The paper 'Understanding Financial Accounting Issues' is a great example of a Finance and Accounting Assignment. Social accounting and disclosure revolve around social corporate responsibility which is presented in the modern triple bottom line method, guided by the Global Reporting Initiative. The sole aim of all these concepts is to create a sustainable development environment as a social contract with society to improve the public’ s general perception of a firm as a good corporate citizen. Below is a discussion of the concepts. There are rules and norms of how a society should interact with other players to create a sustainable economy for sustainable development.
This is commonly referred to as a social contract. Corporate Social Responsibility has become a critical issue in the branding and sustainability strategies of all businesses ranging from small to large in the last couple of years. This is because; it has become relevant for companies to take a broad view to understand that their obligation goes beyond their shareholders to include clients, suppliers, employees, and the community at large. The nature of CSR has been captured by the four dimensions as, firstly- responsibility involves the expectation of society that the business is lucrative keeping in mind the shareholders’ interest of wealth maximization, secondly the legal aspect is the requirement that the company complies with the laws; thirdly, the ethical aspect constitutes of expectations by society to do that which is just and fair and lastly discretionary involves philanthropic deeds towards communities.
CSR is, therefore, concerned with how business activity in terms of management quality and nature-and-quantity of their impact on society. The Triple-Bottom-Line is a reporting system that is value-added, derived from voluntary disclosure of social responsibility.
Its main constituents are the economic, environmental, and social value addition. Sustainable development is a goal played by all organizations existing to ensure that they meet present objectives without posing a threat to the ability of future generations to meet own objectives. Transparency in how organizations create sustainable development is of interest to a diverse range of stakeholders such as the government and investors (Global Reporting Initiative, 2006, p. 3). Consequently, the GRI plays the role of establishing a common framework under which the reporting of sustainable development is disclosed to be relevant across the diverse pool of stakeholders. The GRI, (Global Reporting Initiative), is an overall reporting guideline that aids companies in properly disclosing their environmental, economic, and social performances.
The guidelines were established in 1977 but recently got updated to the G4 Sustainability-Reporting-Guidelines. The four principal elements include one – stakeholder inclusiveness, two – sustainability context, three – materiality, and four – completeness. They are discussed below: Stakeholder inclusiveness: - Thus implies that every organization should identify all their stakeholders and audit whether all the expectations and interests are adequately met. Sustainability context: - The report produced should cover a wider-sustainability-context. Materiality: - This is a concept that stipulates the context of the report; it should cover assessments that have a direct influence on shareholders' decision-making process.
In addition, it should involve significant economic-social-environment impacts. Completeness: -This is concerned with the report having included significant material aspects and boundaries that are sufficient to reflect the economic-social and environmental impacts. In summary, GRI provides guidelines on how to report and what to include in the report. Question One b) Accountability theory.
Most firms feel the need to have voluntary disclosures to seek accountability in society. Legitimacy theory: This majorly explains the fact that organizations that conduct voluntary social responsibility disclosure do so with the aim of seeking legitimacy. Stakeholder theory. The theory highlights a systematic way of posing managerial related questions such as, “ which groups, or which ones do not deserve any stakeholder attention? ” It has been termed as a theory that acknowledges the attribute of organizations, having dynamic and more complex organizational relationships which to a large extent revolve around accountability, needless to say, responsibility. Question One c) Advantages Voluntary disclosures act as a cost-benefit-analysis tool that is helpful in evaluating decisions related to perceived social responsibilities.
This is one of the reasons most corporations follow the GRI to ensure that their actions in the process of seeking profit maximization do not negatively outweigh the benefits it brings to the society and the environment as well. In addition, reporting on the social impact a firm has to the public is deemed to enhance the competitive advantage of the Individual Corporation against those that do not make such disclosures.
This is to a large extent, attributed to the perception that such firms are good-citizens and are mindful of the immediate environment surrounding them, hence the improved image to the public eye. Thirdly, voluntary disclosure is viewed as a way of cultivating ‘ green and ethical’ consumer-markets. This is amidst the rising movements in enhancing the environment and social responsibility of companies’ actions through a ‘ greening’ movement. Disadvantages It is argued that voluntary disclosures result in high costs in their development which may result in cash flow problems for the entity presenting the disclosure.
In addition, the disclosures may also result in litigation against the company by the public which may also result in cash flow problems and a bad reputation for the company. Lastly, the disclosure may also result in a competitive disadvantage in scenarios where other firms have better social disclosures. Question 2 a) An externality is defined as a cost/benefit that is shouldered by a different individual that is not part of the transaction (Adams & Zutshi, 2004). It may be positive or negative, (Cost or benefit), respectively. Externalities are transmitted through product prices to a third party.
However, it is worth noting that the prices never reflect a full representation of an externality, thus resulting in both the producer and the consumer reaping fewer costs or benefits of a specific economic activity (Boundless, 2015). It is worth noting that all companies that are environmentally managed and well run must at one point have an impact on the society and environment as long as they carry activities (Mathews & Lockhart, 2014). There are three major ways of dealing with externalities, other than reporting them in the sustainability development report under CSR.
They include one – regulations, two – pollution permits, and three – charging mechanisms. A regulatory approach involves setting up appropriate standards for adequately measuring environmentally-damaging-discharge. The disadvantage with this is that it would raise the cost of production as well as prevailing political realities. In addition, it is worth noting that even with strong regulations, there will still be the presence of discharges, they would not cease. Pollution permits are also under consideration after enough literature review has been done to effectively quantify and include externalities in the cost of operations under the financial statements. Similarly, the same approach applies to the charging mechanisms technique, which is also under construction. Reasons for the omission in financial statements Externalities, as previously mentioned, could either be positive or negative and are of broad perspectives.
Following this, measuring them accurately is problematic if the full effects on society are to be captured. Such costs would include mitigation as well as remediation costs, the measurement of which is close to impossible. Moreover, the internalization of the externalities into the full cost of production would result in other costs of mitigating the effects associated with the charges of internalization.
Nevertheless, there has been a suggestion on how to inculcate the externalities in the financial statements through an Environment Equity Accounting statement by Rubenstein and Epstein in 1997 (Mathews & Lockhart, 2014). Question Two b) Cost of production increases due to the requirement of policing the strategies of measurement, which also needs to be audited and prosecuted when necessary. Increasing production costs will translate to higher prices of the end products for the consumers.
In the long run, firms may be forced out of the market by lack of breaking even, amidst the soaring costs of externalities quantification. Legitimacy problem. A firm that reports on the negative externalities that emanate from its production techniques and normal operations in the course of operations may lack legitimacy to the public and other stakeholders. As previously mentioned, companies seek legitimacy through social responsibility reporting and disclosure. However, a negative disclosure will render these efforts futile. Lastly, there has not yet been a model of how to quantify externalities.
There is the school of thought that argues on the basis of externalities being a necessary evil. Business actions must have an impact on society, even at the minimum. Lack of a conceptualized model to report and measure such social costs impedes on the need to report them in financial statements of companies. Question Two c) The Trans-Pacific Partnership by the government on trade enablement, that infringes intellectual property rights, specifically over Australian Pharmaceutical companies (Verrender, 2015). Dumping of garbage waste in Western Australia (Peacok, 2012)
Adams, C. & Zutshi, A., 2004. Corporate Social Responsibility: Why Business Should Act Responsibly and be Accountable. Australian Accounting Review, 14(3), pp. 31-39.
Deegan, C., 2014. Financial Accounting Theory. 4 ed. s.l.:McGraw-Hill Education.
Global Reporting Initiative, 2006. Sustainability Reporting Guidelines RG, The Netherlands: RG.
Mathews, M. & Lockhart, J., 2014. Externalities Revisited: The Use of An Environmental Equity Account, USA: Bellingham: Western Washington University.
Peacok, M., 2012. Miners accused of using oceans as garbage dump. [Online]
Available at: http://www.abc.net.au/worldtoday/content/2012/s3452052.htm
[Accessed 6 May 2015].
Verrender, I., 2015. The TPP has the potential for real harm. [Online]
Available at: http://www.abc.net.au/news/2015-03-16/verrender-the-tpp-has-the-potential-for-real-harm/6321538
[Accessed 6 May 2015].