Yes, accounting does have a cutting edge. Yesterday I was part of a round table discussion on the future of accounting organised by the Institute of Chartered Accountants in Australia. It was called ‘Sustainability & accounting’ and the proceedings will be published in the July issue of the Institute’s magazine Charter.
The participants were: Peter Lewis, the Chief Financial Officer of Seven West Media; Michael Bray, the Chairman, Energy & Natural Resources KPMG; Lee White, CEO of the Institute of Chartered Accountants in Australia; and me. Needless to say, I was there mostly to listen and ask questions in the context of my work on the history of accounting for Double Entry.
It was fascinating to be in the company of such expertise. Especially because what seemed to be simmering when I finished the research for my book (in late 2010) is now cooking at lightning speed: the rethinking of corporate accounting in response to the ‘third wave’ of wealth creation.
Michael Bray mentioned a paper which was published in 1992 by senior accountant RK Elliott, of KPMG New York, called ‘The third wave breaks on the shores of accounting‘. Here Elliott argued that with each new wave of wealth creation a new form of accounting is required. Drawing on Alvin Toffler’s The Third Wave, he characterised the three ages of wealth creation as the agricultural, the industrial, and the information era. Our accounting systems were designed for the industrial era – first codified by Luca Pacioli in Venice in 1494 and then adapted to factory production in the late 18th and 19th centuries. Elliott argued that these industrial accounting systems cannot account for the new, late 20th and 21st century forms of wealth creation of the information age (characterised by Yann Moulier Boutang as ‘cognitive capitalism‘).
So what new forms of accounting are being proposed? Not surprisingly, ‘sustainability is the new black’ (their words). In accounting terms it’s called ‘integrated reporting’ – which is already being tested in 65 pilot initiatives around the world, including by Microsoft and CocaCola. Integrated reporting broadens the concept of capital to include: 1. financial capital, 2. manufacturing capital, 3. social capital, 4. intellectual capital, 5. environmental capital, and 6. natural capital.
There’s also the new ‘Global Reporting Initiative‘ (GRI), which advocates accounting reform and the use of integrated reporting, led by Mervyn King, Governor of the Bank of England. King says the integrated reporting initiative is driven by financial, social and environmental imperatives, ie the need for sustainable business.
While it’s good to hear that accountants are expanding their horizons beyond financial and economic imperatives – and actually beginning to implement new forms of accounting – it seems the actual financial statements remain intact in the new system. The integrated reports appear as text and graphs up the front of the annual report. So I wonder how this new information will feed into the behaviour of corporations and investors if, for example, the cost of polluting a river is not factored into the production process and thus into prices.
Even with integrated reporting, destructive corporate practices – tellingly called ‘externalities’ in economics – will remain external to the real game changer in our capitalist system: numbers denominated in money. Economist Raj Patel vividly captures the conundrum of externalities with his $200 hamburger – $200 being the REAL cost of producing a hamburger, taking account of its externalities: its carbon footprint, its impact on the environment in terms of water use and soil degradation, and the enormous health costs of diet-related illnesses such as diabetes and heart disease. Traditional accounting models do not take these costs into account. And nor, it seems, does integrated reporting. But they still have to be paid. By us.
Next week is the Sydney Writers’ Festival and on Tuesday evening I’m going to the opening address by writer Hisham Matar, who’ll be speaking about ‘The Private Moment‘. Matar will talk about the need to give the private moment its worth and argue that fiction articulates these moments best. He says: ‘Even private life is infiltrated by a totalitarian regime. To describe how people love differently under this situation is an act of resistance.’
I’ll be blogging about Matar’s ‘The Private Moment’ next week – with the second of my librarian v rock star Bronte blogs, on Wuthering Heights, to come. (My PhD annual review papers are due on 21 May so Wuthering Heights will be up after that.)