Unit 9 and 11 CSR Ethics and Corporate Governance MyLo

Unit 9 - A
Accounting Theory
BFA 715
Sustainability and
Environmental
BFA 715 Sustainability, Corporate
Governance and Ethic Unit 9 & 11
Introduction
CSR; Sustainability; Triple Bottom Line
Reporting that provides information about the economic,
environmental and social performance of an entity
Integrated Reporting
Adds Corporate Governance
Departure from sole

economic/financial focus
Tied to the concept and goal of
sustainable development
To what degree??
Developments in social and

environmental reporting
If sustainability becomes part of the expectations held by society, it

must become a business goal
Providing information about social and environmental performance

will increase the trust a community has in the organisation
The view that corporate survival and prosperity is tied to community

perceptions is being promoted publicly by a number of companies

Corporate Social
Responsibility
the integration of business operations and values

whereby the interests of all stakeholders, including
customers, employees, investors, and the
environment are reflected in the organisations
policies (Smith, 2002:42 cited in Adams & Zutshi,
2005:31)
Corporate Social Responsibility is about the

interaction of the corporation with the legal and
social obligations of the societies in which it
operates, and how it accounts for those
obligations (WBCSD, 1999).

CSR and Accounting
Reporting on social and environmental performance

implies management consider they are accountable
for social & environmental performance as well as
economic performance.
Financial accounting - heavily regulated
Social & environmental disclosures largely voluntary

What is Social and Environmental Accounting?
The process
of
selecting firm-level
social [and
environmental] performance variables, measures and
measurements procedures; systematically developing
information useful for evaluating the firms social [and
environmental] performance, and communication of such
information to concerned social groups, both within and
outside the firm (Ramanathan, 1976:518).

Social and Environmental Disclosures
Pollution control
Conservation of natural
resources
Energy conservation
Energy efficiency
Equal employment policies
Socially responsible practices
Employee health and safety

Employee training
Community activities
Health and related activities
Education and the arts
Philanthropy
BFA 715 Sustainability, Corporate Governance and Ethic Unit 9 & 11
What is Accountability?
The duty to provide an account (not
necessarily financial) or reckoning of
those action for which one is held
responsible
two responsibilities or duties
responsibility to undertake certain
actions
responsibility to provide an account of
those actions
"A country could exhaust its mineral

resources, cut down its forests,
erode its soil, pollute its acquifiers
and hunt its wildlife to extinction, but
measured (corporate and national)
income would not be affected as
those assets disappeared" (Repetto
et al, 1989)
WHY????
BFA 715 Sustainability, Corporate Governance and
Ethic Unit 9 & 11
Forms of CSR Reporting

1.
2.
3.
4.
Annual Reports
Separate community report
Separate environmental and social reports
Combined social and environmental
reports
5. Full TBL and/or sustainability report
6. Web based disclosures
7. Other forms of communication with
stakeholders
10
TBL and Traditional

Accounting
TBL is a performance and position report
It is consistent with the original objectives of the corporate entity
Adopts a framework similar to the conceptual framework of financial

reporting
Accountants are as qualified as anyone else to prepare TBL reports
Are TBL and sustainability reporting the same?
How does integrated reporting fit in?
Conceptual framework issues

Measurement problems
Regulated or voluntary?
One ideological position
No such thing as too much profit
Accounting is part of the problem
A new system is needed
11
Limitations of traditional financial accounting
Financial accounting focuses on the information needs of those involved in

resource allocation decisions
The notion of materiality tends to preclude the reporting of social and

environmental information, given the difficulty in quantifying costs
Reporting entities frequently discount liabilities to present value, which tends to

make future clean-up expenditures appear trivial
Adopts an entity assumption where the entity is treated as distinct from its owners
and other stakeholders
transactions not directly impacting the entity are ignored
ignores externalities caused by the reporting entity, some relating to social
and environmental implications of the entitys operations
Expenses are defined to exclude the recognition of any impacts on resources not
controlled by the entity
Externalities caused by the entity cannot be reliably measured, and so are not
recognised
12
Measurement Issues
Financial
Bias; omission; mismeasurement; accounting
policies
Social and environmental

No clear measure against
a set of values
Propaganda and positive
disclosures
BFA 715 Sustainability, Corporate Governance and Ethic Unit 9 &

13
11
Why is CSR is Important to

Business?
Stakeholder engagement
Competitive advantage
Reputation and brand
benefits
Legitimacy
Reduce compliance costs
High quality employees
Ethical investment markets
Reduce organisational risk

Efficiency and cost savings
Aids innovation
Better information for decision
making

14

15
WHAT IS SUSTAINABILITY?
Sustainability has become part of the expectations held by society, it therefore must become a business
goal
Sustainability is defined as "development that meets the needs of the present without
compromising the ability of the future generations to meet their own needs" (Brundtland, 1987, p.8)
Providing information about social and environmental performance increases the trust a community has
in the organisation
The view that corporate survival and prosperity is tied to community perceptions is being promoted
publicly by a number of companies
Encompasses issues such as
Intergenerational Equity
Intragenerational Equity
Eco-Justice
Eco-Efficiency
These are important national questions but also have significant corporate and individual elements.
16
SUSTAINABILITY REPORTING
Also known as
Corporate Social Reporting
Corporate Social Responsibility Reporting
Triple Bottom Line Reporting
Sustainability Reporting
Environmental Reporting
Social Audit
Environmental, Social and Governance Reports
Stakeholder Reports.
But are the different terms really synonymous???
17
A sustainability report refers to a report
that not only presents information about
the economic value of an entity, but
provides information upon which
stakeholders can also judge the
environmental and social value of an entity.
Useful not only for reporting purposes but
also performance measurement,
accounting, auditing and reporting.
18
Benefits of Sustainability Reporting

Embedding sound corporate governance and ethics systems
throughout all levels of an organisation.
Improved management of risk through enhanced management
systems and performance monitoring.
Formalising and enhancing communication with key stakeholders
such as the finance sector, suppliers, community and customers.
Attracting and retaining competent staff by demonstrating an
organisation is focused on values and its long-term existence.
Ability to benchmark performance both within industries and
across industries.

19
Integrated Reporting
An initiative of the International Integrated
Reporting Committee with the aim of
To create a globally accepted integrated reporting
framework which brings together financial,
environmental, social and governance information in a
clear, concise, consistent and comparable format.
To help with the development of more comprehensive
and comprehensible information about organizations,
prospective as well as retrospective, to meet the needs
of the emerging, more sustainable, global economy.
20
Environmental Reporting
Environmental reporting is a subset of sustainability reporting.
To date, research has not drawn any clear conclusions as to the
relationship between environmental performance and
environmental disclosure.
Legitimacy theory would propose that entities with poor environmental
performance would more likely produce greater levels, or higher quality
environmental information to address potential legitimacy threats.
A number of studies however have found a relationship between

more extensive quantifiable environmental disclosures and
good environmental performance
good economic performance

21
GUIDELINES FOR
A range of guidelines which have emerged to provide

direction on appropriate sustainability reporting.
GRI (Global Reporting Initiative)
The United Nations (UN) has produced a number of

reporting initiatives.
Other groups that have provided guidelines include:

The Organisation for Economic Cooperation and
Development (OECD)
The International Organisation for Standardisation (ISO)
22
Overview of Selection Indicators

23
Global Reporting Initiative

Launched in 1997 as an initiative to develop a globally
accepted reporting framework to enhance the quality of
sustainability reporting
A joint initiative of the Coalition of Environmentally
Responsible Economies (CERES) and the United Nations
Environment Program (UNEP)
The aim is to enhance transparency, comparability and
clarity, amongst other principles.
The latest version is G4
24
Global Reporting Initiative

Sustainability reports based on the GRI Framework can be used
to:
demonstrate organizational commitment to sustainable development, to
compare organizational performance over time, and to measure
organizational performance with respect to laws, norms, standards and
voluntary initiatives
THE GRI includes core indicators and additional indicators across

environmental, economic and social performance areas.
In addition the GRI has an Application Levels system
These indicate the extent to which The Guidelines have been applied in
sustainability reporting.
They communicate which part of the reporting framework has been
addressed and reflect the degree of transparency in reporting.
25
Mandatory Sustainability Reporting

Requirements
Australia
The Corporations Act 2001 requires directors to outline the companys
performance in relation to environmental regulations.
The National Greenhouse and Energy Reporting Act 2007 (NGER Act) introduced a
national framework for reporting and dissemination of information about
greenhouse gas (GHG) emissions and energy use by certain corporations.
Canada
The Canadian securities regulators require public companies to produce an
Annual Information Form that reports on the current and future financial and
operational effects of environmental protection requirements.
Denmark
The Danish Act of 16 December 2008 requires Denmarks largest companies to
include their ESG activities in their annual reports or justify the absence of this
information.
26
Mandatory Sustainability Reporting

Requirements
Norway
The government has proposed that large companies
should report their social and environmental performance
to stakeholders.
United States
The US Environmental Protection Agency proposed a
mandatory greenhouse gas reporting rule, which became
effective on 29 December 2009.
The Securities and Exchange Commission (SEC) requires
disclosure of some general information, including
disclosure of capital expenditure for environmental
control facilities, and about environmental claims.
27
STAKEHOLDER INFLUENCES
Contemporary entities now consider a range of
stakeholders in their decision making.
Entities following GRI are required to undertake
stakeholder assessment as part of their reporting
process.
Many businesses identify and engage with stakeholders
as a means of reducing risk and managing reputation.
Stakeholders are increasingly concerned with issues of
sustainability.
28
Stakeholder Interests in Corporate

Sustainability

29
Ethical Investment
Ethical investment and ethical
investment funds are increasingly taking
an interest in corporate sustainability
performance and reporting.
More broadly many institutional investors
are concerned about the economic,
financial and regulatory risks of global
warming.
30
ENVIRONMENTAL
MANAGEMENT SYSTEMS
An EMS is a system that organisations implement to measure, record
and manage their environmental performance.
In addition to providing organisations with an environmental
management tool they also facilitate the organisations
communication to stakeholders.
International standard ISO 14001 Environmental management
governs EMSs.
It covers the development and audit of EMSs, and requires certifying
companies to establish and maintain communication, both internally
and externally.
It also requires companies to develop policies, objectives and targets,
and assess environmental performance against these requirements.
31
CLIMATE CHANGE AND

ACCOUNTING
The Kyoto Protocol is an agreement that
commits signatories to achieve GHG or
carbon emissions reduction.
Under the Kyoto Protocol countries were
allocated allowed emissions in the form
of assigned units that corresponded to
their agreed emission targets.
32
Emissions Reduction
Schemes
Many countries have (are) developing emissions reduction schemes to
mitigate, or reduce climate change.
Two approaches are used
Emissions trading scheme (ETS) are designed to control emissions by allowing
participants to trade excess emissions permits.
Carbon taxes where a levy is paid based on the amount of emissions or GHGs.
Australia has decided to implement a ETS.

An ETS provides a mechanism by which economic activities of an organisation
can be linked to climate change benefits.
These are expected to be significant costs including:
Reporting requirements such as compliance and monitoring costs.
Investments to mitigate and manage emissions.
Re-evaluation of corporate strategies, operational and control systems.
33
Accounting for Carbon Emissions

There is currently no guidance on how to account for carbon
pollution permits or emissions trading activities.
In the short term, organisations are required to account for both
purchased and allocated emissions allowances.
How should they be valued?
Are they intangible assets or financial instruments?
How should organisations account for their obligation to deliver

allowances to the government at the end of the reporting period
to pay for their emissions.
Should organisations be permitted to use hedge accounting to
reduce the risk associated with their allowance asset and
emissions liability.
34
Eco-justice and
Eco-efficiency reporting
When considering environmental and social implications, ecoefficiency and eco-justice issues are considered
two components of sustainability
(apart from economic
performance)
Eco-justice reporting indicates how the entity is using its limited

resources to ensure that disadvantaged groups are not forgotten
includes information about creation of employment, education, health
care, observance of human rights and equal opportunities, impact on
indigenous peoples, support for people in developing countries etc.
Concerned with maximising the use of a given quantity of resources

and minimising the environmental implications of using the resources
relates to environmental protection
the focus of many stand-alone environmental reports
does not address whether the goods being produced should be

produced
35
Environmental reporting guidelines
Currently eco-efficiency focus
led by mining industry in Australia

Australian Minerals Industry
Management
Code
for
Environmental
Environmental Protection Authority (NSW) also produced reporting

guidelines
numerous international bodies have also released guidelines

See IFACs Guidance on Environmental Management
Accounting (Aug. 2005)

36
Social accounting
Addresses eco-justice issues
social accounting refers to consideration of social-based issues for
external reporting purposes
helps to evaluate how well a firm is fulfilling its social contract
widely promoted in the 1970s but lost prominence in the 1980s
Re-emerged in the mid to late 1990s
acknowledges the organisation has many stakeholders,
stakeholders expectations often driving the reporting process
with
the
social disclosures commonly made in annual reports

stand-alone reports commenced in late 1990s
37
Examples of social
disclosures
Health and safety initiatives

injury rates
training programs
relationships with indigenous peoples
community support programs
all typically ad hoc and inconsistent from year to year
GUIDANCE ON SOCIAL ACCOUNTING:

Sustainability Reporting Guidelines, issued by Global Reporting
Initiative
Towards Standards in Social and Ethical Accounting, Auditing
and Reporting, issued by The Institute of Social and Ethical
Accountability (ISEA)

38
Power of the media

The media can provide information about
international operations
organisations need to consider international
community not just local community
negative media coverage is expected to
impact on public perceptions of the
legitimacy of the organisation
39
Strategic alliances with stakeholder

groups
Many
organisations
enter
strategic
alliances or partnerships with other
organisations
may have previously been adversaries
examples:
timber industry and World Wide Fund for

Nature (WWF)
Marine Stewardship Council
Greenpeace and the Sydney Olympics bid
40
Monetising environmental costs and

benefits
Financial accounting typically ignores environmental

impacts, therefore experimental approaches to full-cost
profit calculation are being developed
market prices do not reflect the scarcity of resources

involved or harm resources cause
perception that all costs associated should be reflected in

the price of the good
If done comprehensively this would involve some life-cycle

analysis
consideration of the inputs and outputs from raw
material acquisition to disposal
often referred to as true prices

41
Baxter International
Approach most conservative of those considered
ignores any externalities caused by the business,
and only includes costs and benefits directly
related to cash flows
attempts to demonstrate that by explicitly
considering the environment, actual cost savings
can be made
still applies the usual entity assumption
42
Ontario Hydro
Approach to full-cost accounting explicitly
recognises the existence of externalities
adopt what they refer to as the damage
function approach
uses
site-specific
data
and
modelling
techniques combined with economic methods
to estimate impacts and costs
represents a departure from traditional

accounting approaches
43
BSO/Origin
Place a notional value on the environmental
costs imposed on society
this value is then deducted from profits
(calculated
using
financial
accounting
methods) to determine a measure referred
to as sustainable operating income
although
consider
many
externalities,
ignores many eco-justice considerations
required to pursue sustainability
44
Ethical Investment
Dow Jones Sustainability Index
DJSI Review 2005
Growing rapidly
Returns are equal to or better than
normal investments
Corporate entities are trying to get listed
on these indices
45
CSR at BAT
Our Social Responsibility in Tobacco Production
programme includes integrated crop management;
soil and water conservation; reducing the use of
agrochemicals; environment, health and safety
standards in Green Leaf Threshing operations
(tobacco leaf processing); eliminating exploitative
child labour; encouraging alternatives to wood in
tobacco curing and sponsoring and promoting
afforestation programmes to enable those farmers
whodo require wood for curing to obtain it from
renewable sources. (BAT, 2005)
46
BAT Social Report 2005

We believe it is for informed adults,
balancing the pleasures and the risks, to
decide whether to consume tobacco
products or not. In our view, the message
that smoking is associated with real risks of
serious diseases should be reinforced, so
that informed choices can continue to be
made.
Our business enables governments

worldwide to gather over 22 billion in
taxes & excise duties 15 times the
groups profitBFAafter
taxCorporate
715 Sustainability,
47
BAT Some Comments

BAT - Who should run the tobacco industry
corporates or criminals?
Donations to Universities and Hospitals a
way to buy silence and complacency
How can BAT claim to reconcile gaining a
maximum profit by producing a deadly product
with the aims of being socially responsible?
48
What BAT dont tell us

Smoking is the most important cause of premature death in
developed countries. It accounts for one fifth of deaths in the
UK: some 120,000 premature deaths a year.
The average loss of life expectancy for all cigarette smokers in

the developed world who die from smoking related diseases is
about 16 years. For those who die in middle age (35-69 years) the
figure is 22 years and for those killed by tobacco at older ages
the figure is 8 years.
Men who have never smoked have a 78% chance of reaching 73
years of age whereas those who start smoking by the age of 20
and never stop have only a 42% chance.
Smokers in their thirties and forties have five times as many
heart attacks as non-smokers

49
Current State of Play

Focus would appear to continue in terms of external
reporting and public relations at this stage
Large and an increasing number of firms produce what are
generally termed sustainability reports, almost all being
voluntary content.
No agreed framework for producing these reports
There appears to be a lack of emphasis on internal data
collection at this stage

50
Is Sustainability Reporting here to

stay?
Disappears has become a

part of regular reporting
Remains a PR tool
Regulation vs. self regulation
Part of annual report
Sustainability and similar
reports prepared by many
Increased
verification/assurance
More important and more
substantial
Entities that talk the talk will
have to walk the walk

51
All public corporations live a lie. They

believe that we reside in a world where
capital has the right to grow and that
right is a higher right than the rights of
people to their culture and what we hold
in common. You cant get to sustainability
from an economic model that strives first
and foremost to increase the amount of
money large corporations have.
Paul Hawken, 2003 Dreams of a liveable future
Is this the reality?

52
If sustainable development is to become a

reality rather remain a seductive mirage,
governments,
communities,
companies
and
individuals must work together to improve their
"triple bottom line" (economic, social and
environmental) performance. To this end, we not
only need new forms of accountability but also
new forms of accounting
Achievable in the current mixed historical cost
framework?
53
Summary
The focus on environmental and social
reporting is driven by increased community
concern and political intervention.
This has not historically been supported by
reporting regulation.
We need alternative forms of performance
measurement and reporting

54
Accounting Theory
Unit 9 B
CSR and Risk
BFA 715 Sustainability, Corporate Governance and Ethic

Unit 9 & 11
55
Areas of Interest:
Contaminated land
Oil spills
Nuclear disaster
Genetic manipulation
Impact assessment
Increasing pressure to adopt environmental strategies
Management of environmental risk in practice
Related to the finance industry
Industry differences
Food and health
Tourism
Natural disasters
Extreme risk

56
Introduction
What do we mean by The Environment?
The Victorian Environment Protection Act (1970) defines

environment as physical factors of the surroundings of human
beings including the land, waters, atmosphere, climate, sound,
odours, tastes, the biological factors of animals and plants and the
social factor of aesthetics.(S.41)
A wider view adopted in Western Australia defines environment

as the mutual relationship between the environment at large, its
component parts and the particular elements of the environment
affected by the decision making process. (Environment Protection
Act 1986 S.3.1)

57
As such, business activities affecting the physical environment

can be taken to embrace all impacts whether of a positive or a
negative nature including:
(i) pollution control in the manufacturing process;
(ii) protecting and improving the environment;
(iii) designing facilities harmonious with the environment;
(iv) reducing excessive noise, air, water and land pollution;
(v) undertaking environmental impact studies;
(vi) land reclamation and reforestation;
(vii)
taking part in or sponsoring anti litter and
conservation campaigns and conservation campaigns;
(viii)
recycling of aluminium, chemicals, paper and water;
(ix) setting up recycling plants, conserving resources by
utilising waste material, efficiently utilising material resources
in the manufacturing process and conforming with
government and regulatory standards,
(x) any adverse impact on the environment where no action
has been
undertaken to address the issue.
58
Silent Spring
By Rachel Carson (1962)
There was once a town where all life seemed to live in
harmony with its surroundings
Then a strange blight crept over the area
Mysterious maladies swept the flocks of chickens;
The cattle and sheep sickened and died. Everywhere
was the shadow of death. The farmers spoke of much
illness in their families. In the town, the doctors had
become more and more puzzled by new kinds of
sickness
In the gutters under the eaves and between the shingles
of the roofs, a white granular powder still showed a few
patches; some weeks before, it had fallen like snow
upon the roofs and the lawns, the fields and streams.
This town did not actually exist in 1962
59
The Date is 14 Years Later

The story that follows happened to take place near Milan, Italy. It could have been any location where a
$100-billion-a-year chemical industry is churning out over 30,000 different chemicals, most of them untested
for safety.
More often than not, these chemicals leak out slowly and insidiously but the tragedy near Milan was
sudden, direct, concentrated, and awesome
The Seveso disaster was an industrial accident that occurred around 12:37pm on July 10, 1976, in a
small chemical manufacturing plant approximately 15 kilometres (9mi) north of Milan in the Lombardy
region in Italy. It resulted in the highest known exposure to 2,3,7,8-tetrachlorodibenzo-p-dioxin (TCDD)
in residential populations[1] which gave rise to numerous scientific studies and standardized industrial
safety regulations. The EU industrial safety regulations are known as the Seveso II Directive .
The reactor relief valve eventually opened, causing the aerial release of 6 tonnes of chemicals, which
settled over 18km 2 (6.9sqmi) of the surrounding area. [6] Among the substances released was 1kg of
2,3,7,8-tetrachlorodibenzodioxin (TCDD) (3). At the nominal reaction temperature, TCDD is normally seen
only in trace amounts of less than 1 ppm (parts per million).[7] However, in the higher-temperature
conditions associated with the runaway reaction, TCDD production apparently reached 100 ppm or more.
[8]
Within days a total of 3,300 animals were found dead, mostly poultry and rabbits. Emergency slaughtering commenced to prevent
TCDD from entering the food chain, and by 1978 over 80,000 animals had been slaughtered. 15 children were quickly hospitalised
with skin inflammation. By the end of August, Zone A had been completely evacuated and fenced, 1,600 people of all ages had been
examined and 447 were found to suffer from skin lesions or chloracne. An advice center was set up for pregnant women of which
only 26 opted for an abortion, which was legal in special cases, after consultation. Another 460 women brought on their pregnancies
without problems, their children not showing any sign of malformation or pathologies. Herwig von Zwehl (Technical Director of
ICMESA) and Paolo Paoletti (director of production at ICMESA) were arrested. Two government commissions were established to
develop a plan for quarantining and decontaminating the area, for which the Italian government allotted 40 billion lire (US $47.8
million). This amount would be tripled two years later.

60
At a little before twelve-thirty that afternoon a

technician at a chemical plant, was finishing up
his lunch. There was no active production
going on at the factory that Saturday.
In addition to essences and essential oils for

perfumes
and
cosmetics,
the
plant
manufactured trichlorophenol (TCP), a raw
chemical, used for making a weed killer and
defoliant
called
2,
4,
5-T,
and
also
hexachlorophene, a bactericide.
TCP was used in making hexachlorophene, the

principle ingredient in many surgical soaps.
After a long, toxic, unhealthsome track record,
hexachlorophene had been banned from wide
use in toiletries in the United States. But it was
still available in other countries with less
stringent regulations.
715 sat
Sustainability,
A few other workersBFA
had
down Corporate
to a coffee
when startled by an inordinately loud pong
61
A huge, grayish-white cloud was spewing out under

tremendous, screeching pressure from the safety-valve
stack of the TCP reactor. In moments, minute particules
like very fine sand or dust were falling around them.
They covered Viros face. It felt like half wet salt. He
wiped his face with a maintenance rag, his skin
smarting. A thick white fog surrounded all of them. The
leaves and the ground and the factory roof were
immediately covered with tiny white crystals.
The enormous cloud rolled slowly toward Milan.

It
stretched some five miles long.
An overpowering,
medicinal and chlorine like stench permeated
everywhere, choking them all. Out of the cloud mist fell
stench, vicious and acrid it was thick and gray,
rolling over on itself, then suddenly changing to several
different colours.
No-one knew atBFAthe

715 Sustainability,
time that
Corporate
the cloud had been 62
inadvertently saturated
with one of the deadliest
At noon on Thursday, Mrs Z went out to the yard to select

two chickens for dinner. With a start she noticed the
condition of the tomato plants. They seemed to be burned
brown, the leaves dry and crumbly. She passed by the
rabbit cage and stopped to look into it.
The first thing she noticed was that they had not been
eating. She looked closer. She was shocked to see that
blood was oozing from their mouths and rectums. She halfran to the chicken roost and opened the hatch. All of them
had toppled over on their sides and were dead. A thought
quickly flashed through her mind: she and her family had
been eating their livestock and vegetables ever since the
cloud had come over, five days before. She froze with fear.
The situation grew worse:
People were being hospitalised

Animals were dying in agony, birds falling from the sky
The factory started burning work overalls each day
Warning signs were erected near the factory
63
Though management still claimed there was no danger
A researcher from the Negri Institute in Milan undertook

a search for TCP finding that if it went over 200 degrees
celsius a substance called TCDD or dioxin was
accidentally formed. Clearly for the safety valve to
release this would have to happen. The dioxin was
named
tetrachlorodibenzo-p-dioxin
and
1/100,000,000th of a gram in a two pound mixture could
kill half the rabbits that ate it.
Dioxin is one of the most potent toxins known to occur

as a pesticidal impurity. It is the most potent smallmolecule toxin known. It dwarfs arsenic and strychnine.
It is noiseless, odourless, tasteless and invisible. It is a
hard chemical and will remain to pollute and possibly
drift indefinitely.
64
Environmental Risk
Risks are made up of two elements:
the likelihood of something happening and

the magnitude of the consequences if it did.
Environmental Risk is the likelihood, or
probability, of injury, disease, or death resulting
from exposure to a potential environmental
hazard.
(General Environmental Multilingual Thesaurus 2000)

65
Environmental Risk Management
Risk Management is a well-established field of professional

expertise. It is used in a wide range of areas including:
engineering, business and finance, health and safety,
environmental
management,
healthcare,
emergency
management, business continuity management, sport and
recreation etc.
Risk Management has been described as 'all the things you

need to do to manage an uncertain future'. Risk is
associated with making decisions, and in most cases risks
are taken so as to achieve some advantage.

66
Environmental Risk Management
Risk management is "the culture, processes and structures

which are directed towards the effective management of
potential opportunities and adverse effects."
The risk management process is defined as "the systematic

application of management policies, procedures and
practices to the tasks of establishing the context,
identifying, analysing, evaluating, treating, monitoring and
communicating risk."
Standards New Zealand and Standards Australia have published a joint risk management standard (AS/NZS 4360: 1999 Risk Management).
Where does risk fit with accounting theory?

67
Are the Disaster Numbers Really Increasing?

Written by David Dubov, DisasterRelief.org Writer
Weve all seen recent reports of so many disasters hitting Asia: huge forest and brush fires, bus crashes,
ship collisions, typhoons, floods. It seems that more and more tragedies are occurring in specific regions of
the world. But is this perception backed up by facts?
The lines between some of these disasters can get a bit blurred.
Forest and brush fires are often started by people.
Flooding can be made worse by local deforestation.
Poorly managing water resources and overusing farmland can make droughts much worse.
What is a Disaster?
Websters Dictionary defines a disaster as "a sudden calamitous event bringing great damage, loss, or
destruction." Disasters only happen to people. An earthquake in a remote mountainous region, while
devastating to the countryside in which it happens, would not bring great damage, loss or destruction. But
what kind of disasters are there and how do they affect people?
Some examples of natural disasters are:
Some examples of man-made disasters are
earthquakes
landslides/mudslides
hurricanes/typhoons
tornadoes
floods
tsunamis
forest/brush fires
drought
chemical/oil spills
building fires
bus/airplane/ship accidents
air and water pollution
war and its consequences

68
Is There a Connection Between People and the

Increase in Disasters?
"There is a very strong link between disasters and
increased development," says Schramm. More people and
infrastructure in developing countries make for more
disasters. Increasing development of an area combined
with population growth leads directly to use, and often
overuse, of surrounding resources.
As more land is needed to support the population, forests

are burned off for agriculture, or cut down for wood.
Farmland is used continuously and not allowed to replenish
itself. Animals are allowed to eat plants that would
normally keep precious topsoil in place. Cities move up
hillsides and remove the plants that would otherwise hold
down the soil. People build wherever they can fin space,
including along flood-prone rivers and in flood plains.
Many times, homes are poorly built of readily available

materials. Even moderate earthquake can collapse such
structures. In typhoons and tsunamis, reefs and
windbreaks may have been destroyed, and their natural
protection is no longer available.
69
But Are Disasters Really Increasing?

The answer is yes... and no.
Were certainly seeing a rise in the numbers of disasters happening all over the world,
as development speeds up in areas such as Asia and Africa. But the regions have
always been prone to disasters simply because of their large populations and the
natural hazards that occur there. The plains of central Africa are prone to drought and
have been for as long as people have bee keeping written records.
Volcanoes and earthquakes have been happening around the so-called "Ring Fire," of
which Asia is a part, for thousands of years. The "Ring of Fire" is made up of the lands
surrounding the Pacific Ocean. Volcanoes are very common all around this huge circle
because of the movement of tectonic plates away from its center
Disaster is nothing new.

But there is another factor at work here.
Reporting Disasters
Were doing a better job nowadays of keeping up with disasters. The Internet, worldwide news agencies and satellite television provide information as fast as the speed of
light. Literally. Countries once inaccessible, but just as prone to disasters, now receive
more attention than in the past.
The experts agree on the facts: were definitely more aware of disasters than we once
were, and maybe slightly more vulnerable as the population of the world increases.
Sources: University of Wisconsin, Disaster Management Center, Office of Foreign Disaster Assistance, US Agency for International Development (USAID),
Natural Hazards Center, University of Colorado, Boulder,
Disaster
Research Newsletter.
10 th Nov 1998.
BFA 715
Sustainability,
Corporate
70
Hall, T. The Ugly Face of Australian Business.

Harper & Row 1980.
There is no need to look very far to find the ugly face of Australian business. it is all around us in
some guise or other:
The Philip Morris representative boasting that his company's Marlboro cigarette is now the nation's
top selling brand to children
The financial empire built on sand and wild promises, taking with it as it crashes the hopes and
dreams of thousands of small investors
There is another side to the coin, a world of deadly poisons and of agents that induce cancer; and a
world of executives manipulating information and deceiving their employees and the community. It is
a world where the employee is an expendable commodity, lulled into a false sense of security by a
false and hypocritical facade of caring. And it is a world totally committed to short-term economic
gain at the expense of grief and exploitation. B. F. Goodrich went a stage further on one occasion
when it had a contract to produce brakes for a US Air Force jet. When the newly designed brakes did
not meet the specifications, the company simply submitted false test data to give the impression that
they were correct.
For some industries, defrauding the consumer is as simple as it is profitable. A fruit juice
manufacturer, for example, who added just enough water to save on half of one cent on each of his
daily orange production of 20,000 cartons, contributed an extra $36,500 to his annual profit. With
four flavors he could count on an extra $146,000.
It is in the area of chemicals and minerals, however, that some of the most serious incidents occur. In
the course of just a few years, man has made a remarkable discovery. For the first time in millions of
years, he has created a vast number of new chemicals, which we call petrochemicals because they
are derived from petroleum feedstock.
Most are very potent and are devised for a special purpose such as a pesticide or industrial chemical
and they have been synthesised in enormous quantities - in the US alone, 136 billion kilograms in
1978. There are about 30,000 commercially available chemicals and some 2,000 of these are strongly
suspected of, or are known as, causing cancer. Very few, however, have actually been tested to
BFA 715 Sustainability,
Corporate
establish the extent of their carcinogenicity
- their ability
to cause cancer. Indeed very few new
71
Governance
Ethic
& 11
chemicals at all - and they come
on to the and
market
atUnit
the 9rate
of 3,000 a year - receive any serious
testing of any kind.
What is even more disturbing is that we are actually stepping back in time as far as safety is
concerned, allowing substances which are known to be very dangerous to creep back into
industry. One of these substances is the mineral beryllium which is so dangerous that it was
banned outright in America as long ago as 1940. Now it is being used again more widely in
Australia and already several cases of the disease known as berylliosis have been reported.
Another overseas disaster, however, this time in America, had a very serious parallel in
Australia. In 1942 the Hooker Chemicals and Plastics Corporation began dumping waste in
Love Canal, Niagara Falls, NY. In all, there were more than eighty different chemicals, seven of
them known carcinogens, including two which cause leukemia in humans.
For years, the chemicals were no problem but then in 1976, after years of abnormally heavy
rain, they began leaking from the corroding drums. They rose to the surface, sometimes
bubbling in pools like a cauldron, while their fumes seeped into cellars and homes. New York's
Health Commissioner Robert Whalen carried out an investigation and concluded that the
situation was 'an extremely serious threat and a danger to the health and safety of those
living near it'. As a top priority, he recommended the immediate evacuation of all women and
children under two. But for many it was too late.
Alpha Chemicals, a Dee Why, NSW, company manufacturing highly specialised chemicals
including mercury, arsenic and cobalt, was discovered in 1979 to be routinely dumping its
poisonous waste in places which posed a serious threat to the community.
On one occasion employees dumped fifty mercury flasks containing amounts of highly
poisonous mercury on a public tip which in wet weather ran off into Narrabeen Lagoon, a
favourite fishing and recreation spot. With it went 20 kilograms of mercury waste and bags
still containing residue of lead compounds, mercury and strontium chromate. on another
occasion, a worker at Alpha put mercury into the garbage can wrapped in a plastic bag, and it
was regular practice to hose out the factory into the street.

72
THE GREAT COVERUP
Either through the deliberate discharge of the chemicals through the smoke stack or through accidental leaking
and spillage, industries up and down North America appear to be the direct cause of an assortment of cancers
among the community living in the vicinity.
Among the most dangerous known industrial processes is the production of vinyl chloride which is the base for
a multi-billion dollar chemical industry around the world. Vinyl chloride was never tested properly when
industry introduced it thirty years ago, and it was years before it was proved to be a most dangerous cause of
cancer of the liver.
In 1974 the Italian chemical industry sponsored a study which ,showed that vinyl chloride produces these
tumors when it is inhaled in concentrations far lower than those to which many workers were being exposed
around the world, including Australia. But because of an agreement between the researchers and the vinyl
chloride corporation which funded the study, it was deliberately hidden for more than a year. Even then, it was
only an extremely high rate of angio-sarcoma, as the liver cancer is called, that forced the Italians to release it
at all.
In America it took the deaths of thirteen workers who had been exposed to vinyl chloride before it was realised
there what was happening. The Manufacturing Chemists Association knew of the Italian tests but was also able
to withhold all information about them, and for fifteen months even the fact that vinyl chloride was a
carcinogen. Relying on industry for information the government regulation body had no knowledge whatever
that it caused cancer.
It was not until American workers began to die in large numbers and until people were dying who had been
exposed to only very low levels of vinyl chloride, and sometimes who had not even worked in the industry, that
the Association was forced to reveal the truth. One woman who lived four blocks away from a vinyl chloride
plant contracted cancer of the liver. Because of the suppression of this data, tens of thousands of workers were
exposed to vinyl chloride with no warning of its deadly effects.
In Australia the workers suffered largely because of the deceit of the American manufacturers. Vinyl chloride is
produced by only two companies in Australia, ICI at Botany with sixty per cent of the market and B. F. Goodrich,
the largest producer of PVC in the world, operating from the Altona petrochemical complex near Melbourne.

73
Although there is still some dispute among experts about the maximum level of vinyl chloride
in the air that can be safely tolerated, there is an increasing trend to accept that once an
agent is known to be a carcinogen it is dangerous at every level - the Australian standard has
always been higher than in most other countries. When it was discovered overseas that
levels of even five parts per million of air were causing cancer, the Australian standard was
still fifty.
ICI and Goodrich both maintain that they have been entirely dependent on information from
their parent companies overseas for information about the dangers and the new
developments in vinyl chloride. Certainly it was three years after the management of
Goodrich in the United States had been told that vinyl chloride caused cancer, before it even
alerted its own subsidiary in Australia. It is hard to think of a more unsatisfactory situation;
and whatever the dangers of a particular chemical, there must be a more reliable safeguard
for the Australian people than this.

74
James Hardie At Work - Asbestos

Hall,T. 1980. The Ugly Face of Australian Business. Asbestos The Deadly Fibre Pp. 23-37
The Australian industry has repeatedly maintained that it has always operated in line with current
knowledge of the dangers of asbestos, but this is manifestly untrue. In modern times, the link
between asbestos and asbestosis was clearly documented in Britain in 1907, in America in 1917
and in Canada (the worlds largest producer of asbestos) in 1918. Indeed so seriously was the
danger viewed in North America that by 1918, sixty years ago, the American insurance industry
refused to cover asbestos workers. [legal documentation clearly shows that the industry in Australia
was aware of this from the 1930s]
in the mid-1970s James Hardie has obstinately safeguarded its interests by either flatly
denying the dangers of asbestos, or when pushed into a corner, by playing them down.
Australians are kept in almost complete ignorance of the dangers of asbestos; and the extremely
powerful and rich industry lobby has ensured that asbestos continues to be used in situations that
have long been outlawed overseas. By manipulating the information and by making itself virtually
the sole repository of all public knowledge about asbestos, the industry has been able to keep the
Australian public as well as its own workers in almost total ignorance.
In the twenty-two years between 1954 and 1976, when Hardies sold the mine, about 160 people
from the Baryulgil Aboriginal community alone worked there and of those already half are dead.
Most have died from what is best described as heart and chest complaints, usually at between the
age of 43 and 48: the oldest to die was a man of fifty. For practically all of them the true cause of
death, health officials believe, has been contamination from asbestos dust, which is gradually
wiping out this little community before its very eyes.

75
Tests showed that the workers were being exposed to asbestos dust at
levels at least 70 times higher than the permissible safe level.
The asbestos tailings and dust was used extensively on roads and
driveways, and in childrens playgrounds where the children liked to
play in the soft fibres.
At one meeting they asked management if asbestos dust was as

dangerous as some of the stories they had been hearing and reading
from overseas suggested, and if they themselves were being exposed
to the same dangers. They were told Oh, no. It might affect
white people, but not Aborigines.
Hardies were not prepared to consider compensation. Not only the

workers but the towns population were seriously affected by asbestos
related illnesses.
James Hardy TODAY
Think about the issue today was the risk taken by Hardies too great?
If you were the CEO would you have dealt with the risk issues differently?
How would you explain behaviour in terms of accounting theory?

76
Exxon Valdez
On March 24, 1989, shortly after midnight, the oil tanker Exxon Valdez struck Bligh Reef in
Prince William Sound, Alaska, spilling more than 11 million gallons of crude oil. The spill was
the largest in U.S. history and tested the abilities of local, national, and industrial
organizations to prepare for, and respond to, a disaster of such magnitude. Many factors
complicated the cleanup efforts following the spill. The size of the spill and its remote location,
accessible only by helicopter and boat, made government and industry efforts difficult and
tested existing plans for dealing with such an event.
The spill posed threats to the delicate food chain that supports Prince William Sound's
commercial fishing industry. Also in danger were ten million migratory shore birds and
waterfowl, hundreds of sea otters, dozens of other species, such as harbor porpoises and sea
lions, and several varieties of whales.
Since the incident occurred in open navigable waters, the U.S. Coast Guard's On-Scene
Coordinator had authority for all activities related to the cleanup effort. His first action was to
immediately close the Port of Valdez to all traffic. A U.S. Coast Guard investigator, along with
a representative from the Alaska Department of Environmental Conservation, visited the
scene of the incident to assess the damage. By noon on Friday, March 25, the Alaska Regional
Response Team was brought together by teleconference, and the National Response Team was
activated soon thereafter.
Alyeska, the association that represents seven oil companies who operate in Valdez, including
Exxon, first assumed responsibility for the cleanup, in accordance with the area's contingency
planning. Alyeska opened an emergency communications center in Valdez shortly after the
spill was reported and set up a second operations center in Anchorage, Alaska.

77
The Coast Guard quickly expanded its presence on the scene, and personnel from
other Federal agencies also arrived to help. EPA specialists in the use of experimental
bioremediation technologies assisted in the spill cleanup and the National Oceanic and
Atmospheric Administration was involved in providing weather forecasts for Prince
William Sound, allowing the cleanup team to adapt their methods to changing weather
conditions. Specialists from the Hubbs Marine Institute in San Diego, California, set up
a facility to clean oil from otters, and the International Bird Research Center of
Berkeley, California, established a center to clean and rehabilitate oiled waterfowl.
Three methods were tried in the effort to clean up the spill:
Burning
Mechanical Cleanup
Chemical Dispersants
In the aftermath of the Exxon Valdez incident, Congress passed the Oil Pollution Act of
1990, which required the Coast Guard to strengthen its regulations on oil tank vessels
and oil tank owners and operators. Today, tank hulls provide better protection against
spills resulting from a similar accident, and communications between vessel captains
and vessel traffic centers have improved to make for safer sailing.
At what point do we draw the line between resource

extraction at any cost and environmental protection? Can we
have both?

78
Accounting Theory
TOPIC 9 C
New systems of accounting
The incorporation of social and
environmental factors within external
reporting
BFA 715 Sustainability, Corporate Governance and Ethic

Unit 9 & 11
79
Introduction
Discussion on sustainable
bottom line reporting
development
and
triple
reporting that provides information about the

economic,
environmental
and
social
performance of an entity
This is a departure from the traditional sole economic
focus (on profit)
This is tied to the concept and goal of sustainable
development (which includes how current activities will
affect the ability of future generation to fulfil their own
needs)
80
Responsibilities of business
Moves to provide information about social and environmental performance

implies management of these organisations consider they are accountable
for social and environmental performance, as well as economic
performance
This is not a view held universally!
It also depends on how society and business managers view the
purpose of corporations
But there is pressure from communities for business to commit to

sustainable practices (and reporting)

81
How does an entity (its managers)

determine its responsibilities?
What do its relevant stakeholders
business responsibilities to be?
consider
It depends on the personal judgement of the

management involved as to who are the relevant
stakeholders (Stakeholder Theory)
This has implications for the information disclosed
Perceived responsibility and accountability go
hand in hand
82
Accountability (a reminder)
The duty to provide an account (not necessarily
financial) or reckoning of those action for which
one is held responsible
two responsibilities or duties
to undertake certain actions

to provide an account of those actions

83
To whom is business
responsible?
Many large organisations are making public
statements that their responsibilities extend
beyond shareholders to encompass communities
in which they operate and society as a whole
If sustainability embraced then responsibility is
also owed to future generations
If a business accepts responsibility for the
sustainability of its practices it then it should
produce a sustainability report
84
Stages of sustainability
reporting
Stage 1: Why report?
Relates to managers motives

Stage 2: To whom to report (who are the stakeholders?)
Linked to managers motives

Stage 3: What to report?
Involves dialogue with identified stakeholders

Stage 4: What form should the disclosures take?
85
Stage 1: Why report?

As we have seen, different accounting theories
give alternative explanations about why a
business (its managers) might decide to report
social and environmental information

86
Why report? Different views

of business responsibility
Friedman
Expressed the traditional economic/corporate view
Rejected the view that corporate managers have any moral
obligations
Argued that their responsibility is to increase profits as long as
they stay within the rules (more profit is better for everyone!)
This view is often held by the media, which applauds profitable
organisations
87
Why report? Differing views of

business responsibility
An alternative view:
Organisations earn their right to operate in the community

They are artificial entities that society chooses to create
Organisations do not have an inherent right to resources
Consequently they are accountable to society for how it
operates
Societal expectations may exceed profitability
88
Stage 2: To whom to report?

If managers are overwhelmingly motivated to
increase shareholder value then reporting will be
aimed at meeting the expectations of powerful
stakeholders
If managers adopt a broader ethical point of view
then disclosures will be aimed at stakeholders
affected by the entitys operations but some
prioritisation of needs must be done
The decision of whom to report to is related to the
previous question of why report
89
Stage 3: What to report?

This involves:
Establishing that there is a demand for
information
Identifying information needs through dialogue
with stakeholders
Negotiating a consensus among competing
stakeholder needs and expectations
90
Stage 4: How to report?

Conventional financial reporting based on the CF
and accounting standards is inadequate for
reporting social and environmental effects
Triple Bottom Line (TBL) reporting is an
alternative but is not the same as sustainability
reporting (there is a whole literature on TBL)
There must be an attempt to place a cost on the
externalities of a business

91
What to report?
Sustainability
The Brundtland Report placed sustainability on
the business worldwide agenda
Sustainable
development
defined
as
development that meets the needs of the present

world without compromising the ability of future
generations to meet their own needs
Inter-generational and intra-generational equity
central to the agenda

92
What to report? Sustainability

If sustainability becomes part of the expectations
held by society, it must become a business goal
Providing
information
about
social
and
environmental performance will increase the trust
a community has in the organisation
The view that corporate survival and prosperity is
tied to community perceptions is being promoted
publicly by a number of companies (still an
economic focus?)
93
How to report? Limitations of traditional

financial accounting
Financial accounting focuses on the information needs of those involved in resource

allocation decisions (sustainability embraces all stakeholders)
The notion of materiality tends to preclude the reporting of social and environmental
information, given the difficulty in quantifying costs
Reporting entities frequently discount liabilities to present value, which tends to make
future clean-up expenditures appear trivial
Adopts an entity assumption where the entity is treated as distinct from its owners
and other stakeholders (is mutually exclusive with sustainability)
Ignores transactions not directly affecting the entity
ignores externalities caused by the reporting entity, some relating to social and environmental implications
of the entitys operations
Expenses are defined to exclude the recognition of any effects on resources not
controlled by the entity
Externalities caused by the entity cannot be reliably measured, and so are not
recognised (IASB recognition criteria!)
94
How to report?
Disclosure of information about the social, economic and
environmental performance of a business (the managers
priorities!)
But, is the bottom line metaphor appropriate? Can social and
environmental effects be measured through a bottom line?
This seems to indicate that all bottom lines should be
managed in a similar manner. Is this appropriate?
This also seems to suggest that social, economic and
environmental performance are separate to one another.
This is not really the case in practice.
95
How to report? Relevance of measures used to

calculate national economic success such as GDP
Performance of governments is related to outputs

of systems of national accounts
eg. gross domestic product (GDP)

Does not consider issues of resource efficiencies
or equities with how resources are distributed
Experiments are taking place to green GDP

96
How to report A Thought

A country could exhaust its mineral
resources, cut down its forests, erode
its soil, pollute its aquifers and hunt its
wildlife to extinction, but measured
(corporate and national) income would
not be affected as those assets
disappeared (Repetto et al, 1989)
97
How to report? Ideas of Eco-justice and

Eco-efficiency reporting
When considering environmental and social implications, ecoefficiency and eco-justice issues are considered
They are two components of sustainability (apart from economic performance)
They are concerned with maximising the use of a given quantity of

resources and minimising the environmental implications of using the
resources
relates to environmental protection
They are the focus of many stand-alone environmental reports

They do not address whether the goods being produced should be
produced
Eco-justice reporting indicates how the entity is using its limited resources to
ensure that disadvantaged groups are not forgotten. Includes information about
creation of employment, education, health care, observance of human rights and
equal opportunities, impact on indigenous peoples, support for people in
developing countries etc.
98
How to report? Environmental

reporting guidelines
Eco-efficiency focus
Guidelines:
Australian Minerals Industry Code for Environmental Management
Environmental Protection Authority (NSW) also produced reporting
guidelines
Many international bodies have also released guidelines

99
How to report? Social accounting and Ecojustice

Addresses eco-justice issues
Social accounting considers social-based issues for external reporting
purposes
It helps to evaluate how well a firm is fulfilling its social contract
It was widely promoted in the 1970s but lost prominence in the 1980s.
Re-emerged in the mid to late 1990s
It acknowledges that the organisation has many stakeholders, with the
stakeholders expectations often driving the reporting process
Social disclosures commonly made in annual reports
Stand-alone reports commenced in the mid to late 1990s
100
How to report? Examples of

social disclosures
Health and safety initiatives
Injury rates
Training programs
Relationships with indigenous peoples
Community support programs
all are typically ad hoc and not

consistent from year to year
101
How to report? Guidance on

social accounting
The Global Reporting Initiative (GRI) established the GRI

Sustainability Reporting Guidelines the most comprehensive
framework for how to report that is currently available first
edition 1997
But it is not mandatory and so many organisations are selective

what information they choose to disclose
Towards Standards in Social and Ethical Accounting, Auditing and

Reporting, issued by The Institute of Social and Ethical
Accountability (ISEA)

102
Social auditing/assurance
Purpose of social auditing is for an organisation to
assess its performance in relation to societys
requirements and expectations (sometimes
included in TBL or sustainability reporting)
Results form the basis of an entitys publicly
released social accounts

103
Social Accounting Standards
Released in 1998 by the Council on Economic Priorities (US

body)
SA8000
focuses on issues associated with human rights, health
and safety, and equal opportunities
In 1999 ISEA launched standard AA1000

concerned with the processes of setting up and
operating social and ethical accounting and auditing
systems

104
Power of the media
The media can provide information about international

operations
Organisations need to consider the international community

not just the local community
Unfavourable media coverage is expected to affect public

perceptions of the legitimacy of the organisation

105
Strategic alliances with

stakeholder groups
Many organisations enter strategic alliances or partnerships

with other organisations
may have previously been adversaries
Examples:
timber industry and World Wide Fund for Nature (WWF)
Marine Stewardship Council
Greenpeace and the Sydney Olympics bid

106
Monetising environmental costs and benefits

(externalities)
As already discussed, financial accounting typically ignores

environmental impacts, therefore experimental approaches to fullcost profit calculation are being developed
Market prices do not reflect the scarcity of resources involved or

the harm resources cause
There is a perception that all costs associated should be reflected

in the price of the good
If done comprehensively this would involve some life-cycle analysis

consideration of the inputs and outputs from raw material
acquisition to disposal
Often referred to as true prices

107
Some thoughts to finish with

If sustainable development is to become a
reality rather than remain a seductive
mirage,
governments,
communities,
companies and individuals must work
together to improve their triple bottom
line (economic, social and environmental)
performance. To this end, we not only need
new forms of accountability but also new
forms of accounting
108
Finally
All public corporations live a lie. They
believe that we reside in a world where
capital has the right to grow and that
this right is a higher right than the
rights of people to their culture and
what we hold in common. You cant get
sustainability from an economic model
that strives first and foremost to
increase the amount of money large
corporations have.
Paul Hawken, 2003 Dreams of a liveable future
109
Accounting Theory
Unit 9 - D
Corporate
Governance and
Ethics
110
THE GROWING INTEREST IN CORPORATE

GOVERNANCE
Interest in corporate governance appears to be driven by

Highly publicised corporate misconduct
Agency problems
Realisation of other benefits

111
Problems with the Management of

Corporations
Management self interest

Fraud
Perquisites
Anti-social corporate behaviour

Hiding or falsifying information
Perceived gap between performance and
remuneration
112
Problems with the Management of

Corporations
These problems, real or perceived, can have

wider ramifications.
Poor governance is linked to

Poorer firm performance
Increased regulation for all companies
Decreased consumer confidence
Reduced economic growth
It has even been implicated in a number of
national and global financial crises
113
Advantages of Good Corporate Governance

In a globalised and competitive environment good
governance can be a significant advantage.
Good governance can
Reduce the cost of capital
Increase shareholder base
Manage increased scrutiny
Increase consumer confidence
Facilitate economic growth

114
WHAT IS CORPORATE GOVERNANCE?

The procedures and processes according to which an organisation is directed and
controlled.
The corporate governance structure specifies the distribution of rights and
responsibilities among the different participants in the organisation such as the
board, managers, shareholders and other stakeholders and lays down the rules
and procedures for decision-making.
By doing this, it also provides the structure through which the company objectives
are set, and the means of attaining those objectives and monitoring performance
Whose interests are to be protected and what are appropriate objectives of the
corporation Stakeholders.
Traditional or Anglo-Saxon Model
The key role for corporate governance is enabling the efficient use of resources
by helping financial markets to work properly and gives priority to shareholder
value
115
Corporate Governance Stakeholders

Summarised by Milton Friedman:
Corporate governance is to conduct the business in accordance
with the owner or shareholders desires, which generally will be
to make as much money as possible while conforming to the
basic rules of the society embodied in law and local customs.
Alternatives to the traditional view suggest that

corporate governance must go beyond the narrow
interests of shareholders and should be extended to a
wider group of stakeholders.
European Models
Multiple stakeholders
116
THE NEED FOR CORPORATE GOVERNANCE SYSTEMS
The corporate structure requires governance

Separation between capital contributors and management
Under the best circumstances managers should act as though they

had contributed the capital
It would appear this does not happen and managers may bias or
distort the financial statements

117
Positive Accounting Theory and its

Relationship with Corporate
Governance
Positive accounting theory explains that for efficiency

reasons companies are formed and can be viewed as a
network of contracts or agreements that determine the
relationships with and among the various parties involved.
One important agency relationship that arises from this

nexus is that between the managers and the capital
contributors who authorise the managers to make the key
business decisions.

118
Overview of the ShareholderManager

Relationship in Agency Theory

119
CORPORATE GOVERNANCE GUIDELINES AND

PRACTICES
It is generally acknowledged that there is no one
system of corporate governance.
The practices and procedures required or desired
will be affected by:
The nature of the particular corporation and its
activities.
The environment in which the corporation operates.

120
Elements of Corporate Governance

Key elements
Controlling and directing the directors (and senior
management)
ensure that the key managers make appropriate decisions
Role of shareholders (and other stakeholders)

ensure that shareholders have the ability to protect their
interests in the corporation
Transparency and accountability

ensure that the stakeholders (including shareholders) are
sufficiently informed about the activities of the company
and its management
121

122
Elements of Corporate Governance

123

124
APPROACHES TO CORPORATE GOVERNANCE
The Rules-Based Approach to Corporate Governance

Prescribe precise practices that are required or recommended to ensure good
corporate governance.
Associated with enforcement by legislation or listing rules, with imposition of penalties
if the rules are not followed.
Advantages
Provides a set of minimum corporate governance practices that must be followed by all
corporations.
Aids enforcement and clarifies potential liability.
Disadvantages
Lowest common denominator approach

Encourages form over substance
Focus on legal liability not stakeholder interests

125
The Principles-Based Approach to

Corporate Governance
Identifies general principles or objectives for the corporate governance
system to aim to achieve.
Responsibility is placed on the managers to consider which practices are
appropriate, given their circumstances.
Advantages
Places a higher level of duty on directors to determine which corporate
governance practices are required.
Its flexibility means that practices can be adapted for the particular circumstances
and environment of the entity.
Disadvantages
Directors must interpret these principles and decide which corporate governance
practices are needed.
It relies on their honesty, integrity and commitment to good governance.
126
Practical Considerations
In most countries, corporate governance involves
various combinations of both the rules and
principles-based approaches.
Specific legislation that requires certain
corporate governance practices to be followed
by law.
Codes of corporate governance practice issued
by government or industry groups and also by
stock exchanges.

127
DEVELOPMENTS AND ISSUES IN

CORPORATE GOVERNANCE
The global financial crisis has provided an
impetus for regulators, corporations themselves
and other organisations to reconsider aspects of
corporate governance.
An OECD review concluded that while the
espoused principles of corporate governance
were sound, there was a gap between the
principles and their implementation.

128
Increased Focus on Risk Management

The failure of many corporations to manage and
control risk has been identified as a cause of the
financial crisis.
Risk management deficiencies noted include:
Risk was not managed or monitored at the entity
level, but rather at individual activity level.
Information about risks were not reaching the
board.
Organisational culture encouraged risk taking
Disconnect between the corporations overall risk
strategy and related procedures
129
Increased Focus on Risk Management

Risk management in many codes of corporate
governance is not given prominence.
Many corporations are now endeavouring to
introduce more formal and comprehensive risk
management policies and procedures and
integrate these into their existing corporate
governance frameworks.
The task of business risk management is now
often delegated to the audit committee.
130
Elements of the Effective Governance Model

131
Executive Remuneration
This is a contentious issue regularly scrutinised by public and the media.
Concerns have been raised about
The
The
The
The
size of executive remuneration.

apparent disconnect between performance and pay.
use of public (bail-out) money to pay bonuses.
connection between remuneration packages and rewarding short-term focus
In response to the financial crises and concern about remuneration there have been
a variety of legislative responses.
In the US, the Dodd-Frank legislation includes:
Claw back provisions if it is found that compensation paid was based on inaccurate
financial statements
In Australia, recent legislation includes

Increased disclosure
A two-strikes rule where if more than 25% of shareholders vote against the remuneration
report for two consecutive years, the board itself can be put up for re-election.

132
ROLE OF ACCOUNTING AND FINANCIAL REPORTING

IN CORPORATE GOVERNANCE
Accounting clearly has a central role in directing
and controlling a corporation.
Management accounting provides a significant part of
the information on which company operations will be
decided.
Financial accounting provides the means for outsiders to
monitor the corporation and to assess how well those
responsible for managing the corporation have
performed.

133
Deterring, Preventing and Encouraging

Certain Actions and Decisions
There are two key ways in which accounting is used to

direct and control the managers of a corporation.
Encourage appropriate decisions
Linking managers performance to rewards
Transparency and disclosure
Requiring specific disclosure about areas relevant to
corporate governance. E.g.
AASB 124 Related Party Disclosures
AASB 2 Share-based Payment

134
Informing Shareholders and

Stakeholders
The key role for financial reporting in corporate
governance is to provide the information needed to
assess the performance of the corporation and its
managers.
To be useful the financial statements provided must
be transparent, unbiased and complete.
Financial statements are a crucial link enabling
shareholders to monitor directors actions and to
assist in identifying any deficiencies in the
effectiveness of corporate governance
135
Financial reporting
problems
Historically and recently there are many
examples of financial reporting failures.
The choices of accounting policy may not be
neutral or unbiased.
Two key drivers are
Maximising remuneration bonuses
Meeting market expectations
Also instances of outright fraud

136
THE ROLE OF ETHICS
At the core of good governance is doing the

right thing by acting with honesty, impartiality,
integrity, trustworthiness, respect for the law and
due process. A commitment to ethical values is
fundamental
Peter Achterstraat,
Auditor-General in New South Wales

137
THE ROLE OF ETHICS

Good corporate governance cannot exist
without ethics.
The SarbanesOxley Act in the United States requires disclosure of
whether or not there is a code of ethics for senior financial officers.
CPA Australia argues that implementation of a corporate
governance structure is not sufficient and will only work if the
culture of the corporation supports good governance.
The Hong Kong Institute of Certified Public Accountants guidelines
for public bodies places emphasis on the personal qualities of
individuals as the foundation for good corporate governance.
138
INTERNATIONAL PERSPECTIVES AND

DEVELOPMENTS
The Anglo-Saxon model placing emphasis on shareholders interest

dominates in the United States, Australia, Canada and the United Kingdom.
Asia is increasingly adopting the Anglo-Saxon shareholder model.
In Europe, there is more direct recognition of alternative stakeholders (such

as employees in France and creditors in Germany).
It is likely that corporate governance will increasingly consider broader

stakeholders.
The principles-based approach prevails at the moment, backed by

legislation for particular practices.
Future crises, collapses and financial reporting failures will influence future
directions and approaches.
139
Ethics v Morals
Morals personal or private set of values
Ethics formal, public or universal set of values
Morality [moralis (latin)] broad expectations of

behaviour (good or bad)
Ethics [ethicos (greek)] - rightness (right or wrong)

Similar meanings can be used interchangeably
Unethical behaviour is harmful
140
Ethics and the community

The behaviour of accountants is accessed by 3 main
communities:
1. The legal system
2. The accounting profession Code of Ethics
3. The general public

141
Professional Code of Ethics

Joint code of professional conduct:
Section A Introduction 4 basic needs to meet objectives

Credibility
Professionalism
Quality of services
Confidence
Section B Code of Ethics (8 core rules)

Public interest
Integrity
Objectivity
Independence
Confidentiality
Compliance with accounting and auditing standards
Competence and due care
Ethical behaviour
142
Societys Standards of Ethical

Behaviour
Not codified yet understood
Criteria include:
Honesty
Reliability
Value for money
Respect for the law
Discretion
Competency
Principles
Fairness (Henderson, Pierson & Harris, 2004)

143
Ethical issues for accountants

Benefits and costs of unethical behaviour
Benefits nearly always material; or pleasure
or revenge
Costs
Conscience-driven costs
Society-imposed costs
Loss of freedom of choice

144
Benefits and costs of ethical behaviour

Benefits avoiding costs of unethical
behaviour
- Peace of mind and a clear conscience
Costs
Going without material benefits of unethical
behaviour

145
What would you do?
Assessing costs and benefits of ethical and

unethical behaviour is subjective.
2 people faced with same circumstances

may reach different conclusions.
Discuss Scenarios

146
Conclusions
The general public tend to see accountants/auditors as

an integral part of unethical business practices
Most accountants will be faced with ethical dilemmas in
the practice of their profession
Ethical issues are wide ranging
Choices are made on the basis of the expected net
benefit of the alternatives
Education, training and ethical principals can only
prepare you to be aware of and understand the benefits
of acting ethically
147
An ethical dilemma for accountants

Simon Longstaff
Contents:
The ethical dilemma

What are the issues?
So commonplace it's often ignored
Accountants as professionals
Caring about the truth
Beyond rules
The power of a question
Conclusion
148
The ethical dilemma
You are the Chief Financial Officer of a medium to large company.

It is April and the Chief Executive Officer has just returned from a meeting with the
company's bankers.
She calls you to her office to discuss the results of the negotiations. As things stand, the
company requires a fairly significant injection of capital to modernise plant and
equipment.
The company has been promised new orders if it can produce goods to an international
standard. Existing machinery is incapable of manufacturing the required level of quality.
Whilst the bank is sympathetic, current lending policies require borrowers to
demonstrate an adequate current and projected cash flow, as well as a level of
profitability sufficient to indicate a capacity to make repayments from an early date.
The problem is that, largely because of some industrial problems, the business has not
been performing at a level which realises even its 'unimproved' potential. Strictly
speaking, the figures would not satisfy the bank's criteria.
The CEO reminds you of all of this and then mentions that she has told the bank that the
company is in excellent shape, that she believes that its financial results will meet the
criteria and that she will ask the Chief Financial Officer to deliver a financial report to the
bank at the beginning of the next week. She tells you that it is up to you to decide upon
the contents of that report.
Two final pieces of information; you have recently purchased a home - leveraged with a
significant mortgage. Failure to invest and gain the promised new orders is almost
certain to lead to major retrenchments of personnel.
149
What are the issues?
What are some of the ethical issues arising in a case such as this?
For the most part they are fairly obvious:
Should the accountant tell the truth to the bank, irrespective of
the consequences?
Does it really matter if the accountant massages the figures,
perhaps factoring in notional income arising from projected
new sales that will be made once the new plant is operational?
After all, the projected cash flows are the really important thing
to consider.
Does the accountant have a duty to do everything possible to
ensure the preservation of jobs at the factory?
Is the self-interest of the accountant a justifiable concern?
How should the accountant tackle the matter of loyalty to the
CEO?
Whilst this presentation involves a fictional dilemma, it is not too

far removed from the actual experience of many practitioners.
The problem arises from the fact that most ethical dilemmas are of
a much smaller BFA
dimension,
perhaps
the obvious
715 Sustainability,
Corporate lacking
150
significance of the type
of 'big
ticket'
issue
Governance
and
Ethic Unit
9 & 11outlined above.
So commonplace that it is sometimes ignored
Many people find it difficult to recognise an ethical dilemma as such.

It is not that most people are inherently unethical. Instead, the problem is
that many people are unconscious of the fact that nearly everything that
they do has an ethical dimension.
Consider some of the relatively 'invisible' cases where ethical questions
seem to be ignored.
Take a simple example; have you ever seen a person avoid taking a
telephone call by telling someone else to answer and say that the person is
not there.
Firstly there is the matter of deceit and
Secondly there is the matter of getting someone else to do the 'dirty
work".
Some might respond by saying that this sort of behaviour is quite

harmless. But is it really? What sort of message does such behaviour give
about the prevailing values of an organisation? How easy is it to accept an
avowal of honesty from a person who is habitually deceitful for the sake of
minor personal convenience?
The reason for mentioning these cases is to demonstrate how even simple
forms of behaviour are loaded with ethical significance. This ceases to be
any kind of mystery once it is realised that ethics is all about answering a
very fundamental question; namely, "What ought one to do?".
151
The rules of the Accounting profession represent one attempt to

codify principles that apply to a particular group of people
engaged in a common activity.
What it means to claim the status of being considered a

profession.
The term refers to a group ... pursuing a learned art as a common calling in the
spirit of public service - no less a public service because it may incidentally be a
means of livelihood. Pursuit of the learned art in the spirit of public service is the
primary purpose. [Dean Roscoe Pound]
Thus, a profession is distinguished by having a:
Specialised body of knowledge

Commitment to the social good
Ability to regulate itself
High social status
The point should be made that to act in the spirit of public

service at least implies that one will seek to promote or preserve
the public interest. A person who claimed to move in a spirit of
public service while harming the public interest could be open to
the charge of insincerity or of failing to comprehend what his or
her professional commitments really amounted to in practice.
152
In August of 1993, the Australian Council of Professions (1993, p. 1)

issued a discussion paper, Professional Services, Responsibility and
Competition Policy. Significantly, a press release about this paper was
issued under the title, In The Public Interest. Both the paper and the
release sought to distinguish a profession from more commercially
minded occupational associations. As opposed to others, professional
practitioners:
... must at all times place the responsibility for the welfare, health and
safety of the community before their responsibility to the profession, to
sectional or private interests, or to other members of the profession.
If the idea of a profession is to have any significance, then it must

hinge on this notion that professionals make a bargain with society in
which they promise conscientiously to serve the public interest - even if
to do so may, at times, be at their own expense.
In
or
return, society allocates certain privileges. These might include one

more of the following:
the right to engage in self-regulation
the exclusive right to perform particular functions
special status
153
At all times it should be remembered that what society gives, it can take
away. It only accords privileges on the condition that members of the
profession work to improve the common good. Having said this, there should
be no doubt that all citizens are served by the existence of independent
professions that are free to interpret the common good as being something
other than that which a government of the day decrees. Once again, it should
be noted that a capacity for a profession to fulfil this role depends on the
extent to which the broader community trusts its judgement and motives.
The introduction to Ethics & the Legal Profession, edited by Michael Davis and
Frederick Elliston (1986, p. 18) builds on this idea:
One of the tasks of the professional is to seek the social good. It follows from
this that one cannot be a professional unless one has some sense of what the
social good is. Accordingly, one's very status as a professional requires that
one possess this moral truth. But it requires more, for each profession seeks
the social good in a different form, according to its particular expertise:
doctors seek it in the form of health; engineers in the form of safe efficient
buildings; and lawyers seek it in the form of justice. Each profession must
seek its own form of the social good. Without such knowledge professionals
cannot perform their social roles.
154
Caring about the truth

But is there more to being an accountant than is captured
by the definition of the professional?
One answer suggests that beyond there being a specialised
body of knowledge, there is also a particular end that helps
to define the accountant's practice.
It can be argued that accountants have the presentation of
truth, in a fair and accurate manner, as an end.
It should also be conceded that to talk of the 'presentation
of truth' as being an important end of accounting may be to
run the risk of ignoring other important factors.
155
Beyond rules
The real point to be made is that accountants, as professionals, cannot

rely exclusively on their rules to define who they are and what they
will do when traversing the ethical landscape.
Rules are a rough and ready guide when issues are clear. But they
tend to let us down whenever we are faced with a genuine ethical
dilemma.
Questions,
"What sort of person do I want to be?' and
"What sort of community do I want to help to create?".
Questions of this sort lead to contemplation about dispositions (to

obey the rules, to ask difficult questions and so on).
Does it really make sense to do anything to get the job done?
Is it really in the interests of the client to do exactly what he or she
wants?
One is forced to ask whether being a professional involves exercising

judgement (and not just skill). Are professionals relied upon by society
to act as 'gate-keepers' of sorts?
156
The power of a question

There are many factors that motivate people: natural
dispositions to do what is right, the binding standards of the
profession or, indirectly, the flow of sentiment arising from
public pressure. Whatever the stimulus, there is evidence that
change requires nothing more than a capacity and willingness
in people to ask quite simple questions about the rightness of
any proposed course of action.
It is this sense of awareness that ethical questions can and
ought to be asked whenever we have a choice that really
helps to define an approach that, in part, constitutes the role
of the professional. To ask questions is not to seek to impose
an answer on clients or colleagues. But, it is to seek to add a
new dimension of significance to the decision-making process.
157
Conclusion
Accountants have the capacity and the opportunity to look below

the surface of this complex society.
Members of the accounting profession have an opportunity to go

beyond the provision of merely technical advice.
Being a member of the accounting profession and, therefore, one

of the 'gate-keepers' of our society, the accountant can stop to ask
clients to consider whether what they want, at any point in time, is
in fact what they might choose if they took a broader view of their
own self-interest (including that of their community).
In considering such matters, can you be sure that your practice is

a proper expression of the role of the professional, which
necessarily involves a regard for the wellbeing of others in the
community. In the same vein, try to imagine whether or not your
actions would stand up to the 'sunlight test' of public scrutiny. The
motto of the Society is 'integrity".
To be a member of a profession is to be a member of a community.

Ethical issues are not restricted to matters arising in relationships
with clients and the community.
158
Conclusion
Whether or not it can be preserved will depend on the kinds of

decisions that individuals make when trying to answer that
fundamental practical question, What ought one to do?.
To return to the question of the ethical dilemma. It is perhaps an

unfortunate fact of life for us that there really are circumstances in
which no system of rules can provide us with a sure and
uncontroversial answer. On the other hand, it may be that the
existence of ethical dilemmas provide us with two great boons; an
opportunity to exercise our freedom and sense of personal
responsibility and also to engage with others in exploring and
developing traditions that provide guidance to communities.

159
References:
Australian Council of Professions, (1993) Professional Services,
Responsibility and Competition Policy: a discussion paper prepared for
the Permanent Advisory Committee, August 1993
Davis, M. & Elliston, F. A. (Eds) (1986), Ethics & the Legal Profession, New
York, Prometheus Books
Pound, R. (1986) quoted in American Bar Association Commission on
Professionalism, (1966), ....In the Spirit of Public Service: a blueprint for
the rekindling of lawyer professionalism, American Bar Association
Dr Simon Longstaff is Executive Director of St James Ethics Centre. A
version of this article was first published once. St James Ethics Centre
http://www.ethics.org.au/about-ethics/ethics-centre-articles/ethics-subjects/accounting-and-auditing/article-0033.
html
[accessed 090509)

160
Ethics of the accounting

profession:
Staying out of the disciplinary
committee
Contents:
Simon Longstaff
What is ethics all about?

Ethics and the practising accountant
The paradox of the response from business
Some possible solutions for the courageous
Conclusion
Dr Simon Longstaff is Executive Director of St James Ethics Centre.

A version of this article was presented as an address at a conference for CPA Australia in February 1992
St James Ethics Centre

161
Introduction
It appears to be a regular trait of human nature that no-one likes

to be thought of as a villain (except, perhaps, in a romantic sense).
For most of the time, wrongdoing is a petty business hardly likely
to fire the imagination of a gullible public which rarely sees the
harm which lies behind the tabloid images of 'derring-do". Indeed,
Australia is just now coming to terms with a mass-flirtation with a
handful of 'robber barons". Imitation being the sincerest form of
flattery, it is fair to say that a significant number of Australians
joined in, in their own modest way. Now that the party is over,
people are looking for someone to blame and a list of convenient
targets would seem to include the accounting profession.
As indicated above, people generally do not like others to think of

them as having taken advantage of them.
As C. S. Lewis asks, "can you think of a country where people are

admired for running away in battle or where a man felt proud for
double crossing someone who had been kind to him ... Selfishness
has never been admired". Having said all of this, it might seem
162
likely that there would
be a and
great
deal
Governance
Ethic Unit
9 &of
11 interest in the topic of
ethics.
Mention the topic of ethics and, with a few exceptions, you are likely to
elicit one of two common reactions. For many people the realm of ethics,
what might be called the ethical landscape, is a place of complex and
daunting terrain. It is a place far removed from their daily experience, it is
an abstract entity which has little bearing on the real issues that they
confront on a daily basis. Or so they think! Another familiar reaction comes
from the person who believes that the 'ethical landscape' is bounded by
specific sets of rules which, in turn, vary according to the context. So it is
that some accountants will want to answer questions concerning ethics by
drawing attention to sections recorded in their code.
One of the ways to achieve a proper understanding of the realm of ethics is

to consider the kind of issues that questions about ethics are meant to
address
Question first asked by the ancient Greek philosopher, Socrates, and it is,
What ought one to do?.
Questions are endless.
This, in itself, may help you to see the extent of territory making up the
ethical landscape. But the thing which I would draw to your attention is
that in considering how to respond to any of these scenarios you would be
drawing upon your understanding
of whatCorporate
you consider to be the essential
163
elements of the good life.
This explains
the9 power
and sweep of Socrates'
Governance
and Ethic Unit
& 11
question as it ultimately requires us to come to an understanding of what
Introduction
Is the 'good life' one of maximum pleasure and minimum pain, is it one of happiness,
is it one shaped by obedience to a law which we give ourselves as rational beings, or
is it one so led that at the very end it is possible to look back, without any regrets,
and judge that your life has exemplified the true end of human being?
The other point of view is that ethics is all about rules governing the way in which we
determine what is right or wrong, good or 'bad". There is, of course, a place for
rules in the scheme of things. They are of potential use in a number of contexts. Their
chief advantage arises from the fact that they can be applied in a relatively uniform
way by different people. That way, life is made a little more predictable.
The trouble is that people often fail to keep their rules under review. This is not to say
that a good set of rules should be changed just for the sake of variety. Rather, it
points to the need to keep our understanding of the rules up to date and alive. The
biggest problem with rules is that they depend, for their effectiveness, on there being
people who are inclined to observe them. When you have a situation in which
fundamental commitments have been set aside in favour of a situation in which
people try to test the limits and see how much they can 'get away with", then the
rules are hardly worth the paper that they are written on.
So ethics, in general, require us to look beyond a framework which somebody

imposes on us to one in which we have a view about all the dimensions of a good
life.
164
Ethics and the practising

accountant
Some of this may seem to be fairly remote when looked at from the perspective
of the practising accountant.
But think about it for a moment. The image of the accountant as a be-spectacled
number cruncher buried in a back-room was always a fictional stereotype.
The point that the caricaturists have always ignored is that accountants deal with
clients; real people who have substantial problems that need resolution. Clients
are made of flesh and blood and not numbers. True, it is essential that there be a
high degree of technical competence; however, this is based on a fundamental
premise that, as a professional, a duty of care is owed to the client, to the
community, to other members of the profession and even, dare it be said, to
oneself.
Naturally enough, there are some countervailing influences that work against the
maintenance of a position of integrity. Some of these influences can be reduced,
at a crude level, to various instances of greed. But there are more powerful
factors which eat at the heart of any system of ethics. One of these is the need to
ensure the survival of an enterprise. When things are tough, the temptation is to
think of ethics as a luxury which can no longer be afforded. 'Let the client
decide". 'Who am I to impose my values?". 'He who pays the piper calls the tune".
'If I don't do it then someone else will and they will get the fee. I'm usually very
ethical, I deserve to survive".
165
Ethics and the practising accountant

This sort of attitude works in harmony with a tendency to see the law as a boundary to be
tested to the extreme. 'What does the letter of the law require?". 'If the legislators didn't do
their job well enough, then who am I to let them off the hook?". It is so easy to ignore the
spirit of the law - especially in a time, such as ours, during which a predominantly 'legalistic'
outlook is still dominant.
An absence of ethics leads to a reduction in the level of trust that exists in a community.
When a community feels that it can no longer rely on informal canons of decent behaviour,
it often resorts to formal mechanisms of increased regulation and surveillance. Somewhat
ironically, this has a tendency to weaken the bonds of ethics even further. Extra regulation
is always accompanied by increased costs.
There is a financial cost which hits the good and bad alike and which is passed on to the
consumers in the form of higher charges and taxes. There is also a social cost as regulation
also depends on the need for surveillance. There is a subtle but real change in the quality of
our liberty. And there is also the cost to be borne in terms of our ethics. If somebody else is
prepared to tell you what is right and wrong, then it lifts a burden of having to make our
own decisions. In a sense we become less responsible. 'I was only following the code".
'They make the rules, it is not my problem". One of the important benefits that a group of
self-regulating professionals should bring to society is a framework for informal systems of
checks and balances designed to protect the community from some of the less welcome
excesses of human behaviour.
166
The paradox of the response from

business
Every group in society has an opportunity to relieve themselves of responsibility

for their own actions. A grudging reliance on government regulation can lead to a
de facto abrogation of responsibility. In a similar way, reliance on professional
advice allows for an opportunity to deflect criticism, blame and the penalty of
sanctions. Some may regard this as a cynical suggestion, but it may be that
business seeks further to insulate its sense of responsibility by taking cover under
the cloak of the professions.
By relying on professional advice and services, any business seen to transgress

the community's mandate has the option of trying to shrug off the onus of
responsibility by pointing to the government of the day's failure to define (in
adequate terms) the limit of the law, or to the experts who, having been
consulted, approved, and even facilitated, the ill-regarded course of action.
This places the professional in an invidious position. It is often the case that the
client will indicate a preferred course of action in the most general of terms and
then ask, 'can this be done and if so, then how?". Such a client rarely asks, 'Ought
this be done?". In many situations, this reduces the professional to the status of a
'hired gun".
167
The paradox of the response from business

But, could it be that many people in business are actually looking for someone to point out
the limitations inherent in a proposed course of action.
This is purely a matter of speculation. However, is it possible that business may look to
members of the professions to take a broader view of what may be in the client's interest?
Following on from this, it may be that business expects the professions to act as a buffer
against which they can drive their plans and ambitions. The fact that it is possible to do
something doesn't mean that it ought to be done. In the aftermath of the 1980s, there is
probably a number of people in business who continue to appreciate the fact that someone
had the moral courage to dissuade them from a reckless course of action.
Then again, there are those who will pursue a course of action irrespective of the harm that
it might cause to others or even, to themselves. Having made up their minds, they go for it.
As things stand at the moment, a client who is bent upon a course of action can always
shop around to find an accountant who is prepared to do what is deemed to be necessary.
The temptation to capitulate and lower standards in order to maintain business must be
very hard to resist. But if the profession has a sufficiently strong code of ethics which has
been internalised by its members, then it may be that certain types of actions (which would
not otherwise be possible without the assistance of a member of the profession) will not be
performed. And it may be that the frustrated client may even be secretly pleased that an
unwanted passion has been thwarted by another who can take the responsibility and hence
the blame.
168
Some possible solutions for the courageous
Each of these factors may affect the way in which a person

responds to the opportunity to participate in an unethical course of
action. So, are there any solutions?
the test to be applied should involve asking yourself whether or

not you would be happy to appear on prime-time television to be
questioned about your proposed course of action by a skilled and
fully-informed interviewer and knowing that your family and
friends would be members of the audience. Such a test is
invaluable as a rough rule of thumb
The trouble is that nearly everyone can recall a situation in which

the choice was between two equally wrong alternatives .

169
Some possible solutions for the

courageous
The seriousness of each dilemma seems to vary. Yet even this may be a matter that
requires comment. Why is it that some types of unethical behaviour appear worse than
others? For example, nearly everybody would be in high dudgeon at the thought of an
accountant misappropriating funds from a children's charity. Yet, it is difficult to generate
the same ire when discussing an accountant who connives in 'creative accounting'
designed to help a small business to complete the tax return. It is interesting to ask why
this should be. Perhaps the answer lies in the degree of visibility enjoyed by the 'victim".
Or, perhaps the difference lies in the relative position of power at the disposal of the
different parties.
It is, of course, impossible to give a definitive answer to this question. However, it does
draw attention to a range of issues relating to our perception of our responsibilities as
citizens; that is, as fellow members of a community of interdependent individuals. Formal
and informal sanctions may act as some sort of protection and as a check on less noble
ambitions. But beyond this is the prospect of there being a positive incentive to preserve
and enhance the quality of life enjoyed by society as a whole.
In closing, I want to suggest that the accounting profession finds itself in a privileged
position in a modern and complex society such as ours. Complexity brings with it
opportunities for the less scrupulous to take advantage of distractions and divided
attention. Complexity is the parent of conditions in which people have need of strategic
advice. Complexity generates a demand for the deployment of technical skills that the
majority will not have mastered.
170
Conclusion
Accountants have the capacity and the opportunity to look below the surface
of this complex society. I am sure that some have taken the opportunity to
plumb the depths! Others are more attuned to the light. Whatever the case,
members of the accounting profession have an opportunity to go beyond the
provision of merely technical advice. Being a member of the accounting
profession and, therefore, one of the 'gate-keepers' of our society, the
accountant can stop to ask clients to consider whether what they want, at
any point in time, is in fact what they might choose if they took a broader
view of their own self-interest (including that of their community).
Perhaps the key to staying out of the disciplinary committee is to ensure that
your practice is a proper expression of the role of the professional, which
necessarily involves a regard for the wellbeing of others in the community.
The motto of the Society is 'integrity". The word 'integrity' only gains life and
meaning when it is applied to a person. That which is attained only after the
passage of time and testing, can be lost in a moment of disregard. The
disciplinary committee can apply many sanctions but none as harsh and as
potentially harmful as the loss of one's good name.
171
What can accounting offer for

improved ethics?
Simonethics?
Longstaff
What can accounting offer for improved
It seems to me that any response to this
question will need to explore two related dimensions. The first of these touches on the
question of that which accountants should do in order to improve ethics. The second
dimension touches on the question of that which accountants should be. However,
before addressing these questions, there may be some value in turning to an issue of
fundamental importance - namely, the nature of ethical enquiry.
Many discussions about ethics begin with a flourish only to grind to a halt as people
encounter disagreement about the answer to a fairly fundamental question, What is
ethics all about?.
The disagreement flows from the fact that most people only have a partial
understanding of the basic questions that are addressed in the field of ethics. The most
commonly held views include a mixture of the following:
Ethics is the same as morality

Ethics is about rules for behaviour (soft laws if you like)
Ethics is to do with theory (part of the useless species of things dreamed up in ivory
towers)
While each view is severely limited, it is easy to see how it can be held as most people
tend to see only part of the overall picture. Those wanting to capture the broader
perspective may be best assisted by returning to what is regarded to be the founding
question in ethics.

172
Few will be surprised to learn that the basic question of ethics has an ancient pedigree. Indeed, it can be
traced back to a Greek philosopher who lived and taught in Athens during the fifth century BC. Socrates
asked:
What ought one to do?
It should be obvious that this is an immensely practical question confronting us whenever we have a choice
or decision to make. It is also a question that is extremely difficult to avoid. Indeed, the only sure way to
escape this question is to be a creature of unthinking habit who goes about life doing things because
everyone does it or because that's just the way we do things around here or because it seemed like a
good idea at the time.
People who are dissatisfied with this approach; people who wish to make their lives their own will
recognise that Socrates question ultimately requires each of us to give an account of how our choices and
decisions contribute to what we would defend as a worthwhile life. And that is how we come to address
issues of good and evil, right and wrong.
If ethics is about practical rather than purely theoretical matters, it should also be understood that it
encompasses a general conversation about how people should live a good life. This helps to explain the
difference between ethics and morality. The distinction can be demonstrated by using the analogy of a
conversation. If one imagines that the field of ethics is a conversation that has arisen in order to answer
the question, What ought one to do?, then moralities (and they are various) are voices in that
conversation.
Each voice belongs to a tradition or theory that offers a framework within which the question might be
contemplated and answered. So there is a Christian voice, a Jewish voice, an Islamic voice, Buddhist voice,
Hindu voice, Confucian voice and so on. Each voice has something distinctive to say - although they may all
share certain things in common.
There are, in addition to the moralities that flow from the worlds religions, the voices that represent the
various attempts to found moral systems on the thinking of secular philosophers. No ethical theory or
morality (from the West) has found a way to answer Socrates question in a way that totally avoids the
countless ethical dilemmas that seem to be a persistent feature of what might be called the ethical
landscape.
One simple example may suffice as an indication of the type of dilemma that might be encountered. Most
people would agree (possibly for quite different reasons) that people ought to tell the truth. These same
people will hold that one ought to avoid causing harm. But what happens when to tell the truth will cause
another person harm? Each principle seems to be valid on its own account, but when put in combination
with other values an irreconcilable tension may arise. This is not a trivial point. It reminds us that the
ethical landscape is painted in shades of grey and not black and white. Sometimes we need to accept the
limits to certainty when trying to decide how best to proceed. Sometimes our range of choice is reduced to
picking the least bad alternative. Sometimes we may have nothing more than a well-informed conscience
to guide us through the maze of ethical decision-making.

173
A final point about ethics
In all this discussion one crucial point has been left unsaid: that ethical considerations
involve an essential social element. Whether one seeks to move from religious
conviction, or from a position in which one seeks to generate consequences in which
pleasure is maximised and pain minimised, or from the point of view in which other
persons are seen as being members of the kingdom of ends, the result is the same - a
consideration of ethical questions involves a consideration of the quality and nature of
relationships with other people.
What accountants might be!
There is a temptation to think of accountants exclusively in terms of the services that

they provide. Such thinking gives rise to two problems. Firstly, it tends to emphasise
functionality and outcomes at the expense of process. In such circumstances,
consideration of the proper means by which an outcome can be achieved may be set
aside in favour of an orientation towards getting the right result.
Secondly, this focus tends to obscure our view of the accountant as a member of a
profession that has an impact on the tone (and not just the function) of society. It is,
perhaps, this second point that needs to be further explored. In order to do this it is
necessary to say something quite general about the role played by the professions in
society.
Being a member of a profession
The first thing to be understood is that the professions do not have a right to exist. They
are not the product of a law of nature. Nor is their existence a curious metaphysical fact
that one must necessarily take into account when contemplating the cosmos. Rather, the
professions are a social artefact.
There could be thousands of people with a superb knowledge and understanding of the
relevant disciplines and still be no professions as such. Individual practitioners might
attract clients willing to recognise and pay for their learning and skill, but this would not
make for a profession. Indeed, for there to be a profession at all it would first be
necessary for people to come together in order to form some sort of voluntary
association. The trouble is that
not Sustainability,
all associations
are allowed to survive, let alone
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flourish. For longevity, one or
more
of
the
following
need to apply (the list is
Governance and Ethic Unit 9conditions
& 11
indicative and not exhaustive):
Internal conditions
there continues to be a raison d'etre for maintaining the association,

the membership of the association remains committed to its preservation,
there is a decision-making process capable of resolving and managing internal
disagreements, of charting new directions and so on.
External conditions
the new association

the new association
the new association
the new association
the new association
from attack,
the new association
is
is
is
is
is
relatively insignificant and therefore escapes attention,

conceived by society as an expression of itself,
perceived to offer no threat to society,
believed to offer positive benefits to society,
under the protection of some power sufficient to shield it
is sufficiently powerful to ward off any attempt to curb it.
As noted before, the conditions outlined above are not mutually exclusive. Indeed, it is
quite possible that a fledgling association will pass through a number of phases in which
its status changes. One imagines that a history of the professions would reveal just such
a progression. But this is beside the point. The chief fact to bear in mind is that the
existence of an association is a contingency and not a necessity. A sufficiently powerful
force can obliterate it at any time. Alternatively, it can destroy itself through implosion,
collapsing when internal supports have decayed. The facade may stand awhile, but it too
will eventually fall.
Of the external conditions, except in the application of conditions eight & nine, the
association will depend on the goodwill (or indifference) of the host society. One can
imagine societies in which a powerful protector might be minded to guard the interests
of an association. And it is possible to think of groups having sufficient power to protect
themselves. However, all of this is quite academic when it comes to understanding the
place of associations in a modern democracy such as we find in Australia today.
175
Given the sovereignty of the people, the community has the power to dissolve
associations as and when it may desire. Constitutions and Bills of Rights offer only
limited protection as they may be amended according to the popular will. Of course, it
could be argued that the selective abolition of certain associations would be
undemocratic. This may be true. However, it is a curious feature of democracies that
they enjoy the capacity to act undemocratically. The only penalty they might suffer is
the sting of criticism from those who are concerned to promote authentic democratic
consistency. The charge of bad-faith might stick. But short of some external power
imposing sanctions, there would be little to prevent such a course of action being
followed.
The social compact
While a society might be expected to tolerate all manner of associations as a proper

expression of a commitment to the principles of liberty, it is a little more difficult to see
why it should allow any group, defined by a common occupation, to enjoy privileges not
available to other occupational groups. A moments reflection will lead one to conclude
that a society founded on the idea of the formal equality of all can accept only two
reasons for positively discriminating in favour of one group over another. The first is to
redress some acknowledged wrong, the second (which it might be argued entails the
first) is to promote the interests of the community as a whole.
For example, it is accepted by most people that the community would suffer if I had the
right to perform open-heart surgery on my kitchen table. Instead, the right to perform
such operations is restricted to those properly qualified and registered as medical
practitioners. Similarly, it has been concluded that society would suffer if each individual
was permitted to take the law into his or her own hands. Civil peace is thought to be
enhanced if a properly accountable State is able to exercise a monopoly in the
administration of force. Thus, powers of arrest are limited. An impartial cadre of judges
supervises the trial of alleged offenders and the State (on behalf of the community)
punishes the guilty.
None of this is controversial. At the heart of the position described above is the idea of
a social compact made between society and particular occupational groups and
associations. Certain privileges are accorded in return for the provision of social goods
that would not otherwise be available. It is within this general scheme of arrangement
that an understanding of the
role
ofSustainability,
the professions
in Australia must be located.
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The idea of a profession
There is, however, another dimension to the discussion of professions.

Rather than flowing from a consideration of the external environment in
which the professions are sustained, this other dimension relates to what
have been held to be the internal standards of a profession per se. One can
observe that all manner of occupational groups can make bargains with
society in return for privileges or other social goods and yet still not be
considered to be professions. For example, parking meter officers have
special powers not normally conferred on ordinary citizens. Yet, to be a
parking meter officer is not to be a member of a profession. So where does
the distinction lie?
One particularly influential definition of a profession was offered by Roscoe

Pound. It goes as follows(i):
The term refers to a group ... pursuing a learned art as a common calling in
the spirit of public service - no less a public service because it may
incidentally be a means to livelihood. Pursuit of the learned art in the spirit
of public service is the primary purpose.
The point should be made that to act in the spirit of public service at
least implies that one will seek to promote or preserve the public interest.
A person who claimed to move in a spirit of public service while harming
the public interest could be open to the charge of insincerity or of failing to
comprehend what his or her professional commitments really amounted to
in practice.
In August of 1993, the Australian Council of Professions issued a discussion

paper, Professional Services, Responsibility and Competition Policy (ii).
Significantly, a press release about this paper was issued under the title, In
The Public Interest. Both
the
and the
release sought to distinguish a
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177
profession from more commercially
minded
associations. As
Governance and Ethic Unit 9occupational
& 11
opposed to others, professional practitioners:
... must at all times place the responsibility for the welfare, health and
safety of the community before their responsibility to the profession, to
sectional or private interests, or to other members of the profession.
If the idea of a profession is to have any significance, then it must hinge on

this notion that professionals make a bargain with society in which they
promise conscientiously to serve the public interest - even if to do so may,
at times, be at their own expense. In return, society allocates certain
privileges. These might include one or more of the following:
the right to engage in self regulation

the exclusive right to perform particular functions
special status
At all times it should be remembered that what society gives, it can take
away. It only accords privileges on the condition that members of the
profession work to improve the common good. Having said this, there
should be no doubt that all citizens are served by the existence of
independent professions that are free to interpret the common good as
being something other than that which a government of the day decrees.
Once again, it should be noted that a capacity for a profession to fulfil this
role depends on the extent to which the broader community trusts its
judgement and motives.
Deciding to take up the full and proper responsibilities of a professional

career is akin to the old idea of finding a vocation. In most cases, the actual
rewards on offer hardly seem to cancel out the sacrifice that is made when
the narrower pursuit of self-interest (common in the market) is eschewed in
favour of the public interest. Instead of relying on the operation of the
invisible hand, the professional must choose - and choose well! The
burden of choice is sometimes felt to be intolerable. This may explain why
it is that one now hears BFA
members
of the profession
stressing that their
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primary orientation is towards
running
a
business.
Perhaps the idea of vocation has become foreign to most of those who make up
the contemporary professions. Perhaps the belief in intrinsic goods has faded. But
even if one is motivated by a spirit of public service, how is one to determine what
may be in the public interest? One answer, from as far back as the ancient Greeks,
is to try to identify certain core goods. Some of these immediately come to mind.
For example, a good society is likely to be one in which people are treated with
justice, in which good health is commonplace, in which the environment is rich,
rewarding and safe.
The introduction to Ethics & the Legal Profession, edited by Michael Davis and
Frederick Elliston(iii) builds on this idea:
One of the tasks of the professional is to seek the social good. It follows from this
that one cannot be a professional unless one has some sense of what the social
good is. Accordingly, ones very status as a professional requires that one possess
this moral truth. But it requires more, for each profession seeks the social good in a
different form, according to its particular expertise: doctors seek it in the form of
health; engineers in the form of safe efficient buildings; and lawyers seek it in the
form of justice. Each profession must seek its own form of the social good. Without
such knowledge professionals cannot perform their social roles.
As noted above, an old idea is at work here. It suggests that professionals might
need to develop a particular appreciation and understanding of some defining end,
such as justice. It is as much for this and the disinterested pursuit of these ends
that the community looks to the professions for assistance.
In this respect, I wish to suggest that the distinctive end of the accounting
profession is to pursue the truth. Accepting that the notion of what constitutes
truth is notoriously difficult to define, I do not wish to suggest that accountants
accept an impossible obligation. However, I do believe that accountants have a
responsibility to be especially interested in the nature of truth and to ensure that
this interest is reflected in the organisation of their professional practice.
179
What might accountants be? (a refrain)
The point to be made here is that the claim to belong to a

profession entails a considerable range of substantive
commitments. In some cases, the privileges associated with
membership of a profession balance (even outweigh) the
attendant obligations. However, the point has already been noted
that the benefits flowing from society to the professions are not
equally available to all members. In many, if not most, cases a
proper fulfilment of the role of accountant will require sacrifice of
some kind - whether it be suppression of the apparently normal
desire to place self-interest before all others or the acceptance of
a higher degree of risk attached to the discharge of professional
obligations.
I wish to argue that it is the accountants preparedness to accept

these additional obligations that has the potential to add so much
to the quality of the ethical landscape traversed by us all.
Without wanting to load members of the profession with

unrealistic expectations, it seems to me that society is
qualitatively improved by the fact that there are people who are
committed to acting in a spirit of public service and who are held
accountable, to their peers, for doing so. The importance of this
should not be underestimated at a time when there is so much
popular cynicism about societys institutions. Furthermore,
anecdotal evidence suggests that younger people are especially
cynical about the prospects
of success
through ethical means.
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Rather, there seems to
be
a
prevailing
view
Governance and Ethic Unit 9 & 11 that the pursuit of
Accountants have the opportunity to demonstrate that there are

tangible (and intangible) benefits accruing to those who share
practices designed to bolster integrity and a range of other
virtues that the professions should honour in practice.
This leads to a further point: it is essential that professional

virtues be founded in a culture that lends the weight of tradition,
stories and institutional sanction to the practical application of
best practice. In essence, this requires the profession to
demonstrate the reality of inter-personal accountability. This type
of accountability is essential to the process of self-regulation, and
requires moral courage sufficient to meet the needs for a
combination of explicit standard-setting, peer support and
effective disciplinary measures. All of this constitutes a fairly tall
order - especially when set in the context of a society that places
special emphasis on the rights of individuals and the need to be
efficient and competitive within a market economy in which the
pursuit of self-interest is the ideal.
It could be argued that the professions find a more natural home

in a world in which rights are balanced by obligations, in which the
individual is recognised as finding full expression only in society
and where efficiency is valued less for itself than in terms of its
ability to contribute to the common good. Then again, the
BFAthe
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continued existence of
professions
may be one of the pre- 181
conditions for maintaining the viability of this broader conception
An absence of ethics leads to a reduction in the level of trust that exists in a

community. When a community feels that it can no longer rely on informal canons
of decent behaviour, it often resorts to formal mechanisms of increased regulation
and surveillance. Somewhat ironically, this has a tendency to weaken the bonds of
ethics even further. Extra regulation is always accompanied by increased costs.
There is a financial cost which hits the good and bad alike and which is passed on
to the consumers in the form of higher charges and taxes. There is also a social
cost as regulation also depends on the need for surveillance. There is a subtle but
real change in the quality of our liberty. And there is also the cost to be borne in
terms of our ethics. If somebody else is prepared to tell you what is right and
wrong, then it lifts a burden of having to make our own decisions. In a sense we
become less responsible. I was only following the code. They make the rules, it is
not my problem. One of the important benefits that a group of self-regulating
professionals should bring to society is a framework for informal systems of checks
and balances designed to protect the community from some of the less welcome
excesses of human behaviour.
What might accountants do?
Much of the above could be regarded as self-evident or even a little too abstract removed from the realm of daily practice. It could be said that all of the above is
fine in theory. However, what is to be done in practice?
While many of my earlier comments apply equally to all true professions and to all
accountants, I should now like to turn attention to some of the issues and
possibilities that arise for accountants working in government.
The first, and perhaps most provocative point, arises from the curious position that
accountants may find themselves in as employees working in a government
department, statutory authority or government business enterprise. That is, in
circumstances where the independent, professional orientation of the accountant
is in tension with the objectives and procedures defined by the employer.
182
It should be conceded, at the outset, that accountants working in

government are not alone in facing the potential dilemmas arising in
paid employment. Many accountants working in industry and
commerce encounter situations where professional obligations are
sorely tested by the requirements of the employer - for example in
the facilitation of questionable deals designed to avoid tax liabilities.
However, there is a crucial difference in the circumstances of those

who work for government. Unlike those in equivalent positions in the
private sector, government employees work for a body that claims to
be able to define the public good! That is, governments (and
particularly those in a democracy) argue that their election mandate
and representative status allows them to be the final arbiters of
what the public good may require. If taken literally, this means that a
member of the profession may be bound to follow government policy
in a quite uncritical manner. This flows from the conjunction of the
professionals obligation to act in a spirit of public service and the
government claim to be able to define just what the public interest
happens to be.
It should be noted that the obligation of the professional to carry out

a governments project (in such circumstances) arises quite
independently of any obligation arising out of the duties owed to an
employer.
Yet, what is the professional to make of a governments claim to be

able to define the public good? In particular, what should the
professional do when confronted by a situation in which adherence
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would
require
a course of action opposed to 183
Governance
and
Ethic
Unit
9 & 11
that required by the employer?
A comprehensive answer to such questions - would require an analysis of democratic

theory (something beyond the scope of the current exercise). Having said this, it does
seem to me that a few useful observations can be made. Not least of these is to
recognise that history shows that governments have been prone to the siren call of selfinterest to a degree sufficient to cause apparent confusion between the interests of the
political formation in power and those of the wider community. Furthermore, if one
accepts Schumpeters arguments concerning the role and influence of interest groups in
shaping government policy, then it becomes, at the very least, arguable that a governm
view of the public interest may be distorted.
While not wanting to suggest that accountants are especially ethical or courageous
(when compared to their colleagues in public service), they do have the advantage of
belonging to a professional association that can support them, if it is minded to do so.
Individuals acting alone may feel unable to raise their concerns for a variety of reasons
which might include: a lack of access to relevant information, concern about continued
employment prospects and so on. Accountants enjoy peer support which should be
directed to helping them to discharge professional obligations - especially those relating
to integrity, an orientation towards the truth and a commitment to the provision of
independent advice.
Some will argue that this is to require nothing more than that which is owed by the civil
servant as a matter of course. In some places, and at some times, this may be true.
However, there are many countries and political systems where the independence of the
civil service cannot be assumed, or where the degree of independence is heavily
circumscribed. In such circumstances, the presence of professionals may afford access
to an extended critical mass of independent advisors able to lend support to those who
wish to resist attempts to give too partisan a flavour to debates about the nature of the
common good.
Let me be clear, I am not suggesting that accountants ought to substitute their

judgement for that of the government on matters of policy. Instead, I am saying that
accountants must not suspend their judgement in deference to those who exercise
power or influence. That is, the critical assessment by accountants should bolster a
more general tradition in which civil servants provide impartial advice and service to the
government of the day. To do so is quite consistent with a more general professional
obligation to discern the difference between a clients interests and wants.
184
A Proposal and a Practical Example
The need for such a role to be played by accountants has been

recognised, in part, by the institution of offices such as that of
Auditor-General which, in the commonwealth sphere, in Australia,
maintains statutory independence from the executive and reports
directly to parliament. It seems to me that the office of AuditorGeneral, and those like it in the departments of State, provide an
essential form of review. Yet, there are also examples where what
might broadly be defined as an accounting function can be
extended beyond the task of reporting on events passed. Instead, a
more pro-active approach can be adopted.
One example of this extension of role can be seen in the work of the
Inspector General in the Commonwealth Department of Defence.
While acknowledging that the Inspector Generals department fulfils
many other roles, I would like to draw particular attention to its
work in encouraging a more ethical environment.
In the case of Defence, one of the key motivations for the Defence
Ethics Fraud Awareness Campaign (DEFAC) has been to minimise the
incidence of fraud. Having said this, the Inspector Generals
department has adopted an innovative approach designed to
address fundamental questions about the overall culture within
which fraud occurs. This has been an ambitious approach especially given the way in which the services tend to reserve their
right to define the traditions and dispositions that, in part, define
the ethos of each unit.
185
I mention this work because it draws attention to the wider

possibilities that might be explored by those who work in places,
the primary purpose of which is to give account. The point of the
example of the work being undertaken by the I/G is that it shows
how a proper concern about accountability can lead to work that
creates and reinforces structures in which practices conducive to
the exercise of accountability can flourish.
Bearing this in mind, other agencies and officers (such as the

Auditor General) may care to review the scope of services offered
with a view to taking a more active role in assisting organisations
to develop and maintain an ethical culture. Having said this, I
would issue one word of caution. It is my considered view that talk
of ethics ought to be separated from talk about fraud. While
recognising that the prospect of savings (from reduced fraud)
often motivates people to approve budgets for programmes in
which ethics will be explored, I caution against reliance on the link
between ethics and fraud. My chief reason for this is a concern
that the maintenance of such a link will lead people to conclude
(quite incorrectly) that ethics is primarily about stopping people
from acting illegally. As has been argued above, ethical reflection
is of more benefit than merely as a means to preventing wrongdoing.

Sorting the wheat from the chaff: a more speculative proposal
186
I have spoken of the need for accountants to have a particular

orientation to the truth. This is not just a philosophical point about the
distinctive concerns that may provide emphasis for professional
orientation. It is also a practical point that has particular importance in a
world in which the tide of information is reaching full flow.
Disintermediation is occurring in a considerable range of activities.

Although most commonly associated with developments in the field of
financial services, a similar phenomenon can be seen in almost any area
where information is the underlying currency. Changes in the scope and
power of information and communications technology mean that an
increasing number of people, living in the industrialised world, have
direct access to raw data (whether it be in the form of text, numbers or
images). This increased access raises at least one important issue that
accountants might address.
Most people with increased access to raw data will need to find
independent sources of advice able to verify that data is reliable (and,
preferably, true). Accountants have long been trusted as those who
assure the broader community that financial information is both truer
and fair. Perhaps this role can be expanded to encompass other types
of information that might be audited by the profession.
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Conclusion
In the current social environment there are many who would argue
that a genuine commitment to ethics is an unrealisable ideal.
Many think that sound ethical principles are fine in theory but that
they can't really be applied in practice. To try to do so is to be
nostalgic. They say that to promote virtue is to be old fashioned,
to hark back to ideas only useful in a different era. They ask us to
be realistic and to embrace the modern way of doing things.
This plea is often nothing more than an ill disguised plea to allow
for the survival of the fittest. Perhaps such people are right.
Perhaps a dog-eat-dog world will be the most efficient. And
perhaps efficiency is the only value that we need to embrace in
the search for a worthwhile life. Or perhaps efficiency is only one
of a number of important values that we must learn to juggle
across an unpredictable landscape.
Those of us who are serious about the need to make ethical

considerations an explicit concern in our daily lives must face up
to this challenge. After all, what if our critics in the market place
are right? What if the prime (and exclusive) aim in life really is to
maximise our satisfaction of wants (and not just needs)? What if
the liberty of the individual (important as it is) transcends all
other considerations?BFA
What
if it is through competition alone that
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we find the ultimate Governance
expression
of our
and Ethic
Unit humanity?
9 & 11
One can only reply that an authentic commitment to leading an ethical life
may require us to live in a way that makes only partial sense in a world
dominated by an orientation to the principles of laissez faire. The noted
Australian social researcher, Hugh Mackay,(iv) argues that a commitment to
ethics may only make full sense when viewed against a background of
community. That is, the possibility of leading an ethical life probably
depends on the prior existence of a society and not just an enterprise
association.
Most people have a fairly good feel for what it means to live in a society.
But what about an enterprise association'? John Casey(v) has tried to
describe the latter:
We might imagine a city founded purely as a trading post. The laws of the
city will reflect its original purpose, and have to be understood in relation
to this purpose. Contracts will be vigorously enforced however
unreasonable or unjust, because it is of the highest importance to retain
the confidence of those with whom the city trades. Indeed, the notion of a
contract being unjust will have no meaning. All education will be
subordinated to the need to produce an enterprise culture, and no subject
will be studied as an end in itself. The rulers of the city will regard
themselves essentially as the managers of the enterprise. Their tasks will
be to maximise wealth and promote trade.
Is this so very far from what we now experience? Some may say that this is
an accurate and even attractive picture of the type of world in which we
live. But does such a view of our relationships miss something of vital
importance? For example, do we exist simply to facilitate the exchange of
715 Sustainability,
commodities or is thereBFA
something
more?Corporate
Is there, for example, a need to
189
Governance
and
Ethic
Unit
9 &can
11 make a claim on us? Is
value friendships, to realise that other people
The professions, and the community that warrants their

continued existence, face the challenge of making a choice
about the kind of society to be preferred Do we desire a
community of citizens in which something like the professions
make sense? Or do we want the enterprise association in
which each of us is little more than a purveyor or consumer of
commodities? The latter consigns us to a place where the
active pursuit of public service will seem strange and alien just a shadow of a once remembered past.
Accountants ought to be at the forefront of debates about
such matters. Beyond this, they need to demonstrate a
practical commitment to being ethical and doing that which is
right and good. Above all else, this will be the bedrock of their
contribution to the task of building and maintaining a more
ethical society.
190
References:
i Pound, R. (1986) quoted in American Bar Association Commission

on Professionalism, (1966), ...In the Spirit of Public Service: a
blueprint for the rekindling of lawyer professionalism, ABA, p.10
ii Australian Council of Professions, (1993) Professional Services,
Responsibility and Competition Policy: a discussion paper
prepared for the Permanent Advisory Committee;, August 1993,
p.1
iii Davis, M & Elliston, FA (Eds) (1986), Ethics & the Legal
Profession, New York, Prometheus Books, p.18
iv Mackay, HC (1993), Heed the wisdom of the elders, City Ethics,
issue 13, spring 1993
v Casey, J (1990), Pagan Virtues, Cambridge, CUP, p.191
Dr Simon Longstaff is Executive Director of St James Ethics Centre.

A version of this paper was delivered to the AAANZ Conference
Internationalisation of Accounting on 11 July 1995 and a similar
version to the National Management Accounting Conference on 8
May 1996
St James Ethics Centre
191
Accounting Theory
Unit 9 - E
Corporate Failure
192
WHAT IS CORPORATE FAILURE?

Corporate failure is difficult to define.
Often referred to a bankruptcy or insolvency.
Also sometimes terms failure or default.
In research the point of failure can be considered to be:
Filing for bankruptcy

Delisiting for whatever reason
Ceasing to trade
Entering into receivership
A significant indication of corporate failure could be the appointment of

voluntary administrators.
In the US this is called Chapter 11 bankruptcy
In Australia can be initiated by directors or secured creditors
It entails the appointment of an administrator who

Investigates the affairs of the company.
Tries to find a way to save the business
193
WHAT IS CORPORATE FAILURE?

Dunn & Bradstreet, a global entity that researches
business failures adopts a wide definition of
business failure:
businesses that cease operation following
assignment or bankruptcy; those that cease with loss
to creditors after such actions or execution,
foreclosure, or attachment; those that voluntarily
withdraw, leaving unpaid obligations, or those that
have been involved in court actions such as
receivership, bankruptcy reorganization, or
arrangement; and those that voluntarily compromise
with creditors.
194
CAUSES OF CORPORATE FAILURE

There are many reasons why companies fail.
Most fail for multiple reasons.
Corporate decline can stem from multiple
sources both inside and outside the organisation.
These multiple elements often make it difficult
for managers to comprehend and address the
causes of corporate failure.
195

Outside factors can include:
Changes in technology
Recession
Competitors actions
Deregulation or changes in import protection in an industry
Interest rate changes
Inside factors can include:

Weak strategy
Financial mismanagement,
Dysfunctional culture
While there are many factors that can contribute to corporate failure, research of
some high profile failures has identified specific management inadequacies that
appear to contribute significantly.
Prominent corporate failures include
Enron, HIH, Barings Bank, WorldCom, ABC Learning, Tyco and Parmalat.
196

Hamilton and Micklethwait believe that the main causes of failure can
be grouped into six categories:
1.
2.
3.
4.
5.
6.
Poor strategic decisions.

Greed and the desire for power.
Overexpansion and ill-judged acquisitions.
Dominant CEOs.
Failure of internal controls.
Ineffective boards.
The role of cash flow has been noted by a number of observers.

There needs to be enough cash to pay staff, GST obligations, debtors
and other operational expenses.
Businesses are more likely to fail because of poor cash flow than poor
sales
197
COSTS OF FAILURE
Direct costs include
Expenses to hire various professionals
Additional interest on holding debt that
cannot be discharged
Indirect costs are more difficult to

identify, but may include
Reputation costs
Opportunity costs
198
PREDICTING CORPORATE FAILURE

A range of methods have been used to assess corporate financial performance and to search for
signs of financial distress.
Ratio Approach
Liquidity
Profitability
Bankruptcy prediction models
Altmans Z-Score is one of the best known
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

Z = Overall Index or Score
X1 = Working Capital/Total Assets
X2 = Retained Earnings/Total Assets
X3 = Earnings before Interest and Tax/Total Assets
X4 = Market Value of Equity/Book Value of Total Liabilities
X5 = Sales/Total Assets
A Z-Score of 3.0 or more is healthy.

A score of 1.8 to 2.9 is in the danger zone.
A score below 1.8 indicates a high probability of failure.
Studies have shown that Altmans Z-Score has validity in assessing Australian companies .
A variety of other models have been developed
Though most simply refine Altmans original work.
One such model is the CAMEL (Capital adequacy, Asset and Management quality, Earnings, Liquidity) mode.

199
INDICATORS OF CORPORATE FAILURE

The Australian Securities and Investments Commission (ASIC) has set up
the National Insolvent Trading Program, which aims to:
Make directors aware of their companys financial position.
Make directors of potentially insolvent companies aware of their responsibilities.
Encourage directors to seek external advice from accountants, lawyers and insolvency
professionals.
ASIC has identified some key operational and financial practices which, in
combination with other practices, indicate a company is at significant risk
of insolvency. Some include:
Poor cash flow, or no cash flow forecasts

Disorganised internal accounting procedures
Absence of budgets and corporate plans
Continued loss-making activity
Accumulating debt and excess liabilities over assets
Loss of key management personnel
200
CORPORATE GOVERNANCE ISSUES

Corporate governance practices are often at the heart of corporate failure.
Corporate governance relates to the duties and responsibilities of a
companys board of directors in managing the company and their
relationships with the shareholders of the company and the stakeholder
groups
Strong corporate governance, at a company level, will have the following
characteristics:
Boards are active in setting and approving the strategic direction of the company.
Boards are effective in overseeing risk and setting an appropriate risk level for the entity.
BusinessWeek annually rates boards on their corporate governance. The

principles of good governance they look for include:
1.
2.
3.
4.
Independence.
Stock ownership.
Director quality.
Board activism.
201
REGULATION AND POLITICAL RESPONSES TO

CORPORATE FAILURE
Significant corporate failure has consistently led to a focus on
corporate governance and a demand for corporate reform.
In Australia, corporate failures in the 1980s were thought to result
from inadequate accounting disclosures.
Perceived limitations in corporate governance legislation that led to
the collapse of Enron, led to the USs Sarbanes-Oxley Act in 2002.
Subsequent corporate failures in Australia have been used to justify:
The Financial Reporting Council introduced International Accounting Standards from 1
January 2005.
Establishment of the ASX Corporate Governance Council and publishing best practice
corporate governance guidelines for listed companies in 2003.
The Corporate Law Economic Reform Program

202
THE ANATOMY OF A CORPORATE FAILURE

There is often not one indicator that a company is likely to become
distressed or fail.
Cash flow has been seen to be a major contributing factor to corporate
failure.
This is particularly evident in the retail sector.
Deficiencies in the audit process have been found to play a role in a

number of collapses.
These can be compounded by conflicts of interest.
Other factors include
Lack of independence of the audit committee.

Ownership structure dominated by a single shareholder.
Lower than average proportion of the remuneration package for CEO at risk.
Significant related party transactions.
203
A CASE STUDY:
THE GLOBAL FINANCIAL CRISIS
Causes and consequences of the GFC
The GFC is said to have started in the US housing
sector.
Leading up to the financial crisis there were
Substantial increase in housing prices
Historically low interest rates
Subprime mortgages increasingly being used
This created an asset bubble
204
Causes and Consequences of the GFC
Towards the end of 2006 house prices started declining, with

significant defaults and foreclosures on mortgages following in
early 2007.
This quickly turned into a financial crisis which affected credit

markets and jeopardised the banking system.
The financial and economic effects of the GFC were then

transferred to other countries.

205
Government intervention in the GFC
Both the Australian and New Zealand governments responded to

the GFC by announcing stimulus packages to kick start the
economy and to avoid a full recession.
The health of Australian Authorised Deposit-taking Institutions

(ADIs) following the GFC, as a result of regulation by the Australian
Prudential Regulatory Authority (APRA) is seen as a model for
corporate governance of financial institutions around the world

206

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Unit 9 - A

Departure from sole

Developments in social and

If sustainability becomes part of the expectations held by society, it

Providing information about social and environmental performance

The view that corporate survival and prosperity is tied to community

BFA 715 Sustainability, Corporate

the integration of business operations and values

Corporate Social Responsibility is about the

BFA 715 Sustainability, Corporate

CSR and Accounting

Reporting on social and environmental performance

BFA 715 Sustainability, Corporate

What is Social and Environmental Accounting?

BFA 715 Sustainability, Corporate

Social and Environmental Disclosures

Employee health and safety

BFA 715 Sustainability, Corporate Governance and Ethic Unit 9 & 11

"A country could exhaust its mineral

Forms of CSR Reporting

TBL and Traditional

TBL is a performance and position report

It is consistent with the original objectives of the corporate entity

Adopts a framework similar to the conceptual framework of financial

Accountants are as qualified as anyone else to prepare TBL reports

Are TBL and sustainability reporting the same?

How does integrated reporting fit in?

Conceptual framework issues

Limitations of traditional financial accounting

Financial accounting focuses on the information needs of those involved in

The notion of materiality tends to preclude the reporting of social and

Reporting entities frequently discount liabilities to present value, which tends to

Social and environmental

BFA 715 Sustainability, Corporate Governance and Ethic Unit 9 &

Why is CSR is Important to

Reduce organisational risk

BFA 715 Sustainability, Corporate

BFA 715 Sustainability, Corporate

Benefits of Sustainability Reporting

BFA 715 Sustainability, Corporate

A number of studies however have found a relationship between

BFA 715 Sustainability, Corporate

A range of guidelines which have emerged to provide

GRI (Global Reporting Initiative)

The United Nations (UN) has produced a number of

Other groups that have provided guidelines include:

Overview of Selection Indicators

BFA 715 Sustainability, Corporate

Global Reporting Initiative

Global Reporting Initiative

THE GRI includes core indicators and additional indicators across

Mandatory Sustainability Reporting

Mandatory Sustainability Reporting

Stakeholder Interests in Corporate

BFA 715 Sustainability, Corporate

CLIMATE CHANGE AND

Australia has decided to implement a ETS.

Accounting for Carbon Emissions

How should organisations account for their obligation to deliver

Eco-justice reporting indicates how the entity is using its limited

Concerned with maximising the use of a given quantity of resources

the focus of many stand-alone environmental reports

does not address whether the goods being produced should be

Environmental reporting guidelines