Integrative And Sustainable Objectives: Role Of Accountants And The Six Capitals

Six Capitals

Discuss about the Integrative and Sustainable Objectives.

A responsible organization allows its accountants to play a collaborative role in information gathering (non-financial) and giving a strategic guidance to the key decision makers.  Hence, the organizations have a major reliance on the accountant in respect of various functions and play a leading role in driving the business by considering various aspects. Different concepts and theories needs to be consider by the accountant to provide a balanced environment and steer the organization (Horngren, 2013).

Value creation is one of the chief objectives of the organization and in this regard, the accountant s plays a pivotal role. The role of an accountant is not limited to accounts but goes forward to various other activities. With the due passage of time, there are various concepts that have come to the forefront and help the organization to conduct the business in a better fashion. It requires the role of accountants to have a direct influence on the business. The Six Capitals are a part of the Integrated Reporting IR developed by IIRC (International Integrated Reporting Council). IR is a way of thinking and enhancing the organization’s planning and reporting activities. It is a big boon to the organization because the reporting, as well as planning has undergone a huge change. The new age corporate reporting demonstrates a company’s interconnectivity of strategic objective, performance, risks, and incentives. Moreover, it even highlights the sources of value creation. The interconnectivity among various items has provided a strong sense of working that has promoted the welfare of the organization. Previously it was difficult to have such an alignment because of underdevelopment stage.  However, the current scenario is different and provided a huge boost to the working. It is a complete umbrella where the company can link its various activities. It is a form of corporate communication that concisely shows the inter-linkages of the financial performance. This is in tune with social, environmental, and economic arenas. It is important in the current scenario because it helps in the fuller development and leads to a better course of activity (Needles & Powers, 2013).  Organizations are not only concerned for profits but should project the effects of its functioning on the resources it has used and the value creation. IR is that ‘dashboard’ view of the process (Brigs, 2013).

The Six Capitals are the pillars of value that hold the organization and its basis for functioning. Six capitals defined as the support that helps the organization in various areas. The set of values provides the company stability in across various parameters and ensures that the momentum of the company is undisturbed. A business cannot operate in isolation and it must be ensure that all the areas properly tapped to get the best access. Here comes the importance of six capitals as it lays a solid foundation and ensures that the work remains undisturbed. They are namely - financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital (Leo, 2011). The financial and manufactured capital are the most commonly reported ones and are in the use by the company; the new addition are the intellectual capital, human capital, social and relationship capital, and natural capital (Flower, 2015).

Role of Accountants

The overall inventory of capitals is not ascertain over a period. There is continuous flow between capitals and an increase, decrease, transform over time. Human resources of a company that are human capital for the organization demonstrate a simple example. They are trained over a time span and become skilled employees, even though at the cost to the company, which reduces its financial capital (Leo, 2011). For the company, the financial capital has translated into human capital and the immediate loss of one capital is gain by creating value in the other one. Such interactions become more complex with larger activities (Flower, 2015). This continuous flow, transform process is an endless cycle at different rates and different net outcomes to the organizations. There are various capitals into operation. Firstly, it is the financial capital where funds at the disposal of the organisation for investing in the production of goods or the provision of services, garnered through private financing or generated through operations or investments example debt, Equity, Grants, etc. Secondly, it is the manufactured capital where the Manufactured/Provided physical objects/services are present with an organization for the production of goods and these includes production equipment and tools, Infrastructure (such as roads, ports, bridges, and waste and water treatment plants), Buildings. Thirdly, it is the intellectual capital where we can find organizational, intangibles  that are knowledge-based such as intellectual property, example patents, copyrights, software, rights, and licences, Organisational capital like tacit knowledge, systems, procedures and protocols, intangibles that are concerned with the  with the brand and reputation that an organisation has developed. Fourthly, it is about human capital where employee’s efficiency, experience, and their vigour to innovate come into picture (Eccles & Krzus, 2010). For association and support for an organisation’s framework, that is base on governance and approaches of risk management, and ethical values like the recognition of rights of human, capability of understanding, development, and implementation of an organisation’s strategy. Moreover, it contains loyalties and motivations for enhancing the processes, goods and services, that include the ability to lead, manage and collaborate (Flower, 2015). Related aspects include diversity and equal opportunities, employee turnover, occupational health and safety, training and education and labor/management relations. Fifthly it includes Social and relationship capital where the organisations, institutions and connections structured between every group of stakeholders, community, and other networks (and an ability to share information) to enhance everyone’s well-being. The key relationships and the level of trust to keep in touch and stay engaged that an organisation has developed and endeavours to build and protect with its stakeholders such as suppliers, customers, business partners and others (Flower, 2015). Moreover, related aspects includes safety and privacy, corruption; customer and social health , anti-competitive behaviour, human rights such as non-discrimination, indigenous rights,  freedom of association, and (Eccles & Krzus, 2010).

Accountants as a second nature are taught to record, classify measure, quantify, and maintain records. This has been a key function of managing resources that has become indispensable to any commercial organization (Penman, 2013). Hence, accountants have become indispensable in implementation of newer methods of reporting and ensuring newer measures work and present the correct picture of utilization and profits (Eccles & Krzus, 2010). For this purpose, the measurement of these capitals is quintessential and IIRC has developed framework to be used to interpret and espoused in the reporting.

Various quantitative indicators or KPIs (key performance indicators) and monetized metrics established to explain organizations’ uses of and effects on various capitals. Many uses of these metrics can explained only through narratives or through certain numbers. This judgement call and understanding of the framework is in the able hands of the auditors and accountants. Many of the ownership of the capitals is outside the organization and may be or not be a legal sense. Such categorization is imperative for organizations with specific technical functions. These measurements derived from the existing accounting principles and laws that the accountants well versed with. This gives an edge to them to carry out these tasks effectively. As per the current reporting practices for some capitals, the reporting has matured to a greater level than the ones of the rest of the capitals. This is due to the known relationships of the various factors involved and their inter-relationships (Libby et. al, 2011).

Traditionally these two are seen hand-in-hand, reported together. However, there is distinction between “land, labour, and capital.” The main components are financial statements and the various metrics present in the Balance sheet for capital and Inventory management metrics for the manufacture capital. These are quantitative in nature and over a period, qualitative reporting with additional disclosures and introduction to management commentary has become the norm. These are in the form of Notes to Financial Statements, and can be trace via discussion of management and analysis, assessment of business and reporting in narrative form. These provide a context to interpret the quantitative data such as financial position, financial performance and management strategy, objectives and challenges.

Typically, the resources owned and operated upon the by the organization are recognized on the financial statements of companies. Many of the factors have a behind the scenes interaction in the dynamics of growth and running of a business. However, it can be recognize on paper when a clear explanation provided for the financial statement element. It can follow the recognition, as well as measurement of criteria of a framework that is relevant in terms of financial reporting, such as they can be quantifiable. These form part of the Sustainability reporting which is a part of the broader IR.

The IR spread over a wider frame and hence has a different approach. It reflects the organization’s influences part on the environment (natural capital), society (social capital) with its stakeholders externally and internally (human capital) and society. Intellectual capital is the key to the future earning potential income for all companies but is most under-reported. It is concerned towards the organization on a wider domain and covers different parts. Most of this capital is conservative estimates as per standards board’s except for few such as – development costs, but with certain exceptions again in U.S. International, standards also ignore capitalization of intangibles that are generated internally (Melville, 2013). Therefore, it is observe that there are exceptions and there is difference present in different forms.

IR is not a lonely process rather it is composed of various metrics and forms a major part of it. Some metrics forming part of IR are as follows:

There is a serious challenge of judgement and the case of difference in perspective. Different accountants can have different measure and judgement of the same thing, since most of these factors are qualitative and intangible in nature. The measurement approach is different according to the presence of different parties and hence, the same answer cannot be found. Some functions can cause a net increase or net decrease in the overall stock of capital. Different parties will evaluate the same thing in different way like the employer and employee’s perception of training is bound to be different. Hence, the perception varies and leads to a difference when it comes to different parties.

The selection of South Africa’s Eskom is done for the integrated report. The report that is integrated displays their economic, social, operational, and performance that is concerned with environmental concern for the year from 1 April 2015 to 31 March 2016, with the comparative information of two years and future targets that is related to short term, as well as long-term are showcased. The integrated report is to be read in relation to the overall financial statements for an overall overview of financial performance. The company has provided good results in terms of financial performance and projected net profit after tax of R4.6 billion for the year ended 31 March 2016. The report clearly showed the investments the company had done and with the context and logic of strong analysis. The financial capital invested explained carefully with strategic reasoning. It also touched upon the results of the investment and the challenges it faced in achieving these results (Laux, 2014). It definitely worked towards creating value for the country. Hence, it can be said that it goes in favour of the country and is an essential step towards value creation (Flower, 2015).

The report explained the various interrelations of the effects of investing in natural resources and its procurement.  Further, it aims to utilise the barren areas to improve production. It also explained the environmental effects of its mining and production activities. It was transparent and gave a clear context of the losses (Gibson, 2012). The company listed out efforts to induct, train, and enhance the skills of the youth in South Africa. It also explained the need to train and create special programs so that the potential of productivity had an upside. The productivity can enhance when there i proper training and it creates such an environment that enables to tackle any situation with ease and flexibility (Peterson & Plenborg, 2012).As the  company stated in its report there is an adoption of a phased, as well as approach that is prioritize in nature. It considers the left over part of power stations and the influence of the power stations on air quality. However, it is the need of the hour to put into implementation the Emission standard of 2020. This will enhance the price of electricity by 10%. This way it has shown the relationship between its capital factor and the environmental factors. It has mentioned the need to affect one with the other to give an idea of the natural resources used. It has reported an acquisition of 54 R million of intellectual property in 2015-16 and aims for another $40 million. It has explained it to be technology transfer from another company. What the report could also require is how the company sees these acquisitions helping in future revenue generation. This is something the report lacks in (Graham & Smart, 2012).

Conclusion

Ongoing initiatives and adoption of this practice more widely will bring out the nuances for improvement and create a more serious approach for integrative reporting. Although integration is starting to happen in various organizations, reporting is still not aligned. Some companies provide the financial reporting and as an add-on supply natural, environmental, social and human information. The criticism stands strong that companies use these reports to just provide the good news and use these add-on reports to justify or legitimise the damages done socially or environmentally (Guerard, 2013). If firms were to take this qualitative information hand-in-hand with the financial information, these criticisms would disappear. Hence, it is clear that the accounting profession has undergone a sea change and it has played a vital part in the process of value creation (Albrecht et. al, 2011). There are immense challenges in the six-capital process however, with a strong accounting board the companies has been able to have a better system and implement six capitals. The accountant for the purpose of implementation of six-capital considers various techniques.

References

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