1. the quality of being fair and impartial. “equity of treatment”. Synonyms: fairness, justness, impartiality, egalitarianism
2. the value of the shares issued by a company. “he owns 62% of the group’s equity” Synonyms: value, worth; ownership, rights, proprietorship
“he owns 25% of the equity in the property”
Double-entry bookkeeping is a simple and powerful mathematical tool. With it, we accountants can establish as clear a picture as we can want of the growth of a project, its shape, its operations, its relationships, and it’s likely futures. Yet, as individuals and as a profession, we often give little thought to the assumptions that underlie our choices – about what we choose to count, about why we do it, about our power in these endeavors. At its most benign, this is partially because social responsibility doesn’t necessarily rear its head in B.Comm programs, and partially from a well-deserved reputation for preferring things neat, organized, balanced, cleared. Yet the world is changing, and out there are activists who find the trappings of money and power abhorrent. They are rejecting the system in which most of us work, and they are absolutely correct to do so. They are also rejecting administrators as a class, as lackeys to the rich, and they are (so far) also absolutely correct to do so. Arguments can be made that business owners have a responsibility to act to reverse climate change. But what then of we Keepers of the Records, the creators of reports and plans, the jugglers of resources? Can our tools and skills brought to bear on the questions of human extinction? Should they?
Accounting records comprise the oldest known disposable records kept by people. They were marks on clay tablets in Sumer, ancient Iraq in 4000 b.c., used to issue receipts for sheep or barrels of beer. As trade developed over the next 5 millenia, so too did record keeping and, in time, double-entry bookkeeping. This system allowed for the equation of assets minus liabilities to equal a tradeable and taxable value for the company, shared equitably as reported on a Balance Sheet, as well as to take into account the effect of recent operations, listed in a Profit and Loss Statement, which shows information on Sales minus Direct Costs and Expenses.
Today, the Balance Sheet and the Profit and Loss Statement comprise what we call company reports. A complete picture of the costs and benefits of actions over a given period of time, and the effect of those actions on the value of the organization engaged in them. Now, consider that climate change has been caused by a remarkably huge overuse of resources, and disregard for waste. Instead, we account for only the last paid dollar cost of items, and their profit margin at the next transfer of ownership. This fails entirely to take into account the full social and environmental costs of our activities, with items wrongly classed as externalities in what is a permanently closed system. As a consequence of this narrow view of costs and revenue, very few business models in the western economies are sustainable. In fact, the very most ecological organizations in our culture rely on an infrastructure that would require 4 planets for their sustenance, were the folly to spread to the rest of the world. (Which it has. It isn’t cute how excited they are?) The activities of our organizations, improperly recorded at their true costs, have brought the world to this brink, and with it of course those organizations we are meant to steward.
Facing this simple conclusion – that we’ve been counting wrong, that we’ve been giving our clients and bosses terrible advice – is the work of rational administrators in this century.
We are beginning to see the result of 300 or so years of industrial revolution. In some measure, it’s the crowning achievement of humankind. It opened the door to general literacy, pluralism, social cohesion and scientific advances the likes of which could not have been imagined by people just a few generations earlier, nor by others back some 200,000 years. (See Britannica.com’s Industrial Revolution for a partial treatment of the subject.)
However, the system which was designed to create these benefits has a fatal flaw: it allows people, and Incorporated People, to dispose of resources with no immediate penalty, differing the loss to an undefined and uncertain future. When the consequences are in our hands, we know that that is an irrational model. For example, we teach children that if they break something, it doesn’t always get replaced. Or, well, we probably should.
Like all tools, bookkeeping is driven by the will of its wielders. The methods themselves are neutral tools, and can be leveraged by accountants and administrators to create sustainable systems. Powerful groups comprised of world leaders are working on how to reform accounting, and to find models that will allow for social and natural capital to be accounted at their true values, as well as setting standards for comparing organizations and moving resources through trade markets. For individual organizations, frameworks exist to do these types of analyses, the broadest of which is called “Triple Bottom Line Accounting”.
These full-cost accounting frameworks and newly minted methods acknowledge that we don’t cover every cost and benefit by controlling only at the bank and cash accounts, and that some factors are ignored or deferred in such a reconciliation. For example, the cost of healthcare for fired factory employees, 10 years down their path of poverty, or the uncounted benefits derived from a successful social outreach campaign. In order to properly account for these activities and their effects on the ecological and social systems on which the organization depends, we add to the traditional bottom line of profit two other measures of value: social, and environmental, we expand our calculations of financial factors to include mid- and long-term contingencies, and we brace ourselves for working in the complex metrics of saving the world.
The triple bottom lines: Profit, Planet, and People.
Many great people are working on standards and methodologies to implement full-cost accounting. While they get along with that, here is a working model for bookkeepers. You can scroll down to the end to check out some other models in section 3 of this guide.
How to Establish Full-Cost Accounting
Just like when we set up the financial accounts of a company, we must determine which social and environmental factors to account for as per the unique activities of the organization, establish control measures to ensure the accuracy, relevancy, and continuity of the data, design budgets that cover (all) the costs of our activities, and report on results.
- Work in the right organization
- Form a team
- Identify the factors to be tracked
- Set values, targets, and contingency plans
1. Work in the right organization
If you want to put your efforts into an organization that is working towards the long-term success and survival of yourself and your community, there are two ways to do it: you can build that organization where you are, or you can change organizations.
To stay in place:
- Spend some time considering your proposal to the people who would be involved in a switch to rational accounting.
- Write out budgets and recruit or quote experts to make your case
- Take into account all stakeholders
If you decide that you need to make a change:
- Look for partners or an employer who like to do things properly.
- Spend some time working on a few industry-specific full-cost accounting models
- Collect expert opinions and references
2. Form a team
Once you’re in the right place, set up committees made up of people who know how the organization works. 3 to 7 people are ideal, and groups should be representative of the skills in the organization as well people’s cultures and social power. If necessary, multiple committees can be formed and the tasks separated among them.
These people will be responsible for:
- Identifying the factors to be tracked
- Setting targets and contingency plans for each factor
- Establishing the value of factors to be tracked
- Reporting to stakeholders
- Taking action on weaknesses and successes
- Getting expert advice
As a manager, you will need to communicate information as well as provide training and empowerment in these new and important measures. Our collective survival is at risk, and discussions which deal with that risk in a rational way are frequently traumatic, particularly during this time of transition, and for quite a few people who haven’t necessarily been thinking about it at all. Thankfully, the fastest way to produce equity in a company is to start with the people most closely involved, and the effects are immediately positive, psychologically and financially, throughout affected supply chains.
Consider the following actions:
- Information and training sessions on new social and environmental measures
- Offer social and psychological support with regards to climate change and uncertain economic times, including shared social occasions for staff members and their families
- Establish channels by which all interested persons can identify and set metrics to do with social and environmental costs, risks, and benefits
- Link performance bonuses to full-cost results
- Establish a retirement plan and other shared social safety nets such as local food buying clubs, skill-shares, and flexible, reduced work hours.
3. Identify the factors to be tracked
As in traditional bookkeeping, the goal of full-cost accounting is to account for every factor that may touch on the organization’s ability to continue to fulfill its mandates. Each organization is unique, but here are a few good ways to be sure to cover all possible factors.
People have been doing an incomplete job in accounting for the true costs of their work. We have to fix it, and they aren’t going to like what it does to their reports. But we do have to fix it, because otherwise climate change will win. Be brave. You got this.
Recognize good factors
The factors you choose to measure need to meet the same qualifications for good information as we use in standard bookkeeping, as per the FASB’s Generally Accepted Accounting Principles. What may seem striking when looking them over is that we’ve as a profession managed to exclude all these social environmental factors using these excellent (though possibly incomplete) principles.
- Principle of Regularity – Adhere to GAAP rules and regulations as a standard.
- Principle of Consistency – Apply the same standards throughout the reporting process, and fully disclose and explain the reasons behind any changed or updated standards.
- Principle of Sincerity – Strive to provide an accurate depiction of a company’s financial situation.
- Principle of Permanence of Methods – The procedures used in financial reporting are consistent.
- Principle of Non-Compensation – Both negatives and positives are fully reported with transparency and without the expectation of debt compensation.
- Principle of Prudence – Emphasizes fact-based financial data representation that is not clouded by speculation.
- Principle of Continuity – While valuing assets, it is assumed the business will continue to operate.
- Principle of Periodicity – Entries are distributed across the appropriate periods of time.
- Principle of Materiality / Good Faith – Accountants must strive for full disclosure in financial reports.
- Principle of Utmost Good Faith – Presuppose that all parties remain honest in transactions.
From this general basis, you move on to establishing the social and environmental factors specific to your situation.
Consider the following social measures and initiatives:
- Employee needs
- Responsibilities to clients or other beneficiaries
- Supplier and supply chain processes
- Local community needs
- Regional and Global community needs
Consider that environmental measures and initiatives frequently include:
- Human health
- Waste elimination (a particularly interesting area for revenue capture.)
- Climate change mitigation
Note that many social and environmental factors can’t be monetized for accounting purposes. In these cases, notes to the annual report provide context for other analytical models, for example: ethical foundations or life-cycle analysis, often linked to key performance indicator and specific piloting measures. Financial contingencies can also be registered in a number of ways, depending on the model used (see the list of models, below).
Lists, templates, and models:
Large corporations use formal models. Small and medium company bookkeepers can use these as a basis from which to consider changes to current systems. The level of analysis required is the same as for other bookkeeping decisions.
Global Reporting Initiative
Sustainability Accounting Standards Board
Sustainable Stock Exchanges Initiative – Guidance on Reporting
Database of best-in-class and best-in-year sustainability reports with dozens of examples
Mainly Social measures:
International Standards Organization – ISO 26000
Demonstratingvalue.org – Social Costs Worksheet
Care International / NEF Consulting – Simplified Guidelines for Social Cost-Benefit Analysis
of Climate Change Adaptation Projects on a Local Scale
Investopedia – Marginal Social Cost
Mainly Environmental measures:
Network For Business Sustainability – Measuring and Valuing Environmental Impacts
United Nations – Environmental Reporting
Study your GL accounts
Ask what social or environmental factors should be measured and improved for each account. Here are a few points to consider for some common accounts:
Bank Accounts: paper statements, interest rates, bank or credit union’s reputation, working to support a local credit union, examining payment methods, payment delays, cash flow and seasonal habits, telecommuting for accounting staff.
Accounts Receivable: payment habits of clients, number of clients, location of clients, mailing methods, collection methods, alternative payment options, bad debt procedures, creative partnerships.
Investments: Choose mutual funds by detailed examination, invest in local progress, invest in partnerships. Measure long-term social returns. Measure long-term environmental returns. Plant trees.
Capital Assets: environmental examination of each asset, including history, current use, and complete future. Social examination of each asset, including history, current use, and complete future. Correct problems. Make reparations for the past. Establish a rational future acquisitions policy. Share. Borrow. Help others build.
Short Term Liabilities: Payment habits to suppliers. Relationships with government agencies. Location of suppliers. Supplier activities. Choosing forward-thinking partners.
Equity: Who owns the organization? Who benefits when stock prices go up? Who loses? What happens to the planet? Who benefits and who loses when the organization makes more revenue? And less revenu? Who benefits and who loses when the organization has more expenses, or fewer?
Sales: What are we selling? To who? Why? How? Is the price fair? To whom, and how? Full life-cycle cost and benefits analysis. If an item, what is its future? If a service, it’s effect?
Funding: From who, and why? How to measure any differences between their wants and your values? Establish methods to define and refine organizational values, under formal yet accessible processes. Keep clear records and good open communication. Check transparency. Help others form similar relationships.
Purchasing: What are we buying, from who, and where, and how. Supplier comportment. Full life-cycle environmental and social details of items and all component materials. Identify component materials. Research supply chains. Share resources with others in your industry.
Salaries: How much more is one human worth than another? Freedom of speech and other human rights within the organization. Offer a multitude of learning opportunities. Retain aging employees with pensions.
Transport: Methods of transport, their environmental costs, the necessity of each. Activities of the transport and courier companies. Best practices. Establishing partnerships and cooperative efforts. Logistics, global procurement, slave trade industries (https://www.cfr.org/modern-slavery).
Telecom: Origins and life-cycle of equipment. Reputations of providers. Internal contingencies. Resource sharing.
Publicity and Promotion: Who is the target market? Should they be? Age, social status, nature of the offering? Are the copy and media true? Is the media appropriate? If printed, what is the life-cycle of the materials? Can we be an industry example?
Insurance: Reputation of providers. Consult an independent actuary. Consider partnerships to mitigate uninsured risks. Set up contingency funds for climate change. Set up employee retirement and health plans (or a retirement community).
4. Set values, targets, and contingency plans
Once identified, each of the social and environmental factors that will affect your organization must be considered in detail, with help from experts as appropriate.
For most factors, there will be multiple and varied costs and benefits, with money being only one among many possible measures. Each should be considered within the whole of a factor as well as on its own, and listed where appropriate in the company statements.
Improvements can be instant or progressive and in either case targets need to be clearly identified. In the case of progressive goals, periodic targets should be set, so that progress can be tracked. One method for this process in the use of Key Performance Indicators (KPIs).
Targets won’t always be met. Targets and periodic targets should be linked to contingency plans, which are actions to take if the targets aren’t met.
Some factors may be contingent on others. Written plans should be passed forward in time. It is not unreasonable, for example, to plant trees today for use in renovating a manufacturing facility meant to stand a hundred years or more.
A Case Study
Here is a study on breaking factors into working measures. In brackets are the expected consequences, ordered by relative magnitude.
A publishing company has established that their ink, though the most ecological available, is transported from very far away, and is manufactured in a country with poor worker rights. They have decided to correct the situation in two ways. They want to train their workers abroad to work in their digital department as they phase out ink purchases, and fund local innovation in new inks. Taken as two factors:
Factor 1: Training Abroad
- People promoted through the training program per year should be 50% of all employees year 1, then 25% of the remainder in successive years. If quarterly targets aren’t being met, HR needs to consult with the worker committee and local experts to correct (increased social assets, lowered training costs over time)
- Surveys of the people every 6 months for 10 years to see how the program is developing (increased social assets, fiscal expense per year for the surveys)
- Training fund (expense, diminishing fiscal liability over time, decrease in future training costs)
- Fossil fuel use reduction (reduces environmental costs, increases social assets, reduces cost)
- Publicity in 3 outlets (increases revenues, increases social assets)
- social media
- national morning shows, 3 show target
- get exit polls (increases expenses)
- green movement
Factor 2: Local Innovation
Work with local development funds to sponsor passionate young ink makers (improved environmental situation, increased cost, increased social assets)
Much like traditional transactions included in net profit, social and environmental measures can be ongoing or discrete, and be measured both over time and at a given period in time.
Given expected health and social correlations, an ongoing social factor to consider might be employee happiness. Periodic targets could be to see increases in happiness at regularly scheduled reporting dates. There are a number of tools used by industrial psychologists to measure these soft factors. Annual reports might show happiness as measured at year end, along with the changes accomplished in the current year.
Given the broad benefits of waste-loop management, ongoing environmental factors might include something such as tons of waste from operations, in which targeted and continuously reducing amounts would be budgeted for and reported on as appropriate.
Given that it affects half of the population and all of their dependents, a common social factor might be to achieve gender parity by a certain date.
Annual reports then show if the target was met, and include a comprehensive report of costs and benefits of initiatives as they are incurred.
Discrete environmental factors are likely to include projects to correct or improve current ecological miscalculations. Given their likely particular effect on capital planning, for instance in the capital costs of installing solar panels, which will also affect maintenance and energy expenses going forward.
In accounting for these newly recognized factors, we have to expand our traditional notions in two ways:
Units of Measure
In social and environmental journals, though we account for any financial effects into the GL, measures are not necessarily monetary nor precise, and some factors must be tracked on unique parameters, via careful record-keeping. Though entries may be non-monetary (number of people retrained, number of kilowatts generated), we do retain the double-entry principle as its control functions for confirming information are invaluable. Thus, most models test the validity of information for both sides of all non-monetary entries, rather like entering a cheque from a bank account. One source (a cheque) is sufficient to create an entry, but a control function for verifying the information needs to be put in place (the bank reconciliation), to independently confirm accuracy. An equivalent function must be planned for information needed for each non-monetary factor.
Reports drawn uniquely from 3 years of bank records are not only much too narrow, current records are much too short. They can guide us in measuring the future by only about 3 years, and that very imperfectly. The people involved in an organization have a lifespan of closer to 85 years, with likely 20 to 65 or more years ahead of them – years in which to work towards improving their lives and their communities. And it isn’t only employees who are disserved by short-term planning. Small corporate partners will last 10 to 20 years, the larger entities upwards of 100 years. The products and materials you use may have a lifespan that makes them toxic for 5 human generations, or 10, or 50. Our economic system itself has an expiration date, and every single stakeholder has an interest likely to last 10 years at the absolute minimum. Consequently, failing to take into account long-term factors is a malfeasance. It is understood that financial information is not reasonably predictable in grand detail. But what we can predict, we must, whether in money or not, even if it is only a single item in a far right column:
Year 1: Switch to eco-suppliers
Year 3: Finish staff retraining
Year 6: Entire product line recycled after-market
Year 15: Zero dollars on energy at facilities.
Year 20: Open senior day center for retired workers
From the mindset of taking into account the full range of factors affecting an organization, we leverage every bit of modern technology and brainpower that we can find, and we set up the custom systems that each of our social and environmental factors requires. When we find financial liability, we fearlessly report it to the financial statements. When we find financial opportunities, we do the same.
Functionally, many models clear social and environmental costs and benefits through balance sheet accounts such as:
Long Term Assets
Long Term Liabilities
Long Term Equity
Revenues earned and expenses incurred for social and environmental initiatives are treated as other revenues and expenses in the financial reports, though they should be clearly identified, particularly when calculating amortizations.
Separate factor-by-factor ledgers and reports for each social or environmental factor being tracked are kept, drawing in large part from project management methods and tools. Good documentation is vital, as are clear schedules and expectations over time. Financial effects and budgets should be included, and kept synchronous with financial reports.
In our accounting training, we’re taught that there are two ethical ways to do the job. The first is the letter of the law, with a bias for public intent. It’s the one that our cost models have replaced with computers. The second is the letter of the law, with a search on behalf of clients for the best options. Outside of government, that is the model that professionals work with. Not alone among my colleagues, I propose this third possibility: a full-cost model as an extension of the spirit of our profession. This is to help stakeholders understand a true state of affairs, and with that understanding, enable us to shape a solid future together. What were once dismissed as “externalities” must be accounted for in good stewardship, and doing so can save the world.
Enjoy your work.