Ambiguous But Tethered: An Accounting Basis for

Sustainability Reporting

George Joseph

University of Massachusetts Lowell

Accounting and Sustainability

• This paper analyses developments sustainability from the perspective of the interaction of the social and the organizational, and the resultant role of role of accounting.

• The question: despite the ambiguity of the area, does accounting serve to provide the “tether” that supports sustainability reporting.

Accounting and Sustainability• The following quote from Hopwood (1983) provides

insights that form a basis for the analysis: The social is not and cannot be isolated from the

organizational. Indeed, in part at least, the social is manifest in the organizational and the organizational, in turn, constitutes a significant part of the social. It might even be useful to see the social as passing through the organizational, with both wider and more localized concerns calling upon practices such as accounting to create an ambiguous but nevertheless tethered conception of reality (p. 302).

Accounting and Sustainability

• Using the GRI guidelines for reporting sustainability, the paper examines three key accounting “tethers”, namely:– accounting semantics and the conceptual

foundation– measurement – corporate governance and external assurance

Theoretical Foundations – Social, Organizational and reporting systems

• The forces shaping the organization from the social framework can be viewed for example in Gidden’s categories: power (domination), signification (meaning) and the moral underpinnings (legitimation).

• Social systems developed with technology and growth of capital, influencing the growth of organizational forms that separated management and ownership (Power) with the goals of profit being the legitimation for the existence of the firm

• Reporting systems developed the semantics such as revenues and profits (signification) to to bridge the “information asymmetry” gap between the absentee owner (shareholders) and management

Theoretical Foundations – the emergence of Sustainability Reporting

• With globalization, dispersion of shareholdings, and the driving urge to compete for low costs increases the “race to the bottom”

• Stakeholder based societal factors now come to the fore, as increased global trade have also included the need by global corporations to assure that contractors can meet labor, human rights and environmental standards.

• The NGOs have grown numerically and in capability to influence organizations politically, dispersing the power structures

Theoretical Foundations

• Thus, sustainability has grown to contain a “race to the bottom” that can adversely impact the stakeholders, including communities, which has entered organizational thinking – the recognition of the risks to global brands from problems in the supply

chain, – the increasing sophistication of activists pressuring corporations about

environmental, human rights or labor concerns, and – the growing demands for transparency in social performance indicators.

• These signaled the new moral underpinnings or legitimation criteria.• The convergence of the factors resulted in the coining of phrases,

and the development of the new language (signification) of “sustainability”

Accounting and Sustainability

• Accounting Semantics and Concepts: – The influence in accounting semantics and concepts:

• Some terms acquire new meanings as the interaction between the social and the organizational is visible in the trade-offs between stakeholders; hence, costs (environmental, employee), profits and usefulness can take on new meaning when viewed from different perspectives

• Unique terms are now coined or adapted to depict the new realities; hence, the three perspectives of economic, social and environment are seen as “triple bottom lines” (Elkington 1997).

• Old concepts continue to be in use to drive the goals of the new areas: e.g., qualitative concepts of reliability, relevance and timeliness

Accounting and Sustainability• Measurement• The goals of measurement has expanded to three areas (TBL)• No single universally appropriate unit of measure that correspond to

the stakeholders and their needs. • Measures are challenged by trade-offs between services/

stakeholders:– Trade-offs in environmental measures, i.e., carbon poisoning or

arsenic poisoning (Robins 2006), or employee well-being, i.e., maternity leave or housing (Norman and MacDonald 2004).

– inter-generational issues, i.e., achieving social, economic and health and safety objectives should not occur at the expense of future generations

– Global and regional issues are driven by staleholder priorities and trade-offs (social work in one region as opposed to environmental in another)

Accounting and Sustainability

• Corporate Governance • Could stakeholder “engagement” or dialogue be nothing more

than “Corporate spin” when the ultimate goal is to pursue the business goals or “the business case” for sustainability (Roberts 2003)

• Transparency and empowerment of stakeholders necessary to “hold the accounters to account” (e.g., Cooper and Owen 2007, p.653)

• There are wide variations on outcomes because of the voluntary nature of the governance mechanisms. e.g., three specific initiatives provide guidance on assurance statements, AA1000 Assurance Standard (AA1000AS), the GRI Initiative, and ISAE 3000 (published by the International Auditing and Assurance Standards Board).

Sustainability Reporting• GRI is used to illustrate the concepts using guidelines

and reports available online (GRI website and the CorporateRegister.com)

• GRI is the foremost and most organized institution facilitating sustainability reporting

• Using the GRI reports and narrowing to Metals industry:– Total GRI reports (3176) using G3 reporting format (1360)– This constituted about 17% of all sustainability reports– Metal industry, only 12% of all sustainability reports use GRI

reports

GRI Reports: Accounting Semantics and Concepts • Using GRI guidelines and comparing the GRI

principles with the Financial Reporting Concepts: – “accountability” to stakeholders as opposed to

“usefulness” to investors, creditors and other users in making rational investment, credit and similar decisions.

– While stakeholders are defined more specifically in the financial concepts, the GRI includes the “Stakeholder inclusiveness principle” which requires firms to identify and engage stakeholders to provide useful inputs for reporting.

– The sustainability context requires a perspective on the impact of the firm in their specific environment i.e., “management approach”.

GRI Reports: Accounting Semantics and Concepts

• However, GRI reporting embraces the character of accounting principles as evidenced in the overlaps, particularly the qualitative ones. For example, in line with SFAC No. 2, it includes:– qualitative characteristics of accounting information that

includes the overarching principles of understandability, materiality, and cost/benefit, and related principles of relevance (predictive and feedback value and timeliness) and reliability (verifiability, neutrality and representational faithfulness).

– Materiality and completeness (overlaps with representational faithfulness) in the guidance principles for what to report, and the qualitative principles of accuracy, timeliness, reliability, and clarity (or understandability).

GRI Reports: Measurement

• Further, the GRI also specifically provides “Sector guidance supplements” for different industries that address unique issues related to that industry.

• The G3 Standard Disclosures outline the performance indicators in each category, while the sector supplements provide the measures, along with indicators that are specific to the industry.

• Performance indicators are categorized into “core” and “additional.” – core indicators to apply to all firms; additional indicators

on emerging topics material for some firms and not for others.

• Firms are categorized based on number of measures used

GRI Reports: Corporate Governance • GRI emphasizes the importance of external assurance to

increase credibility of the sustainability endeavors, but does not: – provide specific recommendations for qualifications of assurance

providers or the reports (only some general recommendations; that they be professional and competent, use professional standards of assurance, including systematic evidence based and documented approaches and not constrained by relationship with the organization that impacts impartiality)

– Provide specific recommendations on reporting contetnt ( only general recommendations on what the report should contain, such as the extent to which the report preparer has applied the GRI Reporting Framework)

– Wide variation: Of 23 firms who apply G3, no single reporting guidelines used; highest number is based on ISAE 3000 (4 firms)

• Firm reports are categorized based on whether external assurance was completed.

Discussion• The direction of sustainability, despite ambiguity:• GRI has addressed issues in ways that are

unique to sustainability, yet draws from accounting concepts, for example:

• by recognizing that a “one size fits all” is less applicable to sustainability

• The onus is on the preparer to substantiate their claims on sustainability based on overall guiding principles (a principles based approach) that first identifies the unique strategy and management approach before applying principles

• Categorizing levels of reporting (A, B plus etc) based on number/type of measures used and audited assurance reports

Limitations• Voluntary adoption has limited application:

– reviewing one sector, the Mining and Metals Sector Supplement, The number of firms adapting the 2002 or G3 guidelines was only a small component of the total firms (about 16 % of the firms and 12% of the reports) reporting on sustainability constituting the larger firms in the industry

– Many firms that adopt do not use most measures or apply assurance services

– No standardization of assurance providers or assurance report

Conclusions• Sustainability is most important internally; concepts of sustainability

are now becoming embedded in the institutional structures, creating a language, legitimacy and enforcement mechanisms that can yield positive sustainable development outcomes in the longer term

• Externally, a greater consciousness among organizations through interaction with wider groups of stakeholders and involvement of NGOs.

• Sustainability is in a transition stage; the momentum can weaken, if power transfers from stakeholders to management and sustainability is limited to “business case”

• The future of sustainability is dependent on wider participation and regulatory systems to create uniformity and comparability and increase effectiveness of corporate governance