ACCA P1 Governance, Risk and Ethics - 2011 - Study text

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Paper P1: Governance, risk and ethics

334 © Emile Woolf Publishing Limited

Step 2

If you consider that there is an ethical problem, you need to identify the nature of

the threats and assess show serious they are.

 There is a conflict of interest (self-interest) threat, because a suggestion has been

put to you that your annual bonus depends on your willingness to accept the

views of the chief accountant. There is also an intimidation threat, in the sense

that your future career might be affected by hostility from the chief accountant.

You might also think that there is pressure to accept the view of the chief

accountant, because you are familiar with him and are willing to accept his

opinion.

 These create threats to your integrity, if you believe that your assessment of the

inventory valuation is correct. There are also threats to your objectivity and to

the requirement for you to act with professional competence and due care.

Step 3

The next step is to assess how serious the threats are. The scale of the threat might

depend to some extent on the significance of the write-down in inventory, and the

effect this would have o n the reported profits for the year. A minor difference

might be overlooked, but anything more serious should not be ignored.

Step 4

You need to consider safeguards to protect yourself against the ethical threat. As an

initial course of action, after you have re-assessed the inventory valuation, should

be able to discuss your concerns to the chief accountant. If the chief accountant has

not changed his opinion, you can ask for some time to think about what you should

do.

If you disagree with the chief accountant and you consider the problem to be

serious, it would be inappropriate for you to decide that it is no longer your

problem and you will simply do what you are told.

It would also be inappropriate to decide that you can wait and see what the auditors

have to say about inventory valuation. This is shifting the responsibility to the

auditors, when the responsibility is initially yours. You cannot be sure that the

auditors will identify the problem during the course of their audit.

Safeguards to the ethical threats you are facing can possibly be obtained by

informing other people within the company to the nature of the problem. You can

consider arranging a meeting with the finance director or the chairman of the audit

committee to discuss your concerns.

If you find that the finance director or audit committee are not willing to listen to

your views, you might consider informing the auditors about your concern.

However, before you do this you might wish to ask the ACCA for confidential

advice on the matter.

If these measures fail to remove your concerns about the ethical risk, you might

need to consider resignation from the company.

Chapter 15: Conflicts of interest and ethical conflict resolution

Example

You are a senior accountant working for a public company that produces

sophisticated telecommunications equipment.

For political reasons, the government has placed a total ban on exports of all goods

to Country X, where there is a repressive dictatorship and a civil war in one region.

You have been asked to prepare the documentation for the sale of a large quantity

of equipment to a customer in Country Y, and arrange the method of payment.

There is no ban on exports to Country Y, but the customer has acted in the past as a

buying agent for the government in Country X. You are therefore aware of the fact

that the equipment exported to Country Y will soon find its way into Country X.

You have discussed your concern with the finance director, who told you that there

was no ban on sales to Country Y, and what happened to the equipment after that

was none of his concern and should be none of your concern either.

What should you do?

Answer

Step 1

The first step here is to identify the issue. The problem here is your involvement in

an export transaction which is not strictly illegal, but is probably intended to have

the same end result as an illegal action.

The export is not strictly illegal, so you are not under a legal obligation to report

your concerns.

Step 2

You should assess the threat to your compliance with the fundamental ethical

principles. The threat here is to your integrity. You are under pressure from the

finance director to keep quiet and get on with your job, suggesting perhaps that

action will be taken against you if you fail to comply. This is a form of intimidation

threat.

Step 3

You should assess the significance of the ethical issue. In this case, it is probably

sufficiently significant for you to consider an appropriate response to the problem.

Step 4

When problems arise of an ethical nature, the first course of action should be to find

a way to resolve the matter through internal procedures. Since the finance director

will not listen to your concerns, you might consider using the arrangements that the

company has for internal ‘whistle blowing’. If there are no formal arrangements for

whistle blowing, you might consider reporting your concerns to the senior

independent director.

Paper P1: Governance, risk and ethics

336 © Emile Woolf Publishing Limited

If no-one in the company take up your concerns and tries to deal with the problem,

you might consider, as a final resort, reporting the matter to someone in authority.

However, before you become an external whistle blower, you should consider the

following matters:

 What will be the effect on the public interest if the unethical transaction goes

ahead? Is there a sufficiently strong public interest concern to justify informing

an external authority?

 The answer to this question depends partly on the gravity or significance of the

matter. Is a serious ethical problem involved, to justify you informing the

authorities?

 Is there a probability of a repetition of the problem in the future? In this case, is it

probable that there will be more export orders from the same customer in the

future?

 What is the quality of the information that you have? In this case, how certain

are you that the equipment will be transferred to Country X after it has been sold

to the customer in Country Y?

 What is the reason for your employer’s refusal to act?

All these matters could affect your decision on whether or not to report your

suspicions to an external authority. If you decide that you must ‘blow the whistle’,

you should keep documentary records to provide evidence of your concerns and of

your attempts to resolve the problem internally.

This is a problem where different individuals might reach a different conclusion

about the appropriate action to take.

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Governance,riskandethics

CHAPTER

Social and environmental

issues in ethics and business

Contents

1 Social and environmental footprints

2 Sustainability and accounting for sustainability

3 Environmental management systems,

environmental management accounting and

environmental audit

Paper P1: Governance, risk and ethics

338 © Emile Woolf Publishing Limited

Social and environmental footprints

 Introduction

 Environmental footprint (ecological footprint)

 Carbon neutrality

 Social footprint

 Social ecology

 Towards the measurement of social and environmental effects

1 Social and environmental footprints

1.1 Introduction

The purpose of economic activity is to create economic wealth. It is now recognised,

much more than in the past, that economic activity also has an environmental

impact and a social effect. An organisation is said to create an ‘environmental

footprint’ and a ‘social footprint’ - a visible mark on the environment and on society.

(The word ‘footprint’ is intended to have the same meaning as in everyday use,

when we speak of leaving a footprint in the sand, as a mark that we leave behind

where we have been.)

The social footprint may be either beneficial or damaging. The environmental

footprint is almost inevitably damaging.

1.2 Environmental footprint (ecological footprint)

An environmental footprint, also called an ecological footprint, is a term that means

the impact that an entity has on the environment, in terms of:

 the amount of raw materials that it uses to make its products or services, where

the raw materials are subject to depletion (see note)

 non-renewable resources that it uses to make its products or services

 the quantity of wastes and emissions that it creates in the process.

Note: Raw materials subject to depletion are raw materials that can be renewed, but

where the current total rate of consumption exceeds the total current rate of

renewal. Fish stocks and hard wood timber are examples.

In the past, it was accepted that in order to grow, companies (and economic activity

as a whole) had to increase their environmental footprint. With the recognition

today that the world cannot go on increasing its environmental footprint, many

leading companies are looking for ways to reduce the size of their own particular

footprint and ‘tread more softly’.

Chapter 16: Social and environmental issues in ethics and business

Reducing an environmental footprint involves the development and

implementation of policies for:

 better (more efficient) resource management, and using different resources

 ‘green’ procurement policies

 waste minimisation and waste management (for example, policies on reducing

pollution and recycling waste).

The measurement of environmental footprint

There have been attempts to measure environmental footprint, using a common

measure for all activities. It can be measured in terms of the area of productive land

and aquatic ecosystems that have been used, from whatever global source. An

environmental footprint for any economic activity or any company can therefore be

measured in terms of hectares of productive land or aquatic ecosystems.

One widely-used method of footprint analysis for the economic activity of nation

states is to identify four methods of environmental consumption:

 energy use

 the built environment (land covered by a human settlement and its connecting

infrastructure, such as roadways)

 food products

 forestry products.

For each category, it is possible to measure the land area used for these activities

within the country, in global hectares, to obtain a total environmental footprint for

the country. This is then converted into an environmental footprint per head of the

population.

Countries that consume most environmental resources and create most

environmental damage relative to other countries are those with the highest

environmental footprint per head of the population.

1.3 Carbon neutrality

The effect on the environment of economic activities by individual companies may

be measured in terms of emissions of carbon-based pollutants, such as the release of

carbon dioxide into the atmosphere.

Some environmentally-conscious companies already measure their impact on

carbon pollution, and might have a stated environmental policy of being ‘carbon

neutral’.

Carbon neutrality exists when a company is able to counterbalance its use of carbon

products, and particularly its carbon dioxide emissions, with activities that reduce

the amount of carbon dioxide in the atmosphere such as growing trees or plants

(which absorb carbon dioxide from the atmosphere). Some companies have also

tried to reduce their impact on carbon dioxide pollution by switching to the use of

fuel and energy that does not involve carbon consumption.

Paper P1: Governance, risk and ethics

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Example

There are many examples of large environmentally-conscious companies.

One company has listed some of the initiatives it has taken to create a sustainable

business as:

 Setting a target of zero waste generation and zero waste emissions

 Conserving energy and resources such as oil, coal, natural gas, water and

minerals

 Recycling materials to reduce the need for disposals

 Reducing packaging waste

 Making, using, handling and transporting materials safely and in an

environmentally-friendly way and in compliance with local regulations

 Managing land efficiently to increase habitats for wild life

 Developing new products and processes that reduce the environmental risks.

1.4 Social footprint

A social footprint is the effect of economic activity on society and people. In general,

economic activity is seen as providing benefits for society, although some

companies are much more ‘people-friendly’ than others. Some companies, for

example, use child labour and/or pay subsistence-level wages to their workers.

Companies might seek to measure the contribution of their activities towards

society in terms of:

 Total numbers employed or increase in the total number of employees

 The proportion of the total work force employed in different parts of the world

 The proportion of the total work force that is female or from different ethnic

groups

 Health and safety at work (for example, numbers of employees injured each year

per 1,000 of the work force).

1.5 Social ecology

There are critics of the Western capitalist approach to environmentalism. Social

ecologists argue that the environmental crisis has been caused by companies

seeking growth, profits and economic self-interest. Nothing fundamental has

changed. Companies are still trying to get bigger and more profitable, even though

they use environmental ideology to express their plans and ambitions. They argue

that the environmental crisis cannot be averted without a radical change in human

society.

The following comments are illustrative of the thinking of social ecologists.

 Environmental problems are caused by companies that seek continued growth

in size and profits.

Chapter 16: Social and environmental issues in ethics and business

 Social ecologists also argue that the structure of society and the future of the

environment are closely linked.

 They argue that most environmentalists focus, wrongly, on improving

technology to improve the environment, or even on restricting population size.

These environmentalists are focusing on symptoms of the environmental

problems, not its root causes; so they will not find any lasting solution.

 A truly ‘green’ entrepreneur cannot possibly survive in today’s capitalist culture,

because by using ecologically/environmentally sound methods they would be at

a disadvantage to more ruthless rivals who will produce at a lower cost.

1.6 Towards the measurement of social and environmental effects

So what is the relevance of social and environmental issues to the accountancy

profession?

The answer to this question is that, setting the arguments of social ecologists to one

side, many companies are becoming increasingly aware of environmental and social

issues, and their responsibility for preserving the environment and developing

society, as well as for making a profit.

In order to help companies to set targets for achievement and assess their actual

performance, there should be measurement. Environmental and social effects

should be quantified, because managers find it easier to plan and control using

numbers than using more general qualitative assessments.

Some accountancy bodies, including the ACCA, are contributing towards efforts to

establish measurement and reporting systems for social and environmental issues,

to complement traditional financial reporting. As it is increasingly recognised that

conventional financial accounting and financial reporting systems might contribute

to non-sustainability, sustainability has become a key issue for accountants. There is

now important progress in exploring how financial accounting and financial

reporting can play a part in a more sustainable future.

These initiatives may become linked to the developments in corporate governance

and reporting to shareholders. It was mentioned in an earlier chapter that in the

European Union, companies are now required to provide information about social

and environmental risks in an annual business review for shareholders.

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Sustainability and accounting for sustainability

 Accounting, the economic model and sustainability reporting

 Sustainable development

 Reporting by companies on sustainable development

 ‘Environmental footprint’ for individual companies

 Triple bottom line reporting

 Balanced scorecard and sustainable balanced scorecard

 Sustainability Assessment Model (SAM) and full-cost accounting (FCA)

 Sustainability reporting: concluding remarks

2 Sustainability and accounting for sustainability

2.1 Accounting, the economic model and sustainability reporting

The capitalist system creates incentives for maximising wealth, and it is based on

the assumption that wealth can only be increased through continual economic

growth. This is the ‘economic model’ of society. As a result, growth-seeking

economic activities continue, in spite of growing concerns for the environment, and

recognition that continual growth in its current form cannot be sustained.

Accounting has developed in support of the economic model. Financial reporting

measures the consequences of a company’s activities in terms of the use of the assets

that it owns and the liabilities for which it has the direct responsibility for payment.

Current accounting practice does not allow companies to report the consequences of

their actions on external assets that it does not own, and the creation of liabilities for

which it does not have to pay directly.

Investment decisions by large companies are made using accounting techniques

such as discounted cash flow analysis, which focuses exclusively on economic

consequences of investment, and does not measure or evaluate the environmental

and social impact.

In the past, companies ignored their consumption of natural resources such as air

and water because they assumed that supplies of these items were both limitless

and free. This is no longer the case. It can now be argued that whereas companies

are increasing economic wealth through growth and the search for profit

maximisation, society may well be getting poorer because of the damage that

economic activity is having on the environment and society.

As companies have become increasingly aware of environmental issues, and begin

to accept that economic growth might not be sustainable, they have become more

interested in measuring sustainability and environmental impact.

Traditional accounting methods do not provide for this type of measurement, and to

the extent that companies (and society) want environmental and social impacts to be

Chapter 16: Social and environmental issues in ethics and business

measured, traditional accounting is inadequate. Alternative measurement and

reporting systems that recognise the need for economic activity to be sustainable

have therefore been considered, although there is as yet no widely-accepted

standard measurement and reporting system.

It seems quite possible that as systems for reporting sustainability are developed,

the accountancy profession will be closely involved, because of its long experience

with measurement and performance reporting systems.

2.2 Sustainable development

A problem with accounting for sustainable development is to identify what

‘sustainable development’ actually means. A generally-accepted definition provided

by the Brundtland Report (for the World Commission on Environment and

Development, 1987) is: development that meets the needs of the present without

compromising the ability of future generations to meet their own needs.’

However, there are practical difficulties with this definition:

 What are the needs of the present? Presumably, these are more than simply

survival needs, because current levels of consumption are, in many parts of the

world, well above survival level.

 What are the needs of future generations? Are these just survival needs? If so,

there is presumably an assumption that economic wealth will decline.

 Over what time period should the needs of future generations be measured? In

theory, future needs should be measured into the long-term future. However,

companies and governments plan for the future over much shorter time frames.

 Do we mean the needs of all people in all societies, or is sustainability measured

in terms of individual countries or regions of the world?

Since companies plan for the future and report their performance within fairly short

time frames, reporting for sustainable development by companies is likely to focus

on relatively short-term measures of sustainability.

Another definition of sustainable development is: ‘a dynamic process which enables

all people to realise their potential and improve their quality of life in ways which

simultaneously protect and enhance the Earth’s life support system’ (Forum for the

Future).

2.3 Reporting by companies on sustainable development

The previous section of this chapter suggested that the environmental footprint (or

ecological footprint) can be measured for countries and governments in terms of

geographical area per head of the population. Companies need something different.

Several techniques have been used by companies to plan and report their

sustainable development, or the impact of their activities on society and the

environment. These include:

 measures of the ‘environmental footprint’ for individual companies

 triple bottom line reporting

ACCA P1 Governance, Risk and Ethics - 2011 - Study text - Emile Woolf Publishing

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