A resource looking at all aspects of Social Accounting.

Social Accounting

Social accounting is a method by which a business seeks to place a value on the impact on society of its operations. This might include the following impacts on the environment: waste; the effect on society of the packaging it produces; and how much fuel it uses in its company cars. It can also include the effect on the local community who might have to live in the shadow of its premises, and how it engages with the community, its customers and workforce.

• Introduction
• Background
• Corporate Social Responsibility (CSR)
• FTSE4Good Index Series
• AccountAbility: The Institute of Social and Ethical Accountability
• Examples of Social Accounting
• What about the Public Sector?
• Standards for Social Reporting
• Social Auditing

Social Accounting

Introduction

Social accounting means many things to many people and the extremes are best summarised by:

These two comments span the range of ideas that social accounting now encompasses. Many companies now prepare social accounting reports and appendices to their annual report and accounts as a matter of routine. Others don't do so on the grounds that they don't benefit from it and that it's too costly. There are currently no statutory requirements in the UK relating to the preparation, publication or independent review of corporate environment and social reports.

There is a key feature of social accounting and that is that its effects are felt throughout an organisation. This means that we can't do a bit of social accounting in the factory or the office but not in the canteen: social accounting involves us all. Governments are also keen to see the development of social reporting and accounting as they are keen for organisations to include corporate social responsibility as part of their every day decision making routine. The UK Government has given its Department of Trade and Industry (DTI) the job of working with the business community and social accounting.

Traidcraft plc is a leader in the trade/aid field and has been actively preparing and publishing social accounts since the early 1990s. Traidcraft was the first plc to do so and they may also be the first to admit that preparing social accounts is difficult. They also admit that it provides major learning opportunities for all staff. They have learned how to communicate better as a result of preparing their social accounts. To make accounts understandable for non-accountants and non-business people requires levels of skill that Traidcraft didn't have before.

In this resource we will explore social accounting in the context of the modern enterprise.

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Social Accounting

Background

The biggest exponent of social accounting within the accountancy profession in the UK is the Association of Chartered Certified Accountants (ACCA). The ACCA has an entire section on their Web site called Sustainability devoted to this topic.

The ACCA helps us to realise that the world of accounting is changing as non-accountants get more and more involved in it. The ACCA points out that the food industry is facing problems because there are people who accuse them of ignoring health issues because of the sugars, salt and fat that producers are putting in their products. Similarly, the accounting scandals at Enron, World Com and Ahold have made accountants and non-accountants alike appreciate that every industry and profession needs to look at the way it works.

What can organisations do in terms of social accounting: what does it mean?

A lot of businesses are regularly publishing social accounting reports now. For example:

• Diageo and BP both publish statements of their community involvement: what they do, where they do it and how they compare with other companies in this area.
• The Body Shop undertakes an audit of its social, environmental and animal testing performance: social or ethical auditing.
• The Co-op is at the forefront of social corporate awareness and they regularly publish financial data relating to the various stakeholder groups as they have an impact on social activities.

Social accounting really started in the 1970s as pressure groups began their work on opening up the boardrooms of big business. Based on the initial success that the 1970s brought, the environmental lobby then began their own pressure campaigns in the 1980s. Things have now developed to such a stage where we now find it difficult to define what might be meant by social accounting. After all, we have already seen, just by looking at Diageo and The Body Shop, that the work done in this area is very varied.

Let's look at the various aspects of accounting and reporting that we would probably all agree to include under the heading of social accounting. Let's begin with corporate social responsibility (CSR). That will lead us to discuss what is called the FTSE4 Good Stock Market Index. After that we will consider the work of the Institute of Social and Ethical Accountability and finally we will look at several examples of who is doing what as they seek to account more socially.

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Social Accounting

Corporate Social Responsibility (CSR)

Corporate Social Responsibility is a much wider concept than social accounting and there is even a Minister for Corporate Social Responsibility in the UK Government.

Stakeholders have their own expectation of responsible behaviour from a business. As we see from newspapers, radio and the television, if such expectations are not met, then these stakeholders might take action in a variety of ways to affect the success of a business in some or all of the markets in which it operates.

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Social Accounting

FTSE4Good Index Series

The FTSE is the Financial Times Stock Exchange Index and they have put together the FTSE4Good Index. What that means is that all companies that meet certain corporate social responsibility standards are allowed to be members of that series.

Companies are included on the basis of their environmental record, whether they develop positive relationships with their stakeholders and whether they are supporters of universal human rights.

Which companies would you put on the FTSE4Good Index list?

How do you decide? Well, read the newspapers, take a look at their annual reports and accounts, watch the television news and look on news Web sites.

If you want a copy of a FTSE company's annual report and accounts, there is a good chance you can get it free of charge from the FT's Annual Reports Service.(http://ft.ar.wilink.com/asp/P003_search_ENG.asp)

You should be reading good things about your chosen companies, for example:

• The company respects its environment
• The company has developed positive relationships with its stakeholders
• The company respects human rights

Here's a good one: look at the news stories about Manchester United. Remember that Manchester United was bought by the American billionaire Mr Malcolm Glazer in the spring of 2005. Do you also remember that there was a lot of fuss over it from Manchester United supporters and some of its shareholders? Well, have you heard anything bad recently? Erm, not really!

Have you heard anything good recently? Erm, yes! Sir Alex Ferguson was told in July that if he wanted to buy Michael Owen, or any other good player, he could. Do you think Manchester United is on the FTSE4Good Index list, by the way?

Which companies should definitely not be on the FTSE4Good Index list? Think about it, some companies just can't be there and your job is to decide why. Want some clues?

How about companies that sell things that:

• Damage your health?
• Could kill you at the pull of a trigger or at the press of a button?

Are we there yet? Good, no tobacco companies, no arms manufacturers, no manufacturers of weapons systems.

Actually, there are several FTSE4Good Indices: for the UK, for Europe and for the USA. Read the FTSE4Good Index Series to find out more [PDF, 206 KB].

Why would a company want to get onto the FTSE4Good Index list? In other words, what does a company get out of being on the list rather than not being on it?

This is the biggest question of the three because it is probably more complicated than the other two big questions. One reason is that a lot of stakeholders want to deal with companies that are socially responsible: they are fair traders, they don't use sweated labour, they don't sell shoddy goods.

So by being on a list like the FTSE4Good Index, stakeholders know that a company is socially responsible and worth dealing with. The FTSE4Good Index Series Web site gives us four headings that we can use to sort out why companies want to be on the list:

• Investment: to identify socially acceptable shares and debentures
• Research: to identify socially responsible companies
• Benchmarking: to track the performance of socially responsible companies
• Reference: to give us a standard of how socially responsible companies are behaving

Summarise why you think a company would want to be on the FTSE4Good Index list under each of the following headings:

• Managing risk
• Reputation
• Cost savings
• Brand marketing

Now take a look at the company benefits of being in FTSE4Good to see what the FTSE4Good Index people have put under these headings.

Image: Are Marks and Spencer on the FTSE4Good list?

Who decides which companies are eligible to go on the FTSE4Good list?

FTSE works in association with the Ethical Investment Research Service (EIRIS), and its network of international partners to research company corporate responsibility performance. EIRIS is a leading independent provider of research into the social, environmental and ethical performance of companies.

How do they decide?

A variety of sources are used to check the most up to date and relevant information:

• Reading annual reports
• Looking at company Web sites
• Written questionnaires
• Telephone questionnaires

Source: FTSE4Good Index Series [PDF, 206 KB]

In addition, fact sheets detailing the information held by EIRIS are distributed to companies on a regular basis for updating and reviewing.

FTSE4Good members come from all over the world and, as of February 2004, the main membership was found in the UK and the USA, with Japan running in at number three.

Country	Total
UK	297
USA	209
Japan	88
Others	230
Total membership	824

Which British companies are on the FTSE4Good list?

Here are just a few examples:

• BAA
• Burberry Group
• Cadbury Schweppes
• Diageo
• EMI Group
• Friends Provident
• Greggs
• House of Fraser
• ITV
• London Stock Exchange
• Manchester United
• Marks & Spencer Group
• Safeway
• Unilever
• Woolworths Group

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Social Accounting

AccountAbility: The Institute of Social and Ethical Accountability

AccountAbility is an international, non profit making, professional institute dedicated to the promotion of social, ethical and overall organisational accountability; and is dedicated to promoting social and ethical accountability for sustainable development by:

• Creating a credible assurance standard and underlying accountability framework
• Providing quality professional development and certification
• Advocating an enabling public policy environment for organisational accountability
• Developing innovative 'ideas-for-action' through research and practice

Source: AccountAbility

AccountAbility is ten years old now so it's not just a flash in the pan idea. More than that, one of its basic ideas is that it's not enough just to talk about accountability, companies have to do it.

This means that AccountAbility looks at how companies take action on the basis of stakeholder engagement. They also expect companies to carry out innovations on the basis of stakeholder engagement.

The framework is rather a clever diagram as it shows us that an organisation is primarily accountable to its shareholders: the major stakeholders in any company. More than that it shows just how management of the organisation is accountable. It is accountable in terms of innovation, performance and learning: companies are dynamic organisations and reporting systems are dynamic too.

More than that accountability is expressed in terms of accounting, reporting and assurance: how management is to report to its shareholders. Finally, all of these aspects are embedded in the organisation: they are part of what the business does in the same way the products and employees, shareholders and customers are.

In the form of a diagram, the AA1000 framework looks like this:

Reproduced by kind permission of AccountAbility

A good way for us to appreciate the ins and outs of the AA1000 Framework is to see how it is being used in reality. The following page has a few examples...

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Social Accounting

Examples of Social Accounting

Take a look at the annual reports and Web sites and any news stories about these five organisations and prepare a short report on how three of them are using social accounting. You could start by finding out whether each company is on the FTSE4Good Index list.

• Traidcraft plc (http://www.traidcraft.co.uk)
• The Body Shop (http://www.thebodyshop.com)
• British Petroleum (http://www.bp.com/home.do?categoryId=1)
• Manchester United (http://www.manutd.com/home/default.sps?splashtickets)
• Friends Provident plc (http://www.friendsprovident.co.uk/)

Sir Adrian Cadbury and CSR

Sir Adrian Cadbury was a senior executive with the Cadbury group for many years and was the chairman of one of several UK Government Commissions on Corporate Governance. In October 2004 he gave a speech at the annual conference of the Chartered Institute of Personnel and Development in which he said a number of vital things, including:

"A UK consumer survey asks shoppers every month: 'How important is the social responsibility of a business to you when you are purchasing a product?' In 1998, 28% answered 'very important'; by 2000 that figure had risen to 46%. The figures are meaningless: the trend is significant."

Then he makes rather a bold and uncompromising statement:

"I have no difficulty with a quoted company declaring its purpose as being solely to generate profit for its shareholders while keeping within the law, but to make no further concession to society's interests. Its shareholders, its employees and all those with whom it deals know where they stand. Its minimalist social policy stems directly from its values and meets the tests of clarity, commitment and congruence. I believe that society's interest lies in honest disclosure of purpose and values, not in attempting to impose social responsibility standards of some kind. What is not in either a company's or society's interest are stated policies which are insincere and no more than window dressing."

The above statement is strengthened when Sir Adrian later says:

"The social responsibilities of companies need to be clear, consistent, anchored to their values and at times stood by in the face of public clamour."

Source: The Challenge of Corporate Social Responsibility, Sir Adrian Cadbury, CIPD Conference 2003, Business in the Community

In other words, Sir Adrian is in no doubt that a company should live by its own values and if CSR is not at the top of its list of corporate values then, providing it is living within the law, it cannot be criticised. Sir Adrian was reported in the Daily Telegraph, however, as follows:

"...in many cases society would be better off if such companies ignored the campaigners and concentrated on making a profit."

Source: Don't give in to pressure groups, by Richard Tyler, The Daily Telegraph, 7 October 2004

Whilst not everyone will agree with Sir Adrian's position on CSR, the Telegraph portrayal of that position was less than favourable and a full reading of both the speech and the article will reap its own reward!

More Examples

There are a number of ways to access data relating to corporate social responsibility. One way is simply to take a look at the annual report and accounts of a company and look for references to the social report or a separate social report.

Alternatively, carry out an internet search using Google, Yahoo, Ask or your favourite search engine. Search for terms such as social accounting, corporate social responsibility, social auditing and any of the terms you see here.

Finally, the UK Government has a wealth of information available on this topic. For example, take a look at the UK Government Gateway toCorporate Social Responsibility. You could also take a look at the CSR Academy.

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Social Accounting

What about the Public Sector?

The UK Government is keen for everyone to be socially aware of their actions and responsibilities whether their ultimate motivation is profit or non-profit based.

The Government's commitment to social and environmental responsibility is reflected across a wide range of specific projects and initiatives which span:

• Education
• Environment
• Regeneration, social inclusion and community investment
• Workforce issues
• Responsible behaviour in developing countries

Let's look at two examples.

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Social Accounting

Standards for Social Reporting

The ACCA has set out a number of key principles for social reporting, in addition to anything that AA1000 might say. We have seen some of this terminology in use already but here are the most important principles.

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Social Accounting

Social Auditing

So how does a company put all of its social accounting and reporting together? Well, first of all it has to start with a social audit. That is, someone has to verify that when Manchester United, for example, say that they are aiming at curbing racism in football that they actually did something to achieve that aim.

Here are some definitions of social audit that might be helpful:

It should be clear from everything we have said that before a social audit can take place you have to be clear about:

• Objectives - what you are trying to do as an organisation, both internally and externally
• Action plans - how you are going to do it
• Indicators - how you will measure and record the extent to which you are doing it

When these are in place, it is easy to design simple procedures to log what is going on from day to day (social bookkeeping), to tally up the indicators every now and again (social accounting) and make sure that you are on target, or to do something about it if you are not!

Who Carries Out Social Audits?

From the samples we have seen here, social auditors are largely the same as financial or statutory auditors. Take a look at all of the social accounts that we have discussed here and you will see that this is true. However, for other, perhaps smaller, organisations it is not necessarily vital that a fully qualified auditor or accountant takes the job on.

The key characteristic of a social auditor must be independence and remoteness. That is, the social audit must be carried out by someone who does not work for the organisation that s/he is auditing and it is helpful if the auditor is not, for example, a shareholder in the organisation. It might even be helpful for the auditor to know nothing about the products and processes of the organisation when they first begin their audit so that they start their work completely cleanly!

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