You are on page 1of 16

Question: What is corporate social and environment accounting (SEA)?

Answer: Social and environmental accounting is a rather brad term. In this report, we have drawn definitions of social and environmental accounting from the theoretical background of the paper and other relevant literature.

General definition of social and environmental accounting

A study of the theoretical background of this paper reveals the fact that organizations have to operate within a social contract. This leads to the theory that organizations have to fulfill certain desirable roles towards the society to earn the right to operate in that society and consequently enjoy the rewards generated by those activities. Failure to operate within these constraints leads organizations to lose legitimacy that is the right to operate within that society. Therefore, socially desirable activities are can be regarded as activities adopted as an operating procedure of the management as well as a constraint set by the authorities. This idea is further strengthened by DiMaggio and Powell (1983) argument that an organizations response is not derived from the imperative to make organizations more efficient, but rather driven by the desire to make them conform to expectations in their organizational field. These constraints set by the external environment (authorities) lead to the undertaking of social and environmental welfare activities performed by organizations. This idea is further enforced by Milne and Pattens (2002) suggestion that the institutional theory of legitimating provides many possibilities for further work in social and environmental accounting because it has the capacity to explain a level of cohesiveness, conformity and mimetic behavior in the social and environmental narratives among organizations in the same field. This suggestion directs us to conclude that Institutional theory can be a useful method to explain why organizations adopt particular social and environmental disclosures practices.

The necessity to report and record these social and environmental activities of the organization give rise to social and environmental accounting. Social and environmental accounting is

somewhat of a diverse term which has evolved over the years. Linowes (1968, p.37) first coined the term socioeconomic accounting in order to highlight the sociological, political and economic aspects of an accounting that had a significantly broader scope than the conventional accounting standard. This term was also used by Mobley (1970) and Estes (1972). By the mid1970s the term had evolved into social accounting, which was defined by Estes (1976, p.3) as the measurement and reporting, internal or external, of information concerning the impact of an entity and its activities on society. Ramanathan (1976, p.519) adopted a similar perspective by defining social accounting as: The process of selecting firm level social performance variables, measures, and measurement procedures; systematically developing information useful for evaluating the firms social performance and communicating such information to concerned social groups, both within and outside the firm. Anderson et al. (1978, p.6) extended the concept to social responsibility accounting and defined it as a systematic assessment and reporting on those parts of a companys activities that have a social impact. According to Anderson et al. (1978, p.6) social responsibility accounting would describe the impact of corporate decisions on environment, the consumption of nonrenewable resources and other ecological factors, on the rights of individuals and groups; on the maintenance of public service; on public safety; on health and education; and on many other such social concerns.

During the 1980s, the public stature of environmentalism had increased significantly and this was reflected in some authors broadening of the term social accounting to social and environmental accounting. For example, Gray et al. (1987, p.ix) defined social and environmental accounting as: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 make money for their shareholders.

From the above discussions we may conclude that that social and environmental accounting does represent a broader, more expansive accounting when compared to the traditional accounting

paradigm. In this sense, the conventional accounting paradigm can be viewed as a subset of social and environmental accounting.

Question 2: Describe the present scenario of SEA practiced in Bangladesh


Answer: From the comprehensive research findings of the paper, the present state of Social and Environmental accounting is described in the following segments.

Social and Environmental Accounting in Bangladesh:

It was aptly noted in the paper that very few studies focused on the adoption of Social and Environmental Accounting practices within the institutional theory in developing countries like Bangladesh which are significantly different in nature then their developed-country-counterparts. However, the study by Mir and Rahman (2005) theorized that global institutional pressure namely by multilateral donors and lending agencies resulted in the adoption of IASs (international Accounting Standards). Therefore, we can conclude that institutional legitimization plays major role in significant changes in the accounting policies of Bangladesh. Another research by Islam and Deegan (2008) on the major Bangladeshi organization BGMEA (Bangladesh Garments Manufacturers and Exporters association) concluded that disclosures on responsibility initiatives or policies were implemented to satisfy external stakeholders including representatives of US and EU governments, International Labor Organization (ILO) officials, UNICEF officials, and multinational buying companies. In this report, it is to be specially noted that they placed an argument that social operating practices and disclosures in a developing country cannot be explained until we understand international expectations and pressures towards adoption of these practices.

The chief controlling association of all accounting endeavors in Bangladesh is ICAB (Institute of Chartered Accountants of Bangladesh). When the researchers queried about the extent to which social and environmental issues were considered within ICABs policies the President provided them with the approved evaluation criteria relating to corporate annual report awards in

Bangladesh. The corresponding scoring scheme represents the relative importance of the criteria on the various reporting issues. In addition the evaluation criteria, the President provided a letter containing information on how ICAB addressed social and environmental issues. However, A search that was undertaken of the archives on ICABs policies and procedures from ICABs library and website, the Dhaka Stock Exchange and the Securities and Exchange Commission (SEC) proved unsuccessful in obtaining data. This point to the fact that there is a lack of proper role and leadership by the authorities as far as SEAs are concerned. An analysis of this evaluation form revealed that ICAB appears to marginalize social and environmental practices, relative to other accounting practices, through its annual reporting awards. Therefore, we can conclude that the supreme controlling body of Bangladeshi accounting activities sets no regulations regarding SEAs and fails to play a proper leadership role regarding this issue.

The research findings showed a positive aspect regarding SEAs. It was found out that respondents saw themselves as agents for social change. They supported SEAs for three main reasons, which were to set a constraint upon socially undesirable behavior, to motivate reporting entities to be environmentally responsible and to establish a mechanism to provide a fuller view of an entitys operations. But, the key problem is that there is a lack of consistency in their opinions regarding these three elements. Also, there was a lack of consensus regarding the objectives and measurement approaches to be adopted in social and environmental accounting. Furthermore, there was little consensus with regard to reporting frameworks. This means, even if all the institutional barriers to strengthening of SEA disclosures were removed, there would still be problems relating to implementation of SEA disclosure within a standardized framework.

In addition it was observed in the paper, that imitating local branches of multinational corporations, local organizations have started certain amount of SEA disclosure in annual reports. But, it is a frightening trend that the SEA disclosures in corporate annual reports are incomplete and inadequate, and often provide only a general account of the social and environmental performance of a corporation. This trend is in contrast to the overall objective of

SEA disclosures, and further weakens the prospect of SEA disclosure within a standardized framework.

It is also evident from the topics discussed in the paper that there is lack of international as well as institutional roles concerning SEA. Under these circumstances local factors have become key factors. But, a study of the cultural attribute of Bangladesh revealed a high level of societal power differentiation and the concentration of family ownership. This means, ownership of corporations are limited to a select number of investors and families. Therefore, it can be theorized, consistent with the findings in the paper, these select groups has become the key factors in setting accounting boundaries. SEAs are more inclined to benefitting the general mass of people and ensuring reporting transparency to this mass. However, due to concentration of power within a limited segment of the society, ensuring enforcement of public interest and reporting to a general audience have a lower position in the status-quo. This is another problem in issues related to SEA disclosure. It was evident from the paper that the power to institute has shifted from the sovereign state such as Bangladesh to the global economic and political agencies such as multinational enterprises, large accounting firms, and IFAC that internationalize accounting practice. Consistent with the two theories mentioned at the beginning, it can be theorized that the lack of discerning pressure from the international arena on local accounting bodies and regulatory agencies is a major factor contributing to the lack of development of social and environmental practices in Bangladesh.

Therefore, at the very end we can draw a general conclusion that social and environmental accounting is a much undeveloped sector in the accounting scenario of Bangladesh. The cause of this phenomenon may be attributed to the various external and internal factors described.

Question 3. Should Bangladeshi companies disclose corporate social and environmental issues? Why or why not?

Answer:

We think that Bangladeshi companies should disclose social and environmental issues. Our stance is based on the underlying arguments.

Argument-1: Accounting disclosure stands for statutory or good faith revelation of a material fact (or an item of information that is not generally known) on a financial statement or in the accompanying notes (footnotes). The purpose of accounting disclosure is to inform both current and potential investors of the accounting strategies and methods used when developing periodic corporate financial statements. These financial statements include, but are not limited to, the balance sheet, the statement of cash flows, the income statement, and the statement of stockholders equity. The full disclosure principle requires that any event that would have an impact on the financial statements should be disclosed. As has been seen quite often in recent years, the importance of disclosing complete and accurate accounting information can have huge and lasting effects on the individuals, families, competitors, creditors, investors, markets, and many other groups associated with large corporate firms. These groups are known in the accounting world as stakeholders in the company. Financial statements are used by both internal users and external users. Internal users use the financial statements to plan for the future. This paper explains the roles of accountants and professional accounting bodies in dealing with social and environmental accounting issues within the context of Bangladesh. The major accounting body in Bangladesh is the Institute of Chartered Accountants of Bangladesh (ICAB). The findings of a study suggest that accountants have positive attitudes towards social and environmental accounting but progress is limited. Changes in social and environmental accounting in Bangladesh appears to be evolutionary rather than revolutionary and are more likely to occur through reactive measures from the globalization of accounting. A study by Mir and Rahaman (2005) focused on the adoption of international accounting standards (IASs) in Bangladesh. Their study showed that institutional legitimization is a major driver in adopting IASs because of the pressure exerted by key multilateral donor and lending agencies on the Bangladeshi government and professional accounting bodies. Such pressure emerged from not only a need to provide credibility to foreign investors but also the need for strong accountability provisions with lending and donor agencies. Another recent study by Islam and Deegan (2008) probed the operating and reporting practices

of a major organization in Bangladesh, by choosing BGMEA. The findings indicate that disclosures on responsibility initiatives or policies were implemented to comply with external stakeholders including representatives of US and EU governments and multinational buying companies. In particular, Islam and Deegan (2008) found that BGMEA and its members embraced operating policies and codes of conduct that were similar to those disseminated by more powerful stakeholders. The authors argued that social operating practices and disclosures in a developing country cannot be explained until we understand international expectations and pressures towards adoption of these practices. In spite of such criticisms, various multilateral agencies have been influential in the dispersion of Western accounting standards to developing countries as part of the globalization of accounting. Globalization in this context relates to circumstances in which the strategic directions of the weaker economy are swayed by influential groups in unequal power relationships. It has been argued that corporate social and environmental disclosure may not apply universally to all countries which are in various stages of economic development and with corporations having differing levels of awareness and attitudes towards corporate environmental disclosure. However as economies grow and outlook become more global, we are likely to see an increasing convergence in corporate social and environmental disclosure practices (Ismail and Koh, 1999). Bangladesh has not been experiencing rapid economic growth since its inception in 1971 although a number of industries have been established at an accelerated rate and there is a demand for a cleaner environment. The Government of Bangladesh has even promulgated an Act entitled Environment Protection Act 1995.

From the above explanation it is clear that a very few companies in Bangladesh are making efforts to provide social and environmental information on a voluntary basis, which are mostly qualitative in nature. Companies in Bangladesh appeared to have the lowest levels of social and environmental disclosure. And most of the companies carrying out the disclosure were subsidiaries of multinational companies or large corporations.

So, should Bangladeshi companies disclose social and environmental issues? Yes , they should because social awareness about this matter has been on the rise all around the globe in recent times and as Bangladeshi companies are frequently trading in international markets it is very

important for these companies to be clear and equivocally transparent to their stakeholders both nationally and internationally.

Argument-2: Over the last twenty years, corporate social and environmental reporting has become an issue of interest for researchers. In the decade of 1980, the focus switched over from corporate social disclosure to corporate disclosure and reporting of environmental information and the trend continued in the 1990s as well as beyond. The governing body of accounting in Bangladesh, ICAB took an initiative to address to this problem by representing the relative importance of the criteria on the various reporting issues. In addition the evaluation criteria, the President provided a letter containing information on how ICAB addressed social and environmental issues. An analysis of this evaluation criteria revealed that only marginal priority was given to social and environmental accounting disclosures. A search was also undertaken of the archives on ICABs policies and procedures from ICABs library and website, the Dhaka Stock Exchange and the Securities and Exchange Commission (SEC). The search failed to collect relevant information, which reinforces the fact that authorities are not playing proper role regarding SEA disclosures.

However, in a study the respondents showed support for social and environmental disclosures as a constraint upon socially undesirable behavior; as a motivation for reporting entities to be environmentally responsible; and as a mechanism to provide a fuller view of an entitys operations. In another study it was also asked why disclosure of SEA issues was imminent for companies in Bangladesh, more than 85 per cent of respondents believed that social and environmental disclosures in corporate annual reports are incomplete and inadequate, and often provide only a general account of the social and environmental performance of a corporation. So, we see that there is a general acceptance regarding SEA disclosure issues among accounting personnel which is another argument in its favor.

Overall, there appears to be little consensus on external reporting issues resulting in incomplete or generalized information limiting its usefulness. Which goes to show why it is not only important for the companies already disclosing SEA issues to improve their work but also to

companies not yet disclosing the respective matters to do so in the near future.

However, Bangladesh being a poor economy and being under constant pressure from various external forces and donor agencies it is difficult for companies to carry out actions promptly and according to the policies of their companies rather than those forced by external (mainly foreign) stakeholders. In the absence of international or institutional pressure, local factors are likely to dominate organizational practices and accounting reporting in Bangladesh. Such factors can be attributed to the particular socio-economic context and cultural values such as societal power hierarchies and family ownership, which promotes secrecy, special purpose reporting to key stakeholders, and limited demand for increased disclosures to a wider audience. The concentration of ownership among a few large investors means that market control mechanisms and investor protection are weak. It is up to the government and the governing body to formulate and implement policies that are equally easy to formulate and in accordance to those maintained globally, to enable the companies to implement the policies with ease

Question 4: Does the company performance is positively/negatively correlated with corporate social and environment disclosure?

Answer:

It has been argued that corporate social and environmental disclosure may not apply universally to all countries which are in various stages of economic development and with corporations having differing levels of awareness and attitudes towards corporate environmental disclosure. Survey and anecdotal evidence show that corporations are disclosing social and environment information in corporate annual reports and this has increased over years. It has been argued by the researchers that the level of Corporate Social and Environmental Disclosure is dependent on several corporate attributes and there are studies which empirically examined the extent of social and environmental disclosure and measured the relationship between environment disclosure and

several corporate attributes. According to some studies, accounting in developed countries has similar limitations that support a narrow interpretation of users albeit for different reasons. Cooper and Robson (2006) argue that accounting in developed nations is geared to serving particular stakeholder-groups, in particular, investors. A focus on shareholders needs emphasizes disclosures based on financial imperatives and overlooks non-financial data such as social and environmental issues. As Cooper and Sherer demonstrate, the general economic welfare for a society as a whole is unlikely to be achieved by the single minded pursuit of shareholder interests. The notion of self or sectional interests extends also to the practice of social and environmental reporting. According to Gray, there is now little discussion of the demands of other groups in society, such as employees or consumer groups for how corporate accountability might be usefully considered and applied.

So, is the performance of a company negatively/positively correlated with corporate and social environment disclosure? Yes, there is a relation between company performance and disclosure of corporate social and environment disclosure. How? Lets take a look.

There are some attributes which decide the effect of disclosure on company performance. The corporate attributes considered are size (proxied by sales and assets), profitability (proxied by rate of return on assets and net profit margin), multi nationality (subsidiaries of the multinational companies), industry type, and international link of the audit firm, and audit fees.

Size - There are several studies which have been found that a significant positive association between the size of the company and the extent of corporate social and environmental disclosure in the corporate annual report in both developed and developing countries. Firms with greater total assets disclose social and environmental information to a greater extent than do those firms with fewer total assets. Firms with greater sales turnover disclose social and environmental information to a greater extent than do those firms with lower sales turnover.

Profitability - Profitability as well as corporate financial performance was used by a number of researchers as an explanatory variable for differences in disclosure level. The proponents argue that there are additional costs associated with the social and environmental disclosure and, the

profitability of the reporting company is depressed. The results of different studies measuring the relationship between corporate financial performance and corporate social and environmental disclosure show mixed results. Among these researchers found a positive association between profitability and the extent of corporate social and environmental disclosure (Waddock and Gravess, 1997) whereas Cowen et. al (1987) found no association between the variables. For profitable companies if the rate of return or return on investment is more than the industry average, the management of a company has an incentive to communicate more information (including social and environmental information) which is favorable to it as the basis of explanations of good news and is likely to disclose social and environmental information in their corporate annual reports as a result.

Subsidiaries of Multinational Company - Firms with the mutinationality connections (subsidiaries of multinational companies) disclose social and environmental information to a greater extent than do with those of their domestic counterparts.

Industry type - Firms falling within a specific industry type disclose different amounts of social and environmental information than do those firms in other industry types.

Summarizing the above points we end up with the fact that disclosure of corporate social and environment issues can reduce the political costs for the company which will affect the companies costs and performance as a subsequent result. Companies, depending on the size and stature of their business prowess will have varying effects on their performance after disclosing the respective issues. It can be concluded that companies mostly have a positive correlation between their performance and disclosure of such issues as the act of disclosure improves their corporate image in the mind of external stakeholders and help provide them, the stakeholders, with a clean and transparent set of financial statements and a reliable, relevant and trustworthy annual report.

Question 5: Provide your opinion to improve the corporate social and environmental disclosure in Bangladesh? Also mention the lacking or problems in Bangladesh market regarding this issue.

Answer: Social and environmental accounting (SEA) is an area that is gaining increasing attention from the local as well as global accounting community. In this segment, firstly the problems in Bangladeshi market regarding social and environmental accounting disclosures are described. Consequently, recommendations are provided, which in our opinion would help improve the corporate social and environmental disclosure scenario.

Problems in the market:

1) Lack of pressure and leadership from local regulatory agencies: It was theorized quite appropriately that a radical institutional change is responsive i.e. it cannot be expected without external pressure and regulation. But the key accounting regulatory agency of Bangladesh doesnt exert sufficient pressure to enforce institutionalism of SEA disclosures. A burning example in this subject is the lack of weight on SEA disclosures on the Annual Report Awards by ICAAB. The researchers theorized that the annual report awards rather marginalized issues relating to SEA.

In addition, there has been a lack of pressure and knowledge about this important issue in other regulatory agencies such as the Securities and Exchange Commission (SEC) of Bangladesh, Dhaka Stock Exchange (DSE) etc. demonstrated by the fact that researchers failed to collect information regarding SEA from these sources.

This lack of regulations and guidance has rather farfetched implications. First of all, as there seems to be less general acceptance and requirement for SEA, accountants are led to neglect the importance of actual incorporation of issues related to SEA. Although, research showed that like their global counterparts, local accountants also acknowledged the importance of SEA.

2) Lack of proper role by global authorities:

It is theorized in the paper that global accounting associations have immense effect on the accounting regulations set by developing countries like Bangladesh. According to this paper, the adoption of IASs in Bangladesh was to ensure standardization of financial reporting in order to remove barriers from capital inflows. As such, the problem stated in the previous point may be attributed to (to some extent) lack of leadership as well as regulatory roles that ought to be played by multinational enterprises, large accounting firms, and IFAC that internationalize accounting practice. Therefore, another barrier to development of SEA disposition may be attributed to the lack of discerning pressure by international accounting bodies. In a nutshell, if regulatory principles were imposed by these entities, accounting bodies of Bangladesh would be forced to adopt policies that would strengthen SEA discloser issues.

3) Impacts of cultural attributes of Bangladesh:

It is evident from the topics discussed in the paper that there is lack of international as well as institutional roles concerning SEA. Under these circumstances local factors have become key factors. But, a study of the cultural attribute of Bangladesh revealed a high level of societal power differentiation and the concentration of family ownership. This means, ownership of corporations are limited to a select number of investors and families. Therefore, it can be theorized, consistent with the findings in the paper, these select groups has become the key factors in setting accounting boundaries. SEAs are more inclined to benefitting the general mass of people and ensuring reporting transparency to this mass. However, due to concentration of power within a limited segment of the society, ensuring enforcement of public interest and reporting to a general audience have a lower position in the status-quo. This is another problem in issues related to SEA disclosure.

4) Lack of complete and adequate account regarding SEAs:

We observed in the paper, that imitating local branches of multinational corporations, local organizations have started certain amount of SEA disclosure in annual reports. But, it is a frightening trend that the SEA disclosures in corporate annual reports are incomplete and inadequate, and often provide only a general account of the social and environmental

performance of a corporation. This trend is in contrast to the overall objective of SEA disclosures, and further weakens the prospect of SEA disclosure within a standardized framework. 5) Lack of consistency and consensus

It is indeed a positive factor that respondents of the paper agreed upon the importance of SEA disclosures. The paper summarized that the objective of their support was to set a constraint to behaviors undesirable to the society, to motivate reporting entities to be environmentally responsible and to establish a mechanism to provide a fuller view of an entitys operations. But, the key problem is that there is a lack of consistency in their opinions regarding these three elements. Also, there was a lack of consensus regarding the objectives and measurement approaches to be adopted in social and environmental accounting. Furthermore, there was little consensus with regard to reporting frameworks. This means, even if all the institutional barriers to strengthening of SEA disclosures were removed, there would still be problems relating to implementation of SEA disclosure within a standardized framework.

Our recommendations:
1) Adoption of a long run perspective by the local regulatory agencies: We recommend that the local authorities adopt a long run perspective. Local authorities must acknowledge two factors that are the long run implications of ensuring proper SEA disclosure: Setting up regulations regarding SEA disclosure will ensure transparency in reporting the social welfare activities performed by corporations. Therefore, they will be mandated to perform activities that actually benefit the society rather than undertaking some irrelevant general activities. This will enable actual development of the society in the long run. Similarly, regulations will also ensure actual environmentally conscious activities resulting in a sustainable environment in the long run. The global marketplace is becoming increasingly crowded. A developing country like Bangladesh is highly dependent on global trade. It is to be understood that although international accounting bodies have not set regulations regarding SEA disclosures,

ensuring transparent SEA reporting may help Bangladeshi corporations to gain competitive advantage over the corporations in other countries that have not. In the long run, this may ensure a firm position in the global marketplace and increased revenues Taking these two factors under considerations, the local regulatory bodies should start placing firm regulations and playing proper leadership roles that will strengthen the position of SEA disclosure.

2) Ensuring presence in global regulatory bodies:

Whether the global authorities should start placing regulations regarding SEA disclosure and how they should be made to do it are issues beyond the scope of this report. However, it can be generally stated that placing these regulations would ensure a smooth undertaking of accounting activities in developing countries like Bangladesh. As such, global authorities should start to comprehend the importance of setting up these regulations. Again, it is evident that SEAs are in general beneficial for developing countries like Bangladesh. Therefore, Bangladesh should start working toward ensuring higher presence and prominence of Bangladeshi accounting professionals and organizations in these global bodies so that establishment of SEA disclosure regulations supportive and beneficial to Bangladeshi economy might be ensures. This can be facilitated by establishing world class accounting institutions, supporting prospective accounting students and organizations etc.

3) Acknowledgement of importance of SEA activities by present corporations:

The present highly centralized and steep hierarchical corporations of Bangladesh must comprehend the fact that there is no alternative to SEAs in this competitive and oversaturated marketplace in the long run. Be it to ensure public support or to impress global buyers. They must comprehend the fact that this is a sector of ever growing expenses. As such, there is no alternative to ensuring transparency to ensure their own survival. 4) Adoption of consensus and consistency regarding SEA disclosure:

In the implementation phase of regulations regarding SEA disclosure, a general consistency should be reached in reporting regarding the three key elements. Furthermore, there should be a general consensus among accounting professionals regarding the objectives and measurement approaches to be adopted. The regulations and guidelines should be reflective of this general consensus. A standardized and generalized framework should be established and it should be made sure that there is a general agreement to this framework.

You might also like