SOCIAL ACCOUNTING

Social Accounting

Social Accounting

Introduction

In 1970, Nobel Prize winner Milton Friedman penned a seminal essay in the New York Times Magazine arguing that the sole responsibility of the private sector is to create shareholder value. The implication of his thinking was that business had no basis for making charitable or philanthropic contributions; to do so, he explained in Capitalism and Freedom is a breach of the firm's purpose and responsibility. The Corporation is an instrument of the stockholders who own it. If the corporation makes a contribution, it prevents the individual stockholder from himself deciding how he should dispose of his funds. Friedman's thesis prompted what today remains a controversial debate as to the normative role of the firm in society. It is a debate defined, on the one end, by Friedmanites. Those people who argue that corporations have a legally binding fiduciary responsibility to maximize shareholder wealth without regard to social impact. Friedmanites believe it is neither appropriate nor efficient for private sector corporations to pursue public sector agendas. This, they hold, is the regulatory right and responsibility of the government; not the domain of the private sector. On the other hand, anti- Friedmanites argue that business is morally bound to serve a social purpose beyond its own bottom line. These theorists reason that markets foster economic growth, and those corporations, as market beneficiaries, has a responsibility to give back to society. The concept of social accounting has gained a lot of value for many firms since the last few years. This is the reason why the concept of social accounting in the two companies in the airline sector will be discussed in detail.

The concept of social accounting

In social accounting, accounting conservatism has been defined as the tendency to require a higher degree of verification for recognizing gains as compared to losses. Using firm-level stock returns as a proxy for news, the researcher in 1997 provides evidence that this asymmetric verification requirement results in conditionally conservative firm-level earnings that are more sensitive to bad news than to good news. A large subsequent literature asserts that firms choose to report conservatively in order to lower debt and compensation contracting costs, reduce litigation risk, and minimize tax payments. Firm-level earnings could also be conservative in response to accounting standards, securities regulation, and pressure from external auditors (Cornell, 1987, 14).

The implementation of social accounting in business world

Identifying conditional conservatism within aggregate corporate profits is important for several reasons. First, U.S. Census Bureau data indicates that publicly traded firms constitute only 1% of all firms and account for less than 33% of business employment. However, the aggregate corporate profits measure compiled by the Bureau of Economic Analysis includes the earnings of both public and private firms; the study helps identify how firm-level accounting conservatism influences measurements of the economic performance of the entire U.S. corporate sector. Secondly, the BEA's measure of aggregate corporate profits is a key macroeconomic indicator that receives extensive media attention and is used by a ...