Exploring areas of social and environment accounting

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The literature Review aims at explaining more about the topic by reviewing the past theories, sayings, approaches and methodologies of SEA in all its aspects.

Definition of Social and Environmental Accounting:

Social and Environmental Accounting (SEA) has been defined by Gray and al. (1987, p.9):

"...the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large. As such it involves extending the accountability of organizations (particularly companies), beyond the traditional role of providing a financial account to the owners of capital. In particular, shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities than simply to take money for their shareholders."

Social and Environmental Accounting is often used as an "umbrella term" to describe the impact of business activities on the society (both local and international), employees and consumers... It offers a mechanism for reporting information that enables management to monitor key social and environ.mental opportunities and threats facing organization.

Social Accounting

Social Accounting can also be termed as Corporate Social Reporting, Non- Financial reporting or sustainability accounting. It is a way by which a business seeks to place a value on the impact on society of its operations.

As quoted from Adrian Henrique :

"The social impacts of organization underlie some real social issues - such as obesity, ill- health and community regeneration. The profound effects organizations have on society are becoming increasingly obvious. From the point of view of stakeholders, social accounting is therefore a critical part of delivering accountability and transparency. From organization's point of view, social accounting can help to identify and manage social risk"

In the corporate sector, Social Accounting is used to collect and report information in CSR or sustainability reports.

Environmental Accounting

Environmental Accounting as green accounting or resource accounting is a crucial tool for understanding the role played by natural environment in economy.

Edu et Al (2009) stated that;

"…the use of environmental information to disclose the impact of corporate activities on the natural environment to stakeholders of the corporate entity or organization"

Environment accounts provide information which highlights both the contribution of natural resources to economic well-being and the costs imposed by pollution or resource degradation. Traditionally accounting suffers from limitation in dealing with environmental issues (Fortes, 2001), thus the principal reason for the non- existence of accounting standard dedicated to environmental accounting and reporting. Therefore, environmental reporting has been included in the field of CSR.

Areas of Social and Environmental Accounting (SEA)

SEA has been broadly defined as the "preparation and publication of an account about an organization's social, environmental, employee, community, customer and other stakeholder interactions and activities and, where, possible, the consequences of those interactions and activities" (Gray, 2000).

There is a global move from the single to the triple bottom line, which embraces the economic, environmental and social aspects of a company's activities (Code of Corporate Governance for Mauritius, 2004, p13). Therefore, Social and Environmental Accounting has become popular in contemporary economics. Due to the big interest in this area, there has been inflation on similar terms over the time- especially on corporate level. Therefore, SEA is also known as Corporate Social Responsibility (CSR), Sustainability Reporting and Triple Bottom Line (TBL or 3BL).

Corporate Social Responsibility

CSR in the beginning known as Social Responsibility (SR), was started in the 1950's and was initially defined by Bowen as "… the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society". Clarence C. Walton highlighted in 1967, that the new concept of Social Responsibility recognizes the intimacy of the relationships between the corporation and society and realizes that such relationships must be kept in mind by top managers as the corporation and the related groups pursue their respective goals. With time, the meaning of CSR has sharpened. According to the World Business Council for Sustainability Development, CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as a local community and society at large.

Governments across the world take the initiative to encourage businesses to adopt the concept of CSR by implementing new laws which businesses should adhere to. For example; in Mauritian Government has established a policy with the main objective of mandating registered companies to pay 2% of their book profits towards programmes that contribute to the social and environmental development of the country.

In 2008, Kemp Chatteris Deloitte (KCD) was appointed by the Government of Mauritius, in partnership with the Mauritius Council of Social Service (MACOSS) and the United Nations Development Programmes, to undertake a review of Corporate Social Responsibility in Mauritius Republic. This project mainly involves analyzing the main concepts of CSR in major industries and Small and Medium Enterprises (SMEs). The sample totaled 100 businesses in different sectors, namely; 59 large organizations and 4 banks in Mauritius and 37 SMEs in Mauritius and Rodrigues. And the methodology used was face-to face interview.

The findings revealed that most organizations initially engaged in CSR activities mainly to enhance their image vis-à-vis;

Internal community - 60.3 %

External community - 54 %

Therefore this was mainly for image building. Whereas for multinationals, they are abide by their global policies to adopt the CSR concept.

There were also other reasons found, including corporate reputation and image, employee retention and loyalty, preservation of jobs, transparency, higher productivity…

And finally it was found that 37 % of the respondents carry out CSR activities in a formal way and 63 % in an informal way. The main CSR involvements in Mauritius are charity work (donation) and outsource its CSR responsibilities.

Sustainability Reporting and Triple Bottom Line

Gradually, new terms have surfaced and the phrase Social and Environmental Accounting appears to have been replaced by Sustainability Reporting, due to expanding phrase of research opportunities. Sustainability is based more on the long term compared to CSR. As defined by The Australian Government, Corporate Sustainability as encompassing strategies and practices that aim to meet the needs of the stakeholders today, while seeking to protect, support, and enhance the human and natural resources that will be needed in the future.

In 1994, Elkington found that along with economical aspect of the businesses, social and environmental reporting is also important. He, therefore coined a broader sustainability reporting framework centered on three dimensions of performance - economic, social and environment, known as the Triple Bottom Line. TBL is said to be relatively advanced in countries such as South Africa and the United Kingdom and is also becoming a factor in Mauritius (Code of Corporate Governance for Mauritius, 2004, p13).

A survey showing the international trend in Social and Environmental Reporting conducted by the KPMG Global Sustainability Services every 3 years, demonstrates the growth of the publications of reports containing environmental performance. The most recent one date 2008, the sample comprises of the global fortune 250, and the 100 largest companies in 22 countries.

The survey found that the rate of reporting among the largest 100 companies is 45 % average with the highest numbers in Japan (88%) and the UK (84%). Moreover, it was highlighted that the integration of corporate responsibility information in annual reports is on rise in France, Norway, Switzerland, Brazil and South Africa.

According to KPMG, despite the rise in corporate responsibility references in annual reports is encouraging, most of them are still issued without any environmental and social information. But KPMG insight predicts a greater demand for environmental and social data by traditional financial report readers, such as investors.

To conclude, all the terms (i.e. CSR, Sustainability reporting or TBL) mentioned above go in the same direction and are interdependent, i.e. The principal aim is to take into account the firm's environment and its stakeholders which means being responsible to them for the corporate outputs and impacts and meeting not only shareholder's interests. But why are those companies engaged in the practice of Social and Environmental Accounting?

Theoretical Framework

There are many theories have surfaced over time, explaining why companies should engage in SEA. This study concentrates on some of the most important theories, namely; Legitimacy theory, Stakeholder Theory and Agenda Setting theory.

Legitimacy theory is the most cited and popular theory within SEA area. Legitimacy is defined as:

a generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions ( Suchman,1995,p574)

This theory is describe as a positive theory as it seeks to describe or explain corporate behavior (in term of efforts made to appear legitimate) rather than prescribing how organization should behave. Deegan (2000) declares that organizations ceaselessly seek to ensure that they work within the limits and norms of their respective societies, that is they try to ensure that their activities understood by outside parties as 'legitimate'. It implies that an organization's image and success may be lurked if society perceives that the organization has breached its social contract. Where the society is not too pleased with the way that the organization operates, or legitimate manner, then society will effectively revoke the organization's "contract" to continue its operations.

As suggested by Caroll ( 1999) corporate social disclosures relates to a wider audience, which is represented by stakeholders. The principal focus of the stakeholder theory is the stakeholders. Stakeholders are individuals or groups which have an effect on and are affected by an organization's activities. Stakeholder theory (Gray, Kouhy & Lavers 1995b, p. 53) asserts that "the corporation's continued existence requires the support of the stakeholders and their approval must be sought and the activities of the corporation adjusted to gain that approval. The more powerful the stakeholders, the more the company must adapt. Social disclosure is thus seen as part of the dialogue between the company and its stakeholders".

Therefore, the entity should be used as a vehicle for coordinating stakeholders' interests, instead of maximizing shareholders profit. Managers have an incentive to disclose information about their various programs and initiatives to particular stakeholder groups to indicate that they are conforming to the stakeholders' expectations.

Managers have also understood that one of the best ways to vehicle social and environmental information is through the media, which can be explained by the Agenda Setting theory. Agenda Setting theory is the theory that explains the impact of the media on its audience. It is said that Agenda setting is all about creating a public awareness and is concerned with striking issues by the new media.

Bernard Cohen (1963) stated:

"The press may not be successful much of time in telling people what to think, but is stunningly successful in telling its readers what to think about."

Nowadays, companies use a lot of the media to get free publicity, for example: an apparition of their charitable donation on television. They attempted to assess the relationship between what stakeholders in one community said were important issues and the actual content of the media messages used during the reporting of their activities.

Other Drivers for Social and Environmental Accounting

Creating or Reinforcement of Organization's image

The reputation of a firm though being intangible is the most visible part of an organization. Sending an image where environmental, social and economic issues are taken into account, may bring stakeholders to good perceptions. Indeed, it can be considered as a promotional campaign to enhance reputation and public relations (KPMG, 2005). And it might also position the company as 'employee of choice', therefore motivating and retaining staff and attract the talented ones.

Attracting long term capital and favorable financing conditions

Investors include sustainability considerations within their decision processes. Capital market has known an increase in the "ethical investment"; for example Dow Jones Sustainability Group Index. And also through the publication of those reports, a mechanism is provided to ensure that the proper communication is established with this stakeholder group. Investors tend to take into account that their investments are profitable but also aspects as environment and social issues weigh in the balance.

Desire to comply with Legislation

According to Deegan (2000) this would not be a major motivation in a great deal of countries given the lack of requirements in relation to social and environmental disclosures and associated verifications. But however, 10 years after ten years, things have changes and many Governments around the world issue laws concerning SEA which the companies are adhere to as they understand that their economies won't work without a healthy environment and society.

Maintain a good relationship with the stakeholders

Being socially and environmentally responsible, getting involved in CSR or sustainability reporting demonstrate that there is a certain contract between a company and its stakeholders and ensures the continuity of the company's activities. Mattews (1993, p26 cited in Deegan, 2002.p. 202) asserts that the social contract would exist between corporations (usually limited companies) and individual members of society. Society (as a collection of individuals) defines the boundaries of corporations in terms of legal standing and attributes and the right to possess and use resources and to hire workers. Organizations draw on community resources and output both goods and services and waste products to the general environment. The organization has no inherent rights to these benefits, and in order to allow their existence, society would expect the benefits to exceed the costs to society.

Creating financial Value

This often involves collecting, collating and analyzing data on resources and materials used by the company, and the examination of business processes. This process can help an organization to better to better highlight their opportunities for cost savings and revenue generation through more efficient use of resources and materials. Therefore, leading to slack resources (excess resources), Cyert & March (1963) stipulated that slack Resources play a crucial role in allowing organizations to innovate by permitting them to experiment with new strategies and innovative project that might not be approved in a more resource-constrained environment. Research of Bowman (1996) and Ullman (1985) affirm that corporate performance have a positive relationship under the slack theory.

A belief in the transparency and accountability

Transparency is one of the major issues held in Mauritian companies, especially in listed ones due to corporate scandals held in the recent decade. A Code of Corporate Governance was settled in Mauritius, which is bounded on listed companies and act as guidelines to non-listed ones. The code sets out points such as integrated sustainability reporting.

Accountability simply means the action of reporting the activities for which one is held responsible. There is a growth in the demand for accountability with growing pressure being put on businesses to be more transparent in their actions to society and the environment (Ernest & Young, 2002).

Therefore, SEA demonstrates a company's willingness to properly manage its environmental, social and economic effects, therefore, establishing a good interaction with the stakeholders and demonstrating transparency.

Criticism for Social and Environmental Accounting

Integrating the SEA concept within an organization requires a lot of procedures and takes a lot of time and money as argued by Ness and Mirza (1991). Moreover, KPMG (2005) argue that the measurement of social and environmental performance is rather a complex task. And it was noticed that it is difficult to measure social or environmental cost or benefits. Working towards being environmentally and socially responsible, should start from the bottom of the organization, but is it really practical? Can this culture be inculcated to everyone or some of them might resist to this. The implementation of SEA doesn't represent a guaranty for obtaining financial performance or environment/social-related performances.

Mandatory v/s Voluntary Reporting

Mandatory Reporting

Due to the inadequacy of reporting practices, disclosure of objective and negative information on environmental performance is limited (Deegan & Rankin 1996, Frost 2001), and an 'expectations gap' between the kind of information companies provide and what users of company reports desire has emerged (Deegan & Rankin 1999), therefore for the urge of imposing certain regulations. Mandatory Reporting are those information appearing in the reports in accordance with certain regulations imposed upon them by government or another authorized and recognized body. This enables companies to disclose a certain degree of information and a basic standard for disclosing that information, therefore comparison among different companies' reports would be possible.

As stated by Deegan, Rankin and Voght (2000, p.127):

"Arguably, stakeholders have a 'right to know' about the social and environmental implications of an organization's operations at all times-not just when management has been 'shocked' into action by 'legitimacy threatening' events. Regulation might be necessary to ensure that this 'right to know' is satisfied"

Voluntary Reporting

While, the Voluntary Reporting approach makes sure that corporations will meet the requests of their stakeholders without any legislative instructions ( Maltby, 1997) . Deegan and Rankin (1997) found that voluntary environmental disclosures are considered in the decision-making process of several user groups of annual reports. Researchers in the voluntary disclosure field have argued that companies do not provide such disclosures to satisfy the user's right to know but as a means to which the organization will be deemed legitimate by society and subsequently reap the rewards of such legitimacy (Guthrie and Parker, 1989; Deegan and Rankin, 1996; Wilmshurst and Frost, 2000; O'Donovan, 2002).

To conclude, it was found that companies are more willing to disclose larger proportions of positive information within a voluntary reporting framework than within a mandatory reporting framework. companies continue to use greater levels of self-puffery within a voluntary reporting environment than within a mandatory reporting environment, and suggests that stakeholders may be more likely to receive information that is less favorable to the corporation (and potentially more decision-useful to stakeholders) within a legislated disclosure environment.

Components of Social and Environmental Accounting.

The importance of stakeholders' engagement.

The value of a company is influenced by the quality of its relationship with a range of external and internal stakeholders. Social and Environmental accounting and reporting is a means of communication between a company and its stakeholders.

Stakeholders include the internal and external ones, namely; shareholders and investors, employees, suppliers, society, banks, regulators and government. A stakeholder is defined as those who directly or indirectly influence the activities of a firm.

Stakeholders are increasingly interested in understanding the approach taken to the sustainability impacts of firm's activities. The growth in ethical investment has persuaded corporations to give attention to corporate responsibility (Lydenberg and Grace, 2008). Moreover, competitive advantage can be achieved through environmental accountability (Bansal and Roth, 2000). In section 7 of the Code of corporate governance (2004) which deals with Integrated Sustainability Reporting, it is stated that:

"Every company should regularly report to its stakeholders on its policies and practices as regards to ethics, environment, health and safety and social issues."

Therefore, the ability of a company to communicate its activities and performance effectively with its key stakeholders can be critical to its long term success, viability and growth.

Where are the Social and Environmental Information Disclosed?

Annual Reports

Corporate Governance Section

Notes to the Account

Financial Statements

Director's report

Stand Alone Reports

Environmental report

Social report

Sustainability report

Health and Safety report

Internet web pages

Company Brochures