child labor, freedom of association and non-discrimination measures. Another critical issue that is addressed is that of broader stakeholder and community concerns. These include involving the local community, showing public policy concerns, reducing corruption, discouraging the anti-competitive behavior, and complying with laws.
Environmental performance covers how the materials are used and recycled. It involves direct and indirect energy consumption, preservation of biodiversity, water use, reduction and treatment of emissions, effluents and wastes, and lessening products and services environmental effects. There are numerous theories that have been used by authors to explain the social and environmental reporting of firms. Discussed here are legitimacy and stakeholder theories (Mathews, 2007 p.481).
This theory is central to the social contract that can be implicit or explicit. The firms in this theory have a contract with the society as a whole. The social contract is explicit by the expectations of the society, which are not fixed but are changing over time. It is the utmost responsibility of the community to meet the expectations of the society. If the firm fulfills the expectations the society, it would be treated legitimately by it. Otherwise, it would be at risk. Only a legitimate company has the right to utilize the society’s natural and human resources. Therefore, firms have to respond to the changing societal expectations. To legitimize their activities, firms have to adopt those goals, values, and operations consistent with existing legitimacy definition. They also have to use communication strategy to legitimize their present practices by influencing existing legitimacy definitions. The motives of this theory are to have corporate social and environmental disclosure (CSED) be used as a tool by the company to relay information concerning their operations and activities to meet the expectations of the society. This allows the company to maintain it license to operate in the society (Owen, 2008 p.248).
This theory divides the whole society into groups called stakeholders. A stakeholder of a firm can be defined as any identifiable group or individual who can be affected by, or affect the activities or achievements of an organization's objectives. These stakeholders vary in the power of influencing the corporation. Under this theory, the organization has more than one social contract that can affect the company's operations. Stakeholder theory is divided into two: normative branch and managerial branches of stakeholder theories.
The normative branch of stakeholder theory equally treats all the stakeholders of the organization and does not take into consideration the power of influence of these stakeholders. It only asks the managers to work for the right of the stakeholders. It asserts that social and environmental performance information is disclosed to be accountable to all the stakeholders without considering the element of the power of each of them.
As for the managerial perspective, stakeholders are divided into primary and secondary groups. Primary comprises a group of stakeholders whose cooperation helps the company's survival. The secondary group includes those stakeholders who do not make any transactions with the company, and the company does not depend on them. In this case, the primary group of stakeholders has more power than secondary stakeholders. Therefore, it holds that, companies can disclose social and environmental responsibility information to meet the expectations of the powerful stakeholders. The motive behind the managerial perspective is to have the social, and environmental performance information revealed to comply with the expectations of powerful stakeholders. These stakeholders could be the government, international buyers, and shareholders.
Role of social and environmental performance in developing Social and Environmental Accounting
Environmental accounting is the practice of incorporating principles of environmental management and conservation into reporting practices, and cost/benefits analyzes. It allows the firm to see the impact of ecologically sustainable practices right from the supply chain to the expansion of the facility. It allows the accountants to report on the impact of those decisions on stakeholders so as to allow for proactive decision-making. The decisions could be about processes that simultaneously meet environmental regulations while adding to the bottom line. Consumer concerns about environmentalism and the adverse impacts of non-renewable practices raise another issue of accountability (Gray, 2002 p.690).
The most high profile actionable example of environmental accounting that is global is that of Kyoto Protocol. The protocol is a legal binding agreement entered into voluntarily by fully industrialized and developing nations to reduce the greenhouse effect. National governments develop collaborative kind of relationship with industries that produce or potentially produce the greenhouse gasses, or those industries that manufacture products that result in consumer-generated emissions. They are, therefore, expected to assume responsibility for developing and enforcing legislation that facilitate compliance. The measurement and metrics of the Kyoto Protocol allow industries to adapt to those aggressive pursuits of environmental accounting, but not about reporting actions only. It holds that systems should be developed, and decisions executed that ensures that companies remain profitable through the cycle of manufacturing while keeping the atmosphere healthy.
Social and sustainability accounting often happens as a result of a business creating a strategic action plan, which includes environmental or social objectives. Operating without understanding the social and environmental impact of its decisions is equivalent to wearing a blindfold. Rating of corporations’ environmental activities and capabilities influence a lot of money of ‘social responsible’ investments as well as some consumers, activities, and potential employees (Clarkson, 2008 p.304). Investors who seek transparency are looking for some combination of accuracy in summarizing past performance and careful evaluation of current managerial actions like future environmental performance. Social and environmental rating agencies seek to make. corporations’ environmental effects more transparent. These rating agencies can examine firm’s past environmental performance and environmental management activities. They can also consider a firm's future outlook, such as by analyzing their environmental management plans and investments that intend to enhance future environmental performance. Social ratings aim to provide social investors with accurate information that are transparent to the extent that the firm's behaviors are socially responsible.
Role of provision of sustainability assurance by professional accountants in Social and Environmental Accounting
The accounting profession began to recognize the need to account for social and environmental matters in 1980s when companies started including environmental issues in their annual reports. Several years later, companies were issuing Corporate Social Responsibility (CSR) reports. In their interim reports, they published reports with titles such as; environmental, social, carbon, triple bottom line, climate change, and sustainability to account for these social and environmental issues. In 1990s, sustainability was introduced in as a viable concern when measuring performance on U.S. firms.
Many firms have now developed Corporate Social Responsibility (CSR) frameworks that encompass community, marketplace, environment, and workplace issues for companies that desire to provide more comprehensive reports to their stakeholders. Producing a Corporate Social Responsibility voluntarily helps the firms in several ways including;
Enhancing and maintaining its reputation
Help them to be seen as legitimate by stakeholders
There are accounting and reporting sustainability standards that help on sustainability issues. In the year 2005, International Auditing and Assurance Standards Board approved international standards for Corporate Sustainability Reporting. This IAASB gives the authority to the standard and assurance accounting firms and bodies to conduct corporate social responsibility assurance engagements. This puts pressure on the companies to uphold the Social and Environmental Accounting and impart it in their corporate culture.
For companies to operate smoothly, they must adhere to the standards that are set by the authorizing bodies. They must engage all the stakeholders and follow the regulations stipulated by the theories; legitimate, stakeholder and institutional theories. Firms have to meet customers' expectations for them the obtain legitimacy from the society while carrying out their operations with fewer costs. It is ethical that industries get to business to make profits and in turn take the surrounding society and the environment into consideration.
Gray, R. (2002) ‘The social accounting project and Accounting Organizations and Society - Privileging engagement, imaginings, new accountings and pragmatism over critique?’ Accounting Organization and Society, Vol. 27, pp.687–708.
Mathews, M. (2007) ‘Twenty-five years of social and environmental accounting research: Is there a silver Jubilee to celebrate?’, Accounting, Auditing and Accountability Journal Vol. 10, No. 4, pp.481-531.
Parker, L. D. (2005) ‘Social and environmental accountability research: A view from the commentary box’, Accounting, Auditing and Accountability Journal, Vol. 18, No. 6, pp.842-860.
Owen, D. (2008) ‘Chronicles of wasted time? A personal reflection on the current state of, and future prospects for, social and environmental accounting research’, Accounting Auditing and Accountability Journal, Vol. 21, No. 2, pp.240-267.
Clarkson, P. M., Li, Y., Richardson, G. D., Vasvari, F. P. (2008) ‘Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis’, Accounting Organisation and Society, Vol. 33, No.4-5, pp.303-327.