The environment of companies is constantly changing. In dealing with these changes management shape policies. Within the business society the concept of Corporate Responsibility (CR) is getting a lot of attention. The concept assumes an integrated approach towards three different dimensions of performance, which were coined into 'People, Profit and Planet'.
The literature on CR lays down organisational approaches of companies to deal with the extended responsibilities towards the environment ('Planet') and social issues ('people'). It is pointed at the changes in systems borders by which systems border by which the scope of corporate policies can be characterised. In this respect the analysis
In this paper we reflect on this important aspect of CR and its implications for management accounting. Within business practices it is noticed that accounting processes tend to be restricted on recording those costs that affect the firm's economic position. Therefore, those costs that are not reflected in market prices (e.g. negative externalities) are excluded from regular accounting procedure. From the perspective of welfare economics the production function can be derived that informs about the relationships between the firm's output (quantities of products) and the inputs (Labour, capital and nature). Moreover, the production function may inform about substitution between inputs. However, the accounting procedures at a firm level will narrow down these production function by reflecting only those inputs that have a cost that affects the economic value of that company. While companies produce goods and services the inputs are transformed into outputs. Among these output the externalities may arise from attracting inputs, production processes and outputs. CR explicitly asks to address these externalities. Moreover these effects should be controlled. This asks for information about social and environmental effects of the firm's activities (e.g. producing goods and services, transportation, etc.). For those companies that expand their responsibilities by including the externalities of their suppliers and customers (the use and disposal of products) the case of chain management is introduced. This asks for information of these externalities throughout the whole life cycle of the products. Corporate responsibility implies chain management where managers take decisions in coalitions of internal and external stakeholders. This expands the need for management information from being oriented only at the firm internal management with external stakeholders that are include in the coalition that shapes chain management. Informing external stakeholders itself is not new. The rise and fall of social accounting (1925-1975) illustrates the accounting practices on social issues. What is different now is the purpose and effects of informing stakeholders.
CR and chain management implies the opening of decision-making process in order to include external stakeholders in finding solutions for environmental and social problems related to the firm's activities. In this respect one can speak about an external organisation. But even in those cases where only internal stakeholders manage environmental and social chain effects the rise of new information needs is noticed. It can therefor be concluded that changes in the context of decision making highly affects the management accounting procedures within a firm. To illustrate these different developments in accounting can be clustered into three categories.
I. Classical and advanced management accounting
Private costs are reflected in cost accounting practices that developed over time. For example the accounting innovation refereed to as Activity Based Accounting received lost of attention. As a result of increased automation the costs structures of firms changed dramatically. However, accounting structures were not prepared to point that these changes in cost structures. Costs items (such as the costs related to the use of information technology) were allocated incorrectly within a firm and the actual cost of activities and products were consequently over or underestimated. Activity Based Accounting provided solutions, which resulted in a proper allocation of costs among the firms, activities and costs. Similarly changes in accounting procedures took place at the moment that certain environmental costs gained of important. Still in this respect environmental costs were limited to only private costs: cost that related to actual cash-outflows (thus not negative externalities not compensated for). For this reason many applications of environmental management accounting can be coined as regular improvement in accounting procedures (advanced management accounting).
II. Sustainability management accounting
As mentioned above CR asks for information about the economic, social and environmental dimensions of the output of a firm. However, as these social and environmental dimensions are explicitly to be taken into account while controlling the business activities, new indicators has to be used. New in a sense that not all social and environmental impacts of a firm are reflected in financial terms (costs or benefits) and need to be identified and communicated to the decision-makers. Thereby sustainability accounting are those accounting procedures that mirror a management approach that starts from a holistic sustainability framework that integrates collective ethical values into the firm oriented values. Or as formulated by the Tellis Institute (2001): 'Sustainability reflects the basis aspirations of our historic moment - ecological integrity, quality of life and social justice. Environment, economy and equity are understood as aspects of an unitary global project for a liveable future, requiring systematic rather than piecemeal strategies'. Here the social and environmental consequences should be considered as effects which influence some preconditions that should be met in order to secure humanity and hence the continuity of firms. Informing decision-makers about the firm's impacts on these preconditions is therefor a necessity sustainability accounting should provide. This is stressed by the Tellus Institute by stating that the sustainability framework sees health as a precondition for a viable economy, not merely as an externality requiring marginal adjustments and technical fixes (TI, 2001).
If the firm policy is to incorporate the principles of chain management and a management approach that enhances the sustainability principles as defined than new indicators on the social and environment issues should be provided to the managers in addition to the common financial indicators on the corporate performance. Clearly the concept of performance is broadened toward the three P's.
III Neo-classical Management Accounting
Similar to sustainability accounting the new information need with respect to the social and environmental dimensions of the firm's performance are addressed in the changes in accounting procedures we address as neo-classical management accounting. However, here the collective perspective of accounting practices is abandoned. Only those social and environmental impacts of the firms activities are reported on if they affect the economic value of the firm. A strict firm oriented value principle is enhanced. Here value based approached are found that inform managers about the economic values that are lost or created as a result of environmental and social impacts of the firm behaviour. Nevertheless the system's borders of the firm behaviour may be expanded along the principles of chain management but only these effects are reported on that affect the economic value of the specific firm. This can be illustrated that information is generated that informs the management about the impact of externalities on the firm's reputation and the impact of the changing reputation on the market value of the firm. Currently there is an ongoing debate how such relationships can be reported on (NIDO, 2003).
2. Decision-making and a system approach
Management determines the pathway of the corporate activities by the outcomes of its decision-making. In the context of corporate responsibility the management takes the corporate environment explicitly into account:
- Either indirectly by a focus in the private costs that result from the impacts on the environment.
- Or otherwise by a direct focus on specific environmental issues that needs to be addressed as a result of legislation or other motives (e.g. marketing, reputation)
Corporate policies steer decision-makers and thereby shape the developments in accounting practices at firms. When a system approach is followed internalisation of part the environment occurs as a result of expanding the system borders by means of transactions of the market, imposed by demands and negotiations.
In a system approach that the firm is regarded as a system where the stakeholders set its purpose and boundaries. Since a system has a purpose, it will seek its own continuance and therefor sustainability (Bell & Morse, 1999). Being subject to changing economic, ecological and social requirements decision-makers need reliable information to evaluate the performance of a system that guarantees the continuity of the firm. Decision-makers will use information to control business activities in order to sustain their system.
Information will be needed for internal and external transparency (codes, norms and indicators). When this information is generated, the designers of new accounting practices can use a number of instruments. In this respect the instruments of GAP, ISO 14 001 and 14 031 can be mentioned in the light of dealing with CR. Although these instruments reflect a system approach that is almost universal applicable, the instruments are to be applied in a way that the characteristics of the specific context needs toe be addressed. For example, the social and environmental issues relevant to management may vary among different firms. To some extent similarities in the context will homogenise the application of these tools and in the way that they generate information.
In addition to these new instruments it is expected that firms use their traditional accounting procedures to account for the costs and benefits.