Building a transformative accounting

If 15 years ago the challenge was measuring and gathering data beyond the sole financial dimension, today technological improvements, software packages, and information and management control systems have largely filled this gap. Non-financial measures made their first entrance in the accounting systems through the popular Balanced Scorecard, firstly introduced by Kaplan and Norton (1996). Accounting systems do not underrepresent non-financial dimensions anymore (Otley, 2003).

Rather, the currently existing gap regards creating a language that expresses ESG performance in a way familiar to companies (Hall et al., 2015) and reflects an extended accountability towards a wider array of stakeholder. In one expression, it deals with building a transformative accounting in opposition to a conservative, business-as-usual one.

This gap originates from a widespread misinterpretation of the nature of accounting and the ways it should represent stakeholders’ voices. Indeed, the dominant perspective on accounting is an operational one, as accounts are not inherently useful, they are “made useful in practice” (Andon, Baxter, & Chua, 2015). Accounting numbers do not represent real physical dimensions; rather they sum up qualitative situations, stemming from a process of negotiation and conventional decisions (Gillies, 2004).

Operational accounting aggregates heterogeneous information whom usefulness derives from “technical mastery and accuracy” (Hopwood, 1990b, p. 79), allowing contingent understanding and action (Roberts, 2009). Its completeness, neutrality, and freedom from error –the 3 qualities that according to the Financial Accounting Standards Board (FASB) ensure a “faithful representation” (FASB, 2010, p. 17)- are embedded in communities of practice (Gond, Grubnic, Herzig, & Moon, 2012).

What is lacking in this perspective is the understanding of the normative nature of accounting, beside the operational one. As a consequence, it fails to address properly all the four basic accounting processes, i.e. counting, recording, summarizing, and reporting (Goldberg, 1965). Indeed, it mistakes accounting for stakeholders and reporting to stakeholders, focusing on the latter. Reporting to stakeholders is the process that eventually provides a company with legitimacy, trust, and image – the low-hanging fruits of sustainability reporting. The imbalance in favour of stakeholders’ reporting is what causes accounting narcissism – “knowing the cost of everything and the value of nothing” (Andon et al., 2015). Inconsistency in reporting, proliferation of non-material metrics, glossy and prolix reports with limited informational value derive from this misuse and feed greenwashing.

Not by chance, stakeholder theory posits that firms are responsible towards stakeholders on both normative and instrumental grounds (Donaldson & Preston, 1995; R. K. Mitchell, Agle, & Wood, 2013; Post, Preston, & Sachs, 2002). Accordingly, stakeholders’ representation in accounting has a normative value in the sense that it changes the power relationships between the company and its surrounding environment (Harrison & van der Laan Smith, 2015).

The normative foundations of stakeholder accounting rely on a general principle of fairness (Phillips, 2003), according to which accountability towards stakeholders and their right to access to created value depends on the extent of their contributions of resources to the firm. In this sense, stakeholders have a tacit contract with the firm, implicitly investing in non-monetary terms and expecting a return on such investment. They bring a residual claim to the value created thanks to their contribution. Clearly, they bear a form of risk in relation to their investment.Hence, according to the principle of participation to value creation deriving from voluntary risk-taking, accountability towards stakeholder is not different from accountability towards provider of financial capital (Harrison & van der Laan Smith, 2015; Mitchell et al., 2015).

Harrison and Van der Laan Smith (2015, p. 941) sum up effectively this rationale, “our normative argument, from an external reporting perspective, is that non-financial stakeholder groups that contribute significant resources to the corporation are as worthy of receiving reliable information (on a regular basis) that will help them to mitigate their risks (residual and otherwise) as are those stakeholder groups that supply financial capital to the firm.”

In this perspective, sustainability reporting becomes an institutionalised practice contributing in building the necessary knowledge for voluntary risk-taking for all the actors involved in the value creation process. Hence, as Mitchell et al. (2015) put it, the problem of stakeholder inclusion/exclusion in accounting is one of knowing vs not knowing.

Author: Donato Calace (LUM University)