Management And Accounting Web

Estes, R. 1992. Social accounting past and future: Should the profession lead, follow - or just get out of the way? Advances in Management Accounting (1): 97-108.

Provided by Velynda Wickerson
Master of Accountancy Program
University of South Florida, Fall 2004

Environmental Cost Main Page | Social Accounting Main Page

Neither management accounting nor traditional accounting meets the information needs of corporate stakeholders. Examples of stakeholder groups include employees, customers, suppliers, communities and financial investors (stockholders). The information needs of these stakeholders have stimulated the revival of social accounting. The purpose of this paper is to consider how accountants can address the information needs of corporate stakeholders. This issue is explored in three parts: past, present and future.

A Brief History of Accounting

During the 17th century, sovereigns chartered the early corporations for a specific public purpose, such as opening trade routes to the East Indies or providing certain services like postal, banking, stage or ferry. The sovereign’s agents could easily observe how well these small corporations were meeting their chartered purpose and did not require a formal performance report. The investors, however, hired independent agents to go and observe the operations and provide them with an accounting.

As corporations grew in size, complexity and reach, some kind of performance measure was necessary to satisfy external as well as internal users. The report to the stockholders was adopted by default as it was the only formal reporting being done.

Internal management was not satisfied with this inadequate measure of performance and, thus, developed management accounting. Management got custom reports while the corporation’s external users had to settle for the mostly irrelevant stockholder’s report. In the early 1900’s these management reports were absorbed into financial accounting.

Throughout most of the twentieth century, financial accounting reports have monopolized the field. Corporate performance is no longer based on how well the corporation achieves its chartered purpose but solely in terms of the stockholder’s bottom line.

Large corporations affect much more than their stockholders. They impact, often negatively, their environment, health and safety of employees and customers, and surrounding neighborhoods and communities. Social accounting is concerned with these stakeholders. Thus, the 1970s saw a flurry of activity in this new accounting domain. Corporations and accounting firms experimented with reporting formats and included sections in their annual reports on social performance. Professional and academic organizations commissioned research studies.

However, social accounting ultimately served the interests of the corporation, not the interest of the information users. It became one more tool for the corporation to diminish and obscure the damage it might be doing. Because of this abuse and exploitation by big business, as well as the economic recession during the early-80’s, social accounting became scarce and relatively non-existent. Big corporations lost interest as well as the AICPA and other professional accounting organizations.

The social accounting movement appeared to die, but the need did not go away.

Where is Social Accounting Today?

Although, the social accounting movement of the 1970s has faded, groups concerned with consumer, environmental and labor affairs have revived a new social accounting. External, nonstockholder groups are demanding social impact information from corporations for their constituents and for the public.

Although accounting has ignored nonstockholder stakeholders, various publications such as the Concerned Investor’s Guide and Consumer Reports, supply extensive and useful information about the corporations that affect them. Organizations are filling the void left by the accounting profession’s shunning of social performance information (p. 101). One example is Phil Sokolof’s full-page ads criticizing McDonald’s for serving unhealthy, fat-laden fast food. McDonald’s responded by charging Sokolof with exaggeration and misstatement while introducing a line of more nutritious low-fat products.

The number of companies who are trying to put stakeholders first appears to be growing. Many have appointed environmental policy officers, some undoubtedly for public relations. IBM and Japanese companies have been noted for not laying off workers. Honda, Toyota, and Subaru-Isuzu have stored unsold cars in parking lots to avoid laying off workers.

In the late-80s, NCR took the initiative to identify its mission as to “create value for stakeholders”. Try as they might, NCR ultimately failed with this mission. The accounting system and accounting culture functioned to deter it from its mission, constantly pulling the company and all management decisions away from stakeholder value and back to stockholder value.

In 1986, Johnson & Johnson eventually halted capsule production and urged customers nationwide to stop using Tylenol capsules for a short period of time after a 23-year-old woman died from two cyanide-contaminated Extra-Strength Tylenol capsules. After an intensive review, top management decided to stop selling any OTC medicines in capsule form. J&J practiced stakeholder management with these aggressive steps. This action contrasts sharply with Ford Motors’ unsafe Pinto and Firestone’s exploding tires.

What is the Future of Social Accounting?

Corporate executives are not immune to concerns about racism, environmental damage, equal opportunity, sexual harassment, and unsafe products. Sensitive managers cannot casually accept accounting’s bottom line ethic that only stockholders count.

The renewed interest in social accounting is in part due to the insistence by corporate constituencies that corporations fairly inform them of what they are doing and how it affects them. Corporations are under increased pressure by these “exploited” stakeholders. Estes predicts three outcomes are likely to occur:

1. The federal government will continue to impose regulations (e.g. EPA, OSHA); or
2. The corporate system will fall and restore power to the people; or
3. Corporate America will clean up its own house. (p. 104).

The first two outcomes would cause the corporations to lose their potential for service that the corporate system offers. The third outcome is the best solution but fights an accounting culture that implicitly denies the interests of stakeholders (p. 105).

Estes believes large corporations are accountable to no one, not to Wall Street nor to its board of directors. Corporate accountability is the key requirement to the successful emergence of social accounting. Although accountants have not stepped up to the plate in the past to lead the way in this process, today they have a special role.

The steps would be to first identify the stakeholders of the corporation and then identify their information needs. Management accountants internally undertake this process all the time so it would not be a novel idea. Once the information needs of the various stakeholders are identified, they would have to be evaluated, and assessed for cost-benefit. Finally the best communication media should be chosen, such as a “comprehensive, annual corporate report” to get the information to the stakeholders. If the information is of a more urgent nature, then the TV news media can be used.

Estes believes “stakeholder” accounting offers substantial opportunities for research by both academicians and practicing management accountants (p. 107). Currently few accountants are involved in the movement toward a new social accounting. Thus, Estes asks will accountants get out in front and make a real contribution or be content standing on the sidelines, merely sinking into “irrelevancy”?


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