Financial Accounting Theory essay

Last Updated: 22 Jul 2020
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Traditionally companies have been only contend with reporting on what is legally required of them i. e financial statements. Environmental and social reports, which form the core of corporate social reporting, featured less prominently in the company’s annual report. This trend however, changed in the 1990s where many companies started to incorporate corporate social reports in their annual reports. Environmental and social reports started to become a common feature in the company reports.

One of the main reasons why companies never bothered to report on their socioeconomic engagements is the fact that they made company reports to the shareholders and not to the stakeholders. Shareholders are the owners of the company while stakeholders are the parties that are affected by the actions of the company. Corporate social responsibility is where companies go beyond their statutory mandate and take into consideration the welfare of the other stakeholders of the company. These stakeholders include employees, customers, shareholders, suppliers and even government.

Under CSR, companies are basically concerned with the well being of the community as well as its employees. Environment conservation and sustainability is also part of the CSR (Josephine 2005). The one part of the CSR that has gained prominence is the environmental reporting. Environmental conservation and preservation is the talk of the world today. Terms like 'going green', 'carbon footprints' etc are common. Concerns about environment degradation, green house gas emissions and the use of renewable energy pose a great challenge to many a company.

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Many companies have committed themselves to promoting sustainable development. These companies have signed sustainable development charters. Environmental reporting has been the one feature of CSR that companies were concerned with, although this seems to have expanded. Triple Bottom Line concept of 'people', 'planet' and 'profit' is gaining popularity within the business circles. Triple Bottom line ensures that companies report the social and environmental performance apart from the statutory reporting environments.

TBL is largely concerned with the measurement of the development of the company and the society in general i. e. the economic, social and environmental success. In the Triple Bottom Line approach, companies extend their reporting obligation beyond the traditional shareholder. The interest extends beyond the shareholders to cover all the stakeholders affected by the actions of the company. Triple Bottom line explained As seen earlier ,TBL encompass people, planet and profits as a means of achieving sustainable development.

The people aspect of TBL includes the consideration of the interest of the employees, customers, suppliers and the community as a whole. It basically involves promoting fair trade practices through sufficient salaries to its workers, avoiding the use of child labor, community participation through contributions to schools, health care, water etc. The company may also take a portion of its profits back to support the suppliers e. g. the company may promote the use of environmentally friendly inputs and ensure that they get fair price for their produce (Norman, W & Mac Donald, C April 2004).

The planet aspect of TBL is essentially environmental preservation and conservation through the engagement of activities that do not cause damage to the environment. It is all about the management of the waste emanating from the company and trying as much as possible to reduce the toxicity of these wastes before being released to the environment. The use of clean or renewable energy is also part of the TBL. Examples of clean energy are solar and wind energy. Companies embracing the TBL concept basically entails ethical investments i.

e. they do not engage in weapons production or products which are toxic. These companies usually avoid environmentally degrading practices i. e. they aim to reduce their ecological footprints or the widely known carbon footprints. Remember the controversy created by UK supermarkets when they said that they were going to indicate the number of miles that every product in their store traveled before reaching their stores. Some critics argued it is a way of trying to lock out horticultural exports from Africa.

The profit aspect of the TBL means the economic enhancement derived by the community in which the company operates in. The company should be able to benefit the area in which it does business in. The profit aspect of the TBL is not merely the profits earned by the company rather it is the economic benefit that the society derives from the company’s operations in their society (Norman, W & Mac Donald, C April 2004). Corporate Accountability The corporate accountability has moved away from the idea of being accountable to only the shareholder to stakeholders also.

This is why as part of the corporate accountability, companies are expected to ensure that reports include ethical and social accounting as well as integrate the social environmental and economic information into their management accounts as well as in the decision making process (Sustainability Ltd. 2008) Before many companies adopted corporate social reporting, the perception that the companies were sending to the stakeholders was that they had to have faith that the companies were not engaged in bad practices. This lead to the aspect of the stakeholders trusting the company and assuming that the companies actions were well intended.

During this era, companies rarely included corporate social reports in their statements (Sustainability Ltd. 2008). This, however, has changed to the stakeholders demanding that they be told and shown what corporate social actions that the company is engaged in. This is the reason why nearly every company has a section on corporate social responsibility in their annual reports and/or websites (Brenkert 2004) Corporate social reporting Social and Ethical accounting, auditing and reporting (SEAAR) SEAAR is a performance measurement tool that touches on the two important facets of social reporting i. e.

social impact and ethical behavior. The corporate reporting is included in the company’s mission statement and implemented through stakeholders’ engagement. SEAAR basically starts from the accounting system i. e. collection which is then put in a report recording and analysis of the data in order to evaluate the company’s performance. The next step involves the auditing of the financial reports from step one in order to determine their fullness and integrity. The last step of the SEAAR is the publishing of the audited report from step 3. The published reports are then made available to all stakeholders (ISEA-SA-2000)

The above process is basically a cycle i. e. from financial accounting auditing and reporting. SEAAR ensures that the organization is accountable and transparent to its stakeholders thus contributing to the sustainable development. According to Institute for Social and Ethical Accountability – South Africa , SEAAR basically touches on basic human rights. SEAAR includes social impacts which touches on the company's activities which are aimed at achieving social economic development and ethical behavior of the company, which ensures that, they treat their employees in a dignified and equal manner.

Environmental reporting enables the company to judge its performance on its efforts to conserve the environment. The right to live in a pollution free environment is one of the human rights (ISEA-SA-2000) The quantification of corporate social responsibility is important to every company in that, the company is able to evaluate whether the CSR programs that it is currently pursuing or that is engaged itself in the past were successful in promoting the overall goal of CSR which is to enhance sustainable development. It is therefore paramount that the company uses the internationally guidelines developed by accepted metrics.

Some of these metrics include the global reporting initiative (GRI) that measures the impact of CSR programs on the society or community in which the company operates. This is the equivalent of 'people' aspect in Triple Bottom Line concept (ISEA-SA-2000) The company should also be able to evaluate the economic well being of the local community. If the company is making profits, then, the community should be seen to be making economic profit. Otherwise, the performance of the CSR will have failed if the community stagnates or their economic well being declines. CSR and sustainable development

According to SD Gateway, sustainable development means the use of the currently existing natural resources in a way that it does not compromise the well being of future generations. In order to ensure sustainable development the community should find innovations that will ensure the achievement of quality living that will ensure that the natural resources will never be exhausted. (SD Gateway 2008) The discussion earlier on the corporate social responsibility and corporate social reporting clearly shows that sustainable development is enhanced through corporate social reporting.

Of particular importance are the environmental reporting and social economic reporting. The companies should be able to ensure that they conserve the environment through the adoption of ‘clean’ philosophy. The products that the company products that the company produces should not cause any environmental degradation some with the wastes. The companies should ensure that the waste they emit does not include any toxic waste or if it does, minimal to acceptable levels that cannot harm the environment.

Environmental protection and sustainability is part and parcel of the sustainable development. The socio economic aspect of CSR involves the economic and social empowerment of the stakeholders and the community. As noted earlier, economic and social empowerment touch on the basic human rights. The company should ensure that they adopt fair remuneration and even through contributions to the health care, education and water projects that can ensure better quality of life for the community.

It is therefore evident that environmental conservation and socio economic empowerment of the community are a pre-requisite to the achievement of sustainable development. Environmental conservation ensures that natural resources of land productive in the short and long term periods. Productivity of the environment enables the community to meet their current needs without straining the environment (Das 2003) Economic and social empowerment of the community provides them with alternative option of catering to their needs without largely depending on the environment.

Impact of CSR/CSI on financial Reporting and Accounting profession The introduction of corporate reporting into the mainstream financial accounting reporting has already revolutionized the way companies present their annual company reports. Corporate social reporting coupled with financial reporting ensures that companies are accountable to all the stakeholders of a company. Corporate social reports enables the company to elaborate and measure the success of the various socio economic activities that the company is engaged in. Transparency and accountability is enhanced this way.

Corporate social reporting encompasses the inclusion of environmental socio economic reports etc. The way it was before was that companies had no obligations to report on anything other than their financial reports but with the introduction of CSR reporting, companies are expected to include all the activities that affect the various stakeholders of the company. Corporate social reporting enables the company to engage with the various stakeholders of the company. CSR report is a way of taking into consideration the views, aspirations and needs of the different stakeholders.

CSR thus ensures that the organizational goals are achieved keeping in minds the needs of the stakeholders. Of course, CSR has some negatives impacts on the financial reporting. The benefits associated with the corporate social responsibility may not actually be worth the costs of reporting them. Such that the company will be engaging in a purely public relations exercise that has no meaningful gain in the society. CSR also may lead to information overload to the stakeholders such that it may not be relevant in the long run. A lot of information that requires expert analysis may not be helpful to the stakeholders.

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Financial Accounting Theory essay. (2018, Jul 31). Retrieved from

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