Who are accounts actually for?

There was a time when it was easy to decide to whom an accountant reported: the law said it was the shareholders. The audit report (if there was one) was addressed to them. And in practice, the accountant liaised with the directors and/or owners of the entity that they were working for, and pretty much delivered what they wanted.

Then along came the Companies Act 2006, in which section 172 introduced what might be called ‘enlightened shareholder value’. 

The directors of a company were now meant to have regard to employees, customers, society at large, the environment, reputation and other issues. But the truth was that nothing really changed.

Until now that is. Suddenly the world has noticed that everything is different. You could blame it on climate change, a decade of austerity, or the simple fact that nothing has seemed to change the behaviour of banks since so many needed bailing out by the state.

Whatever it might be, the world beyond accountancy is suddenly suggesting that reporting to shareholders alone is no longer sufficient.

Does capitalism need a reset?

The Financial Times has suggested that capitalism needs to be reset, which is pretty radical for the Pink’Un.

Even more radically, the US Business Roundtable of 181 CEOs of major corporations, including all of the Big Four accounting firms, suggested in August 2019 that the business of business was no longer making profit. It was instead, it suggested, about ‘companies [being run] for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.’

And in November 2019, Professor Colin Mayer of the Said Business School at Oxford University wrote for the British Academy suggesting something remarkably similar, saying that ‘the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems’.

Mayer also suggested that ‘measurement should recognise impacts and investment by companies in their workers, societies and natural assets both within and outside the firm.’ Measurement here does, of course, mean accounting.

Accountants have a ‘broader duty’

So, is there a new role for accounting? I would suggest not, but only for a perverse reason.

My suggestion is that as accountants, we have always known we have a much broader duty than just to the shareholders alone.

The strongest evidence comes from a 1975 report issued by the then-new UK based Accounting Standards Steering Committee, entitled ‘The Corporate Report’. Issued right at the start of the era of UK accounting standard-setting, the document considered to whom accounts should be addressed and suggested that there were many stakeholders groups with an interest in the accounts of a company, all of whose needs should be met.

I now summarise those stakeholder groups as:

1) Suppliers of capital to the reporting entity
2) Its trading partners, whether suppliers or customers
3) Its employees
4) Its regulators
5) Its tax authorities
6) All parts of civil society with which it might engage.

The recent commentary noted previously in this article omits much reference to regulators or tax authorities. On other issues, it is clear that those commentators have rediscovered what we already knew in 1975, which is that accounts have to meet the needs of a wide range of users, and not just the shareholders.

I stress, we are talking about limited liability entities here. I suggest unlimited business entities, whether sole traders or partnerships, have a right to privacy in their accounting, and no responsibility excepting to a tax authority for publishing it. That is because they have accepted responsibility to pay their dues, come what may.

That, though, is not true of limited companies. Their owners have been granted an extraordinary privilege by society, which is to not have to settle their bills in some situations. The quid pro quo is accountability. It’s my suggestion that deep down the accounting profession has always known that this quid pro quo existed, but tried to ignore it.

The trouble for accounting is that now the rest of the world, from the FT and the British Academy to US CEOs, have realised that this broader obligation exists.

The era of accounting to shareholders alone does then look to be over. And accounting will never be the same again.