The 6 capitals: the cutting edge of accounting

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. manufactured capital, 3. intellectual capital, 4. human capital, 5. social and relationship 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 South African lawyer Mervyn King. 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.)

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9 Responses to The 6 capitals: the cutting edge of accounting

  1. Dear Jane,
    I just wondered whether you have come across Social Return on Investment? We would really be interested in talking to you about and would the possibility of you supporting our accounting for value campaign. Please feel free to email me to discuss.
    Thanks. J

  2. Thanks Jeremy, I’d be extremely interested to hear more about Social Return on Investment. I’ll follow it up with you tomorrow. cheers, Jane

  3. perkinsy says:

    From what I have seen, I agree that sustainability reporting does not seem to be permeating core financial reports, rather sustainability reporting is tacked on in supplementary pages or reports. However, I question whether the complex activities of a company can be reduced to one set of numbers. Sustainability reporting expressed in both quantitative and qualitative terms is vital as an additional measure to the more traditional financial numbers. Even more important is greater sophistication and nuance in interpreting corporate information and using financial statements for decision-making. We need a number of different forms of corporate reporting and we need commentators and decision makers to make the effort to give all these forms of reporting adequate attention. Measurement of externalities is needed but this is useless if there is not an accompanying change in attitude to the importance of these measures.

    • Thanks Yvonne. Yes, I agree with what you say, especially that ‘Measurement of externalities is needed but this is useless if there is not an accompanying change in attitude to the importance of these measures.’ I’m just not sure this necessary change in attitude will come as quickly as it needs to – which is why I keep returning to the idea of translating everything into the dominant language of our time: numbers denominated in dollars and cents. Which is the only language that seems to me to have any real power. Although it goes against everything I believe in, I wonder if it’s the only way to save everything I care about, most importantly, the planet. I think change is urgent and changes in attitude are slow.

  4. Daniel Osmer says:

    Currently mathematical models and algorithms guide the economy and not accounting in the form of Balance Sheets, I & E and Cash Flow Statements (including pro forma). Money is an accounting concept and in fact, money has become moving bookkeeping worldwide. As an almost universal language, double entry accounting has the potential to establish a world currency overnight, once the standards boards synchronize accounting rules. A sustainable environment/planet, people and profit are not foreign to existing and true double entry accounting technique. They can all be fully accounted for if we all took the ancient/modern Double Entry technique in earnest. Double entry is not just entering things twice, it is about expanding one’s awareness and to include not only my own normal ‘point of view’ but also the world’s point of view, stepping outside our normal consciousness in order to include other side of the transaction. A deeper accounting if learned, practiced and shared by all, large and small, could act as a social tool for perceiving our collective economic effects that can then be mitigated and modified consciously. Deep Accounting literacy and training would allow us all to ‘see’ each other economically and then act accordingly. Even the famous English economist John Hicks came to the conclusion that balance sheets may make for a better method to guide future economic life than his own mathematical models.

    As to economic value, the twin theory of value creation is a powerful tool and image for considering the sources of economic value. Using the visual image of the electromagnetic spectrum it is possible to have a deeper understanding and method for discussing economic value creation. The visible light between two poles represents the normal economy. With the products of the land (nature) on the left pole of infrared and intelligence and creativity (capital) represented by the ultra violet pole, the economy and human activity (labor) lies in between. Either labor or human activity is modifying the products of nature OR human intelligence is modifying human activity (labor). Of course, most economic value can be traced to a combination of innumerable sources. The image also includes the ultra economic life over and above the normal economy where history’s accumulated capital is directed by human intelligence. I have found that this image allows for a great conversation about the origins of economic value. In the past, economic value was connected to the land (nature products) enhanced by human activity. However, more and more, economic value now comes from the more intangible pole of economic value creation – human intelligence, innovation and creativity (capital). The valuation of these intangible but nonetheless economically real values is a current challenge for accounting professionals.

    Daniel Osmer, Real Estate Professional and creator of the Financial Drivers License for teens. Sebastopol, California daniel@theaecafe.com.

  5. Wow! Thank you for your thoughts Daniel. Fascinating and thought provoking. The more I consider the way you deal with double entry, the more I realise how rich and productive an approach it is. I’ll be rereading and musing upon this comment all week. Thank you.

  6. Pingback: Double Entry at Columbia University and other news from New York | bookish girl

  7. Pingback: 2013 A Big Year for Triple Bottom Line Accounting - Maleny Credit Union

  8. Pingback: Six shades of capital in the 21st century – Six Capitals: The revolution capitalism has to have – or can accountants save the planet? | bookish girl

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