Topic 3: What do we provide an ‘account’ of, and why?

Question 1

Who can use accounting information

Answer 1

information can be used by internal stakeholders (for example, the organisation’s managers and employees), or by external stakeholders (for example, shareholders of large companies, government, concerned local residents, lenders, employee unions, consumer groups).

Question 2

Is accounting a one-size-fits-all practice

Answer 2

No. As already indicated in the previous weeks, there are many different forms of organisations (for example, sole traders, partnerships, trusts, government departments) involved in different types of activities (which might be aimed at making a profit, or not), with different ‘stakeholders’ and perceived responsibilities, and which use different resources. As we should now appreciate, this will impact the ‘accounts’ they produce both internally and externally

Question 3

LSOs and regulations

Answer 3

Large organisations are required by accounting regulations to report the same types of financial accounting information to external stakeholders.

Question 4

The external reporting of social and environmental information tends to be

Answer 4

quite varied (with some organisations producing no information) as, unlike financial reporting, there is very little regulation governing the reporting of social and environmental performance information.

Question 5

Factors that influence internal reporting general

Answer 5

People within an organisation need various types of information to enable them to manage the organisation. What information they collect will depend upon a variety of factors including what aspects of performance they want to manage.

Question 6

Accounting for management

Answer 6

A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking”. what information is collected and used will depend on the objectives/mission of the organisation, the types of resources being used, the values/ethics of the managers, and so forth. Accounting for management purposes is a process based on professional judgment and the internal aspect of accounting is generally considered to be ‘unregulated’

Question 7

Traditional management accounting

Answer 7

Traditionally, collected for internal decision making, with a focus upon maximisation of financial revenues and minimisation of financial costs. traditionally focused upon control of processes/activities, and compliance with predetermined policies and procedures.

Question 8

The evolution of management accounting

Answer 8

Competition

Competitive Advantage

Therefore accounting for internal decision making (management accounting) is much more than just a focus on costs ($).

Question 9

External reporting

Answer 9

The information collected for internal management decision making could also form the basis for reports that are also released publicly.

Question 10

Factors that influence external reporting

Answer 10

Regulation

Stakeholders needs/demands

Manage powerful stakeholders

Manage perceived legitimacy

Increase manager wealth

Location/culture

Question 11

Regulation

Answer 11

Some things are reported because there is no alternative – the organisation ‘has to’ or otherwise face sanction.For example, taxation authorities will require various reports of a financial nature. Other government departments might require information about different environmental matters (for example, emissions of some substances, creation of some forms of waste) or social matters (such as aspects of occupational health and safety). Some forms of organisations, for example companies, will have quite extensive financial reporting requirements as imposed by corporations’ law.

Question 12

Stakeholders needs/demands

Answer 12

Managers might also believe that different stakeholders have ‘rights-to-know’ about particular aspects of the organisations’ performance. Owners (shareholders of companies) of the business require information so as to enable them to monitor their investments.

Question 13

Manage powerful stakeholders

Answer 13

The production of particular accounts might be undertaken for strategic business reasons so as to manage those stakeholders who have the power to influence the operations of the organisation. (Think sweatshops, other controversies that led to organisational change)

Question 14

Manage perceived legitimacy

Answer 14

Organisations will change their external reporting around the time of particular crises. Reporting which is reactive to crises is more about organisational survival than about ‘true’ accountability.

Question 15

Increase wealth

Answer 15

For example, managers might have shares in an organisation, or have bonuses linked to ‘profits’. If they produce particular information or accounts this might increase share price, and their own wealth. That is, there could always be private, self-interest incentives for managers to produce particular accounts or results.

Question 16

Location

Answer 16

The location of an organisation. Some cultures have greater demand for information (or transparency) than others or have different expectations in relation to ‘performance’.

Question 17

Three types of external reporting

Answer 17

Financial reporting
Social reporting
Environmental reporting

Question 18

Financial reporting

Answer 18

Financial accounts are generated through the process of ‘financial accounting’.The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Large companies must follow IFRS

Question 19

IFRS

Answer 19

International Financial Reporting Standards. Most countries use the accounting standards produced by the International Accounting Standards Board (IASB) (an exception being the US) as the basis for external financial reporting. These accounting standards – referred to as International Financial Reporting Standards (IFRS) - must generally be followed by large companies as well as being adopted by many government departments.

Question 20

Social reporting

Answer 20

Social accounts are generated through the process of social accounting. Social accounting will provide information about an organisation’s interaction with, and associated impacts upon, particular societies. Social and environmental performance is not generally addressed by the financial accounting standards released by the IASB. The Global Reporting Initiative’s Sustainability Reporting Guidelines provide a number of ‘indicators’ against which organisation can report.

Question 21

Environmental reporting

Answer 21

Environmental accounts are generated through the process of environmental accounting. Environmental accounting can address an organisation’s impact on living and non-living natural systems. The Global Reporting Initiative’s Sustainability Reporting Guidelines provide a number of ‘indicators’ against which organisation can report.

Question 22

Conclusion of topic

Answer 22

As the need to consider a wider group of stakeholders increases, accounting is changing from merely financial to social and environmental.Accounting is a technical and social practice which has widespread importance and implications to current and future generations and to the environment.

Question 23

How accounting can be a one size fits all practice

Answer 23

in reporting certain aspects of performance – such as financial performance – the existence of many rules and regulations does mean that large organisations tend to report the same types of financial accounting information to external stakeholders.

Question 24

Factors that influence internal reporting examples

Answer 24

personal values, stakeholder pressure, their basis of remuneration, the scarcity of and/or the ecological importance of the resources they are using, their professional and educational background.

Question 25

3 types of internal reporting

Answer 25

Same as external

Question 26

Competition

Answer 26

However, ‘competition’ is now accepted as a key component of management accounting – for example - the strategies that need to be embraced to increase market share and/or achieve various social or environmental goals.

Question 27

Competitive Advantage

Answer 27

To achieve competitive advantage most managers understand that they must consider the social and environmental consequences/costs’ of their operation. The community expects it. Such expectations have changed relative to say 30 years ago.

Question 28

Management of physical flows

Answer 28

If managers want to reduce their use of various raw materials, including water, energy, air, and also reduce their level of waste, CO2 emissions, releases of polluted water, and so forth then they would undertake a careful analysis of all the inputs and outputs of their production process and concentrate on reducing the negative aspects of the operations. This is accounting and can be labelled ‘management accounting’ yet it relies on various quantities rather than measuring things in $$.

Question 29

Example of how information collected for internal management decision-making could also form the basis for reports that are also released publicly.

Answer 29

a large sportswear company might be concerned about the treatment of employees within its supply chain. As such it might require that suppliers must allow an independent third party to enter the factory and make various assessments of the health and safety of the employees. This report could then be used by management to make decisions about such things as whether it will continue doing business with the supplier or whether it will assist the supplier in making improvements that support its workers. The assessment of the factory – whilst prepared for internal management purposes – might also form the basis of a report that is released to the public.

Question 30

Sustainability Reporting

Answer 30

Addresses the three aspects of reporting (financial, social and environmental)

Question 31

Examples of information included in social reporting

Answer 31

− Interaction with local community

− Level of support for community projects

− Support for employees within the supply chain

− Health and safety record