Catlett once claimed that the accounting community has constructed and developed a motivated notion called accounting – it is designed to accomplish certain objectives; not the objective per se.
CSR is provision of information about various facets of an organization social performance, including information about its environment performance, health, support of local community etc. Unlike financial reporting, it is largely unregulated. It is done on a voluntary basis.
The core issue in CSR is the openness of the CSR definition. Because CSR is largely unregulated, managements can take a variety of interpretations. They can report anything they wish, from receiving minor environmental award to paying billions of dollars of environmental fines. They can even choose to report only favorable information and omit unfavorable information, and claim themselves as CSR.
There is a question of substance over form and reliability in CSR reporting. For example, McDonald’s CSR reports about its efficient water usage at its outlet but did not report that each of its quarter-ponder requires 600 gallons of water. It also reports about its practice of recycling paper but did not report about the bacteria-infested waters caused by its large-scale pork production in Southeast U.S. This is how people try to give forms to CSR. But, are they really, in substance, acting in CSR? CSR is usually self-laudatory in nature, which could be misleading to the readers. It is important to ensure transactions and events are reported substance over form i.e. the economic reality and not merely their legal form. But this is often difficult to achieve, as there is no one comprehensive guide on what constitute real CSR.
Another core issue is the limitations of traditional financial accounting that it ignores many of the externalities caused by organizations such as pollution, injurious products, retrenchment of workers etc. This is because financial accounting tends to focus on the information need of stakeholders with financial interests. Therefore access to information by users who are affected in a way that is not financial is effectively denied or restricted. Another example of limitation of financial accounting is, it applies the concept of materiality, which requires a great deal of personal judgment. A rule of thumb is if the amount is more than 10% of the appropriate base amount, the amount is considered material. This effectively means that if something cannot be quantified (as is the case for many social and environment externalities) it is generally not considered material and therefore does not warrant separate disclosure. Again, this is a question of reliability and substance over form. Those are the aspects of the tension for CSR at the practical level, for financial accounting is only good in assessing financial performance of an organization. It cannot provide all-encompassing measure of the organizational performance. It tends to disregard the social and environment impacts and performance of an entity due to the strict accounting definitions like materiality. Thus, our financial accounting at present is not equipped with sufficient tools to account for CSR. This is why CSR depends on reporting that is substance over form. It also depends on reliable reporting, which means faithful representation, substance over form, neutrality, prudence and completeness. These 2 themes are the basis of honest CSR reporting, to gauge the 2 core practical issues of CSR mentioned above.
Social Constructionists would propose that how a company reports its CSR and how it accounts for CSR has ‘real’ social and economic consequences to the company itself. This is because, in preparing annual reports, accountants have the power to make-real whatever it wants to report. As long as the company reports its current practice according to society’s expectation, it will succeed in meeting society’s expectation. As mentioned by Hines, it is a self-fulfilling prophecy. Managements will utilize the openness of CSR definition to its own advantage. So, anything which the company defines as CSR, will therefore become CSR. Accountants will manipulate the abovementioned limitation of financial accounting to cover up negative externalities. This reporting strategy gives the power to accountants to manipulate information and construct social reality which can influence the public’s perception of the entity.
But the Positive Accounting Theory believes that everything an individual does is ultimately for self-interest (based on Rational Actor Theory a.k.a. PAT). Watts and Zimmerman has established the political cost hypothesis which predicts that a company’s management will adopt a particular strategy to minimize the likelihood of negative wealth transfers, i.e. increased taxes, calls for additional wages, product boycotts etc, if it perceives that the company is under political scrutiny which can come from government, consumers, employees groups, conservation groups etc. Therefore, a strategy like voluntary disclosure of information such as CSR will be adopted. This strategy is driven by desire to reduce political costs, and therefore maximizes shareholders’ wealth. It is very unlikely that an honest CSR reporting will be adopted as there is no incentive for companies to be responsible to the society and environment. Only individuals have responsibility.
I agree that self-interest is the driving force for almost all business entities. It is the desire to stay in business that they are willing to follow the trends such as CSR. I also agree that all strategies, including choice of accounting method, are indeed adopted to maximize shareholder’s wealth, no matter how noble it sounds. That is the reality and the fundamental truth that PAT asserts. However, I also believe that human beings want improvements, which PAT does not promote. PAT merely describes what companies would do, but not what they should do. Whereas, Social Constructionism is driven by desire to achieve certain goal, and the goal is dynamic i.e. set by the society.
Here is where accounting comes into play. It is the tool used to achieve certain goals because accountants have the power to construct reality, as asserted by Social Constructionists. When accountants think of something in a particular way, and treat it in that way, they are actually creating reality. For example, consider an entity which, as a result of its operations, has contaminated the land on which it operates. There is no legal requirement to clean up the land (due to no such law in the country). So, should it recognize a liability? According to IAS 37, for a provision to be considered a liability, there must be present obligation, i.e. either legal obligation, moral obligation, or constructive obligation. If the accountant thinks there is no present obligation in any form at all, no liability will be recognized. The accountant may not disclose it separately too if he thinks that it is not material, after all, materiality is all about judgment. Therefore, as far as the public is concerned, the company has not caused environmental damage at all. This is how powerful an accountant is – able to construct social reality.
Hence, accounting for CSR has been created and developed to accomplish various desired objectives and; it is not based on fundamental laws or absolute precepts.
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accounting, ethic
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