How Accountants Can Save the World
What is an accountant?
An accountant is someone who solves a problem you didn’t know you had, in a way you don’t understand, at a price you can’t afford.
This may be the oldest accounting joke around, but it does hold some truth. Accountants solve problems. Sure, they do a lot of paperwork and number crunching, but accounting in practice is more diverse than just bookkeeping and tax preparation. In addition, the accounting field has the potential to influence and transform the world for the better.
Accountants can play a major role in achieving sustainable corporate practices. Everyone is familiar with the concept of sustainability, as it has permeated vocabularies for years. Yet there are major hindrances to achieving sustainability, especially in the manufacturing and production sector. Holding large multinational corporations (MNCs) accountable for their social and environmental impacts is a significant and commonly discussed topic. In today’s world, a negative viral social media post could detrimentally affect a business’s image, and their bottom line. This could drive a company to be more responsible to protect their financial interests. However, an external audit that holds MNCs accountable for their actions is a better way to protect both corporate and social interests.
But how can we measure a company’s social and environmental impact in order to hold them accountable? The accounting field must expand beyond its dated exclusivity on financial matters to include social and environmental accounting (SEA). By expanding auditing practices to measure social and environmental impacts, developing a grading system for the effect of these impacts, and integrating the results on a company’s yearly financial statements, accountants can make sustainable corporate practices a reality.
How will accountants achieve this monumental task?
An important sector of the accounting field is audit. Although a familiar word in most vocabularies, many do not know what auditing actually entails. To limit the scope of discussion here, auditing of large MNCs involves a team of accounting auditors physically inspecting not only paperwork, but facilities and operations as well. The Securities and Exchange Commission (SEC) requires that Certified Public Accountants (CPAs) audit large publicly traded US companies yearly. This yearly audit requires that the auditors attest to the accuracy of financial reports, effectiveness of internal controls, and the overall economic health of the company.
Consumers indirectly benefit from auditing activities as well. Auditors ensure that companies provide reliable information to the public, and that they are not involved in fraudulent activities. Therefore, consumers can buy products with reasonable confidence that they are not purchasing from a crooked company. However, auditing practices can and should expand to meet the increasing demands of consumers that look to purchase “green” products, or at least goods whose production has minimum negative impacts. Increasing information in the form of “certified” labels (fair-trade certification, for example) does help consumers to choose more sustainable products, but a lack of accountability hinders the uniformity and reliability of these claims. Hence, the coined term of “greenwashing”.
Who better to ensure accountability than accountants?
Criticisms of the accounting field include that, “accounting is infatuated with measurable information linked to performance information for financial resource providers rather than attempting to lead change”. In essence, experts concur that the current role of accounting and auditing must change to one that expands its focus to include the moral considerations of society.
Holding companies accountable is a challenge in both practice and implementation. Lack of regulation and enforcement hinders a resolution. Author Muhammad Azizul Islam addresses the issue of social compliance within supply chains of MNCs. He asserts the importance of social compliance for MNCs that acquire supplies and resources from developing countries. Without social compliance and corporate social responsibility (CSR) guidelines, operations of MNCs continue to have adverse global consequences. These global consequences are coupled with “calls for better corporate governance and transparency” which necessitate a more active engagement with corporate practice by regulatory authorities. However, regulations require the passing of laws, which is difficult to accomplish in today’s political climate. To circumvent this problem, we need to look elsewhere for accountability. Both accountability and transparency are a main function of accounting and auditing practice.
Social and Environmental Accounting (SEA) is a fragmented and debated field. If constructed and implemented appropriately, SEA could hold companies accountable for their impact on everything from natural resource depletion to the well-being of their employees. To accomplish this, current MNC audit teams need to recruit and add experts that can evaluate social and environmental impacts. Audit teams already utilize expert advice when auditing companies whose inventory, for example, requires skilled evaluation. To illustrate, an auditor likely cannot tell the difference between a high quality diamond and a piece of glass, so they bring in a gem appraiser. Due to their qualitative nature, evaluating social and environmental impacts requires more judgement and estimation than tangible inventory.
Estimation, with its room for error, is one major contestation to implementing SEA. Quantifying the consequences of water pollutants downstream from a factory is difficult. Estimation, along with professional judgement, is commonplace for CPAs. Part of becoming a certified public accountant is achieving a level of expertise in order to rely on judgement in practice. In this way, CPA auditors already possess the skill and experience to make reliable estimations.
It’s all about the bottom line — and it shouldn’t be.
In a discussion of social accounting as an emerging field, accounting researchers explore the hindrances traditional accounting puts on integrating measurements for societal and environmental impacts of an organization. The history of the accounting field is traditionally a “calculative practice” that has evolved and adapted over time to conform to business needs. Yet, adapting current accounting methods to the new challenges of social accounting faces resistance. One opinion on the difficulty in integrating social accounting is due to accounting’s association with governance and capitalism where the focus is always the financial bottom line. However, the bottom line only offers financial information without consideration for social and environmental factors.
Traditional accounting focuses mainly on a company’s financial aspects. Accounting key practices include measurement and calculations of numbers that equate to monetary values. Putting a monetary value on social and environmental impacts is not only difficult, but may detract from the underlying issues. Quantified amounts tend to implicate that a price can fix the problem, rather than holding the source accountable. Therefore, there is a necessity for creating a different kind of system for measuring and reporting impacts.
Collaboration and evolution
A reasonable solution to consider is using a system of measurement that mirrors the credit rating system. By analyzing multiple factors to determine an appropriate rating, this system already functions as a determinant for a company’s health and potential. Creating a CSR reporting system loosely based on the credit rating system is a plausible task. An even better solution is using the EPA’s existing environmental impact grading system. Accountants, working with environmental experts can easily implement this existing grading framework as it better aligns with the intended measurement purpose.
The most important concern in developing an effective grading system is the amount of estimation necessary in determining social and environmental measurements. Thankfully, accountants are not new to using estimation to determine system failures and account balances. They regularly use professional judgement and estimation in practice. For instance, auditors use estimation consistently when testing internal controls, as well as during the use of analytical procedures in every audit. Therefore, the development of a grading system is only an evolution of what they already do to adapt to a new reporting concept.
The debate on how to measure social and environmental factors is not new. Neither is the discussion of how to integrate these measures into the existing accounting framework. Changing the bottom line to a “triple bottom line” is a suggestion from economic analysts and researchers Timothy Slaper and Tanya Hall. This approach facilitates a means by which to measure corporate performance by taking into account social and environmental factors. However, their assessment and application only pertains to internal measurements, not to external reporting. An internal evaluation performed by corporations is a good start, but there must be a form of regulatory accountability to generate real results.
If society expected organizations to include social and environmental elements in their bottom line, these items would have greater weight in corporate decision-making
Authors Cornelia Beck and Glen Lehman envision a future where accounting influences business priorities such that societal and environmental impacts become a main concern. Accomplishing this requires an evolution in the expectations of large organizations. If society expected organizations to include social and environmental elements in their bottom line, these items would have greater weight in corporate decision-making. In addition, global markets ensure that businesses and corporations compete for market share. If consumers make social and environmental concerns a priority, then corporations will compete to become more sustainable. Therefore, MNCs must make changes to present a more transparent view of their business for consumers and stakeholders alike, determining their true value.
Value is in the eye of the beholder
Accounting for social and environmental impacts helps to better assess a company’s true value. Products and resources used to manufacture consumer goods have a variety of sources. Less expensive materials often come from underdeveloped countries, where a lack of regulation puts into question the true cost of said materials. Indirect costs such as harmful pollutants, unsafe working conditions, or unsustainable farming practices are worthy of consideration, but there exists no system or framework in which to account for these social and environmental factors, or to hold providers in the supply chain accountable. As big business profits from globalization, corresponding costs accumulate. Accounting for these costs and showing a company’s true value in a broader context can reign in unsustainable practices.
The accounting profession is not completely resistant to change. Ernst and Young, one of the ‘big four’ largest accounting firms in the United States is wholeheartedly embracing the tenets of social accounting and “building a better working world”. Included in the firms specialties are services relating to climate change and sustainability, including “credible reporting”, which helps their clients “assess and understand environmental and social metrics that are material to managing their operations”. Unfortunately, the approach at Ernst and Young is not the norm. Scouring the website of the largest accounting firm in the United States, one is able to find little to no information about sustainability or social and environmental reporting. Hopefully, Ernst and Young’s pioneering into the field of SEA will encourage more accounting firms to buy in, and sustainability will become a reality.
Accountants can play a major role in the sustainability evolution by developing a field dedicated to CSR. By first implementing a grading system for social and environmental factors, they will produce standards by which to compare companies. Then, they must train and develop auditors to use the grading system in yearly audits. Finally, putting this grade on publicly available financial statements will force MNCs to develop sustainable practices. Without accountability, MNCs will continue to operate in the sphere they are accustomed to, which is unsustainable. In addition, consumers will continue to purchase goods produced by MNCs without knowing the possible harm caused to society or the environment. Accountants are not the only players in the game of sustainability for a better future, but they have a substantial role to play. This is how accountants can help save the world.
