Understanding Social Accounting Based on Evidence

Questioning the Grand Illusion

In traditional neoclassical theory, value is created through the exchange between supply and demand, developed in the setting of a free market. The general competitive equilibrium theory (Debreu, 1954) explains that, under certain conditions, the maximization of the results by a company (optimization of profit/value) corresponds with the social optimum, that is, with the creation of the greatest possible value for society. From this perspective, we could consider that “[In a free economy] there is one and only one social responsibility of business―to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” (Friedman, 1962/2002, p. 133). “While conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman, 1970/2007, pp. 173–174). In the analysis of the underlying logic, we can see that profit maximization is not an end in itself. Rather, it is instrumental for the purpose of generating value for society. Nonetheless, given that in microeconomic logic, there is a biunivocal correspondence between both results; profit maximization, which is much more specific and concrete, can replace the ultimate aim of generating social value, which is a much fuzzier concept. However, from this logic, the aim of the company is not found therein, rather, in society, but under the assumption that what is good for the company is good for society, generating the consequential DWDG notion (Porter & Kramer, 2011).

Consequently, in neoclassical economics, no conflict is considered between the company’s profit maximization motives and its social function. Rather, profits are a sound indicator of the social function performed by different companies. In this regard, it follows that the purpose of companies, and all other organizations, is not intrinsic to themselves, but rather, it is extrinsic, that is, social. This approach ties in well, not only with the classical social contract theory (Hobbes, 1651/1960; Locke, 1689) but also with current developments, particularly those of Gauthier (1984), and to a lesser extent with Kantian-based contractualism (Donaldson & Dunfee, 1999; Rawls, 1971). Moreover, this perspective links up well with a conception of society based on welfarism, in which the benevolence of social statements is understood solely on the basis of the usefulness that individuals obtain from such statements (Elster, 1992). This has led to the extensive development of instruments for measuring the degree of material welfare, including gross domestic product (GDP) and per capita income, which is strongly correlated, theoretically and practically, with the social optimum. From the foregoing argument, it can be deduced that economic-financial information is a sound indicator of the social value generated by companies, owing to which there is no need to establish additional social accounting for the same. Only in the case of nongovernmental organizations (NGOs) and the public administration, which do not respond formally to market rules, could the introduction of some type of complementary information be justified, namely, social impact reports, social balance sheets, and social accounting, among others.

Notwithstanding, this link between corporate profit and the social value generated is not widespread in society, and is counterintuitive to a large part of the general public, which, in general terms, perceives that profit merely benefits shareholders to the detriment of the interests of all other stakeholders. From a more technical perspective, it has a number of limitations. First, if it is to function correctly, certain assumptions need to be met, which is not always the case (market failures; Stiglitz, 1989). Second, the underlying Paretian optimum only takes the generation of aggregate value into consideration, excluding any consideration of the fairness of distribution. Third, on many occasions, there may be a trade-off between private profits and public interest (Karnani, 2007, 2011). Finally, in general, only economic value—which takes the form of market transactions—is taken into consideration, doing away with externalities, both positive and negative. Certain negative externalities, such as the cost of CO₂ emissions, have timidly begun to be internalized, but the internalization of social costs (health, additions, inequality, and exclusion) is practically nonexistent. Except in certain well-defined settings, neither are positive social externalities (entrepreneurship and disability) being internalized as a value generated by organizations. These limitations, either on their own or in conjunction with other issues, mean that there is often a divergence between private gains and public interest (see Figure 1 for the trade-off between them). It is because the latter is determined not only by the quantity of the value produced but also by the “distribution” thereof (Karnani, 2011). Similarly, the generation of a nonmarket value, which can be either positive or negative, means that the exchange price does not necessarily correspond with the actual break-even price.

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Figure 1.

Public interests versus private interests (the trade-off zone).

It should be noted that there is a certain area of opportunity in which social and private optima may be convergent, and may even give rise to public–private partnership processes. Similarly, there may be an area of loss where both optima deteriorate in parallel. Notwithstanding, there is no need for both optima to coincide because in the central area, there could be a trade-off between the private optimum and the social one, as the social externalization of costs (health care, pensions, dismissals, training, parenting, infrastructures, and cleaning) will improve the private optimum to the detriment of the social one. Moreover, the internalization of social costs by companies will improve the social optimum to the detriment of the private one. This being the case, the optimum is not so much a point of equilibrium as a range of compromise, the limits at which the equilibrium between the social optimum and the private optimum breaks down. It should be stressed that negative externalities are not the only ones that exist. Alongside these, companies generate an extensive array of positive externalities which cannot be monetized directly by means of a price system. In the figure below (Figure 2), we can see the alteration in the social value, generated or detracted, when, at the point of equilibrium between cost and private marginal profit, marginal social profit is added, and marginal social cost is subtracted.

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Figure 2.

The gap between marginal, private, and social profit.

The fact that what is good for society does not necessarily have to be bad for the company and the fact that what is good for the company does not necessarily have to be to the detriment of society (Moran & Ghoshal, 1996) do not imply that the opposite proposal is true; not all that is good for the company is necessarily good for society (Karnani, 2011). However, if that were the case, it would be a grand illusion.

Possibly, it is this trade-off between public and private profit, whose alignment constitutes one of the principal objectives of economic science (Tirole, 2019), which causes mistrust among the general public and is compounded by the asymmetry of information, that serves to fuel all manner of conspiracy theories. The anthropological substrate of neoclassical economics, a selfish vision of individuals, focused solely on the optimization of their own usefulness (profit). It will be unaffected by social interests and to the potential damage they could cause to third parties, stokes mistrust in the economy in general, and in economic entities in particular. To recover the general public’s confidence in organizations, and particularly in companies, there is a need to reconsider how to reduce the gap between individual and social benefit. To this end, we need to reduce this gap by reducing the asymmetry of information existing on the matter. In this regard, we need to reassess the current solution, which is focused on sustainability reports, as can be seen in the Edelman Trust Barometer. After years in operation, it does not seem to have made any headway in terms of increasing the credibility of companies.

Our study focuses on the notion that a new perspective of information symmetry, based not on the quantity of the data provided, but on the business language used, could possibly help. Economic-financial information is a good indicator of an organization’s economic situation, both present and future, as well as of the yield that an investor or creditor can expect from the organization. Notwithstanding, it provides insufficient information on the value that the organization in question generates for or subtracts from society, through both market mechanisms and, particularly, through nonmarket mechanisms (externalities and internalities). There are at least two limitations: on one hand, the exclusion of all those bidirectional or unidirectional transactions which have no explicitly monetary counter value (confusion between value and price), and on the other hand, owing to its focus on shareholders and other financiers, it is rendered oblivious to the interests of the other stakeholders, for example, employees, users, consumers, society, government, volunteers, and other members of society (Richmond et al., 2003). Instead of an asymmetry, perhaps it would be more suitable to consider it as an absence of information because in most cases, this information is not available to stakeholders as a whole, but neither does the organization itself explicitly have it. In this regard, there is a cross-demand on the part of organizations and society to have better information on the impact that organizations or companies have on society, and that it is understood at both universal and local levels. Thus, on one hand, we find a general public that is increasingly skeptical about the supposed correlation between business benefit and social welfare (crisis of confidence). While, on the other hand, companies need to attain legitimacy before their shareholders as a whole, either owing to their responsibility (altruistic) or in their own interest (crisis of legitimacy).

Despite there being clear areas where there is room for improvement, economic-financial information would seem to be a suitable instrument for understanding, communicating, and handling information of an economic nature. It is worth considering whether it would be useful to generate a similar instrument which would provide us with suitable comprehension, communication, and management of social value, and if so, what type of information should be supplied.

Moving Toward an Extended Social Accounting System

As part of their activities, organizations generate or subtract different types of value, of which the most salient is that generated through market activity. Both companies and all other organizations, through their activities, generate jobs, and consequently, salaries, which give rise to social security contributions, private pension plans, income tax, and purchasing power. They also generate other types of taxes (corporation tax, municipal rates, and value-added tax [VAT]). Similarly, these entities—or at least, some of them—drive entrepreneurial activity by purchasing from suppliers, in what could be considered a generation of social value induced by market transactions. Up to this point, we have referred to a value that all types of organizations (commercial companies, social enterprises, NGOs, and public bodies) generate for society through their market activities and which could be denoted as a market-based social value. As has already been pointed out, this could be direct, through added value (Meek & Gray, 1988; Morley, 1979), or induced, through value driven by means of purchasing from suppliers (see Figure 3). Given that in both cases, we are speaking of value generated through commercial activity, this is reflected to a greater or lesser extent in the accounting. The traditional accounting does not directly show the social impact that a business generates, owing to which some sort of transformation process must be conducted to reveal the understanding of the social impact generated by the market activity of organizations.

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Figure 3.

The value generated, distributed, and retained: The foundation of the proposed social accounting.

More problematic is the nonmarket value that organizations additionally generate through externalities or transactional processes not accounted for in the price system (nonmarket). Owing to its nature, this type of value generation is evident in both public entities and in NGOs, but may also arise in commercial companies of all types. Contamination, domestic work, job creation, and other widely known externalities are only a few good examples of this. In commercial companies, leaving their possible instrumental nature aside, there are positive activities of support for the community or individuals, which have value in themselves. Nonetheless, this value is not recorded in the accounting, and at best, they would be considered an expenditure.

Even more complex is the relational or emotional value (positive or negative) which can be generated by organizations for stakeholders. Thus, one individual may have a pleasant experience in their interaction with a given organization. If this individual is a customer of the company, they may continue to be so, or they may change supplier, and perhaps this value would be reflected in the price. However, if they are a worker or supplier, then the transaction costs related to the exchange may prevent the price system from incorporating the emotional value, at least in a clear manner. In those cases which do not involve a price system, as occurs with users of a public entity, an NGO, or the neighbors of a commercial company, it is impossible for accounting to record the emotional value that the different organizations generate for their various shareholders.

This being so, classical economic-financial accounting would seem to be somewhat limited in terms of offering comprehensive information on the value (in its different modalities) generated or detracted by an organization over time. This problem has been patched over with a number of different initiatives: one on hand, the generation of standards in sustainability reports (e.g., GRI, integrated reports, SA8000, SROI), and on the other hand, with demands from the administration for supplementary nonfinancial information (e.g., the Social Value Act or European directive about nonfinancial reports). Nonetheless, to date, no comprehensive economical information system has been successfully developed and accepted generally for the standardization and analysis of nonfinancial information. In this regard, the triple bottom line has a highly developed system for managing economic-financial information (Elkington, 1997). This system, though incipient, is in the process of building a consensus in the environmental setting, and is also referenced in monetary units (Larrinaga-Gonzalez & Bebbington, 2001). Nonetheless, in the social setting, they are not comprehensive and referenced in monetary units of performance (Burdge, 2003). Considering that from the general public’s perspective, the economic and financial setting is merely instrumental, and the environmental setting is fundamentally limiting, we find ourselves with no instruments for controlling and managing the principal function of organizations. Hence, we are unable to gain a deeper understanding of the processes by which organizations generate value for stakeholders (and therefore society) based on monetary units.

Consequently, it would seem necessary to propose a social or stakeholder accounting system (called SĒA), which would allow us to identify the social profit and loss account in monetary terms. Such a system, which we shall call the social accounting system (Gray, 2001; Gray et al., 2014), need not be an alternative to current nonmonetary social information systems. It may be complementary to them, proposing a systematization framework based on the monetization of current information systems (see Figure 4).

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Figure 4.

Social accounting system: A global view.

The social accounting enables us to extend traditional accounting into two dimensions: on one hand, by incorporating the nonmarket value that organizations generate or detract in their interaction with society—including the emotional value—and on the other hand, by extending the focus from investors and financiers, the referents of the current accounting system, to the set of stakeholders that make up an organization. The empirical experiments conducted to date show the capacity of the social accounting to provide an interconnected understanding of the economic and social setting (Gray, 2006), through the integration of a multidimensional approach. This process is completed with the inclusion of different variables highlighted by stakeholders and the monetization of nonmarket value through a process of fair value for nonmonetized (nonmarket) social outputs, including emotional ones (Retolaza et al., 2016). It is an experience with which the Global Economic Accounting organization (www.geaccounting.org) has been working for a decade, having reported a lot of experiences of stakeholder accounting. It is relevant, and therefore, some case analyses have been previously published in the scientific environment to show the system to doing it (Lazcano et al., 2019; Retolaza et al., 2020 or other cases on the special issue on CIRIEC Journal in 2020 [“Special Issue on 100 about Social Accounting,” 2020]).

The intention of developing a social accounting is nothing new. The initial proposals for extending the elements considered in accounting information and relating financial statements to stakeholders (Branson, 2016; Estes, 1976) date back to the 1970s, when Linowes (1968) coined the term “socio-economic accounting,” with the aim of emphasizing the sociological, political, and economic aspects that the classical paradigm of accounting fails to take into consideration. The fundamental idea focused on social accounting superimposed over conventional financial accounting (Solomon & Corbit, 1974). As a consequence of this movement, in the 1980s, French and Italian cooperative schemes would develop the cooperative balance sheet (Riahi-Belkaoui, 1984; Vaccari, 1997), which would subsequently be extended with a view to also incorporating environmental information (Bebbington et al., 1999; Gray et al., 1997; Mathews, 1997). Around the turn of the century, the approach took the form of the so-called triple bottom line (Elkington, 1997, 1998).

In the first decade of the 21st century, the most widespread applications of social accounting employed quantitative data and descriptive statistics to evaluate the degree to which an organization complies with its mission and with the expectations of its stakeholders (Sillanpää, 1998; Zadek et al., 2013). Nonetheless, the approach is neither holistic nor strictly accounting, because, on one hand, it neither uses monetary units nor is adapted to the basic principles of accounting. Moreover, it is a mere supplement to classical financial statements. From a historical perspective, we could consider five moments or stages of social accountability: that of its introduction in the 1970s and 1980s, its initial systematization around the methodologies of the social balance sheet, its subsequent extension to the environmental setting in the 1990s, its systematization around that of accountability during the first decade of this century, and, finally, the greater approximation toward the accounting setting today (see Gray, 2002 for a review on the stages and the authors). From its humble origins half a century ago, social accounting has gradually evolved in a nonlinear manner, and now we find ourselves, possibly, in a phase of renewed and aligned interest through nonfinancial information inclusion on the core of the company.

Principle

Categories

Methodology: Possible Hypothesis

In methodological terms, there are two possible approaches: first, conducting a broad set of social accounting processes, identifying the regularities, and proposing generalizations (inductive method), and second, working with a possible hypothesis based on practicing theory (Retolaza & San-Jose, 2017).

After analyzing 92 cases carried out during the last 9 years (2011–2020) with the support of an external experienced company called GEAccounting, the first option would allow us to formulate hypotheses and test them. In the setting of hypothetical-deductive methodology, the possible hypothesis is robust because the phenomenon studied gives great knowledge that evidence accepts or refutes the hypothesis. Moreover, this methodology allows us confirmations (refuting the alternative hypothesis) of the type: Vx: P (x) (for each x, there exists P); because it can be verified through the analysis of cases or the quasi-experimental methodology, that: Ax: 'P (x) (There is some x in which P does not exist), the consequence derived is that: 'Vx: P (x) (It is not the case that for each x there exists P).

If a determined hypothesis is not refuted because there are instances in which it is confirmed, then this hypothesis is, at least, possible. Given that a hypothesis is refuted when some cases that falsify the said hypothesis appear when proposing the “impossibility of conducting specific social accounting in an entity” hypothesis, and one or more cases are identified in which this has been possible, then the hypothesis of impossibility can logically be refuted. The fact is that it does not necessarily confirm the hypothesis that it is possible to apply social accounting in all cases, but it does confirm that it is possible in some cases (see Retolaza & San-Jose, 2017 for further clarification of the methodological approach). A qualitative analysis for understanding why they have developed could be read at Lazcano and Beraza (2019). It is important for understanding in-depth why companies carried out this social accounting, but not to evidence that they do. Fundamentally, it is shown after a qualitative analysis that they have a communication purpose, aligned with the interest to increase the social value that they create.

Hypothesis

Adhering to this reasoning, the aim is to demonstrate the possible option because of the application of social accounting in different entities. We have a proposal.

There are certain organisations (at least one) interested in developing this type of treatment of social information.

In this article, we have used a total of 96 entities that have started the social accounting application, 92 of which have concluded it. As this is a possible approach, we propose to falsify the negation of the condition of possibility, which, in a hypothetical form, could be formulated as follows:

It is impossible to conduct a process to monetize SĒA with the following accounting criteria [Vx: ¬P (x)].

The subhypotheses to be examined would include those relating to the entity’s sector setting (tertiary sector, public entities, and commercial companies) as well as those relating to the type of organization (listed, small & medium enterprises [SME], cooperatives and microenterprises) or sectors. However, in this study, using possible hypothesis, we will evidence the option to applying the proposed social accounting.