Monday, July 6, 2020
Tuesday, June 23, 2020
Editor's Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following blog post by Michael Kraten, Professor of Accounting at Houston Baptist University. Please contact Michael.Kraten@SaveTheBlueFrog.com with questions, comments, or suggestions about our blog, or to express interest in our organization.
This post has also appeared on the blogs of Econvue and the Public Interest Section of the American Accounting Association, and on Dr. Kraten's own blog Save The Blue Frog. We encourage you to use these links to peruse these outstanding online publications.
The field of behavioral finance studies the behavior of the investment markets. Similarly, the field of behavioral economics studies the behavior of the global economy and the numerous national, regional, and local economies.
But what of the field of behavioral accounting? How does it resemble the fields of behavioral finance and economics? And how does it differ?
Behavioral accountants, like their colleagues in the other financial professions, focus on elements of human characteristics that can be identified in aggregate data sets. They recognize that organizations, like markets and societies, are composed of individuals who make personal decisions in often-predictable ways. Thus, because behavioral researchers can understand and predict individual decisions in various situations, they are also able to understand and predict the impact of aggregate decisions.
Accountants, though, specialize in the development of organizational reports that describe the conditions of organizations. Internal and external users of their reports rely on them to make important decisions that impact the well-being of those organizations. Thus, at times, accountants feel inherent tensions between the goals of “measuring and reporting data accurately and objectively” versus “measuring and reporting data that persuades the user to make decisions that help the organization.”
Individuals study to become public accountants to learn how to implement measurement and assurance procedures in support of the first goal. Separately, they study to become behavioral accountants to learn how to support the second goal. These goals overlap, but they are not mutually exclusive. In certain situations, they are perfectly aligned. In other situations, though, they have little in common, and they may even conflict.
A Controversial Example of Behavioral Accounting
A prime example of controversial behavioral accounting is commonly known as “greenwashing” in sustainability circles. Organizations cherry-pick data that appear to portray them as responsible guardians of the environment, and then present that data to persuade readers that they are responsible stewards of the natural world.
Volkswagen’s notorious collection of falsified emissions testing data is an obvious and egregious illustration of greenwashing behavior. Other illustrations are more subtle in nature, generating healthy debates over whether the content is misleading at all.
Consider, for instance, the pledge that was made by E. Neville Isdell, Chairman and CEO of The Coca-Cola Company. In 2007, he declared that “Our goal is to replace every drop of water we use in our beverages and their production.”
On the one hand, the firm produced data that indicated the successful achievement of that goal. But on the other hand, investigative reporters have noted that “… ‘every drop’ includes only what goes into the bottle. The company does not count water in its supply chain — including the water-guzzling sugar crop — in its ‘every drop’ math.”
Indeed, a public accountant may be able to provide assurance that the “drop for drop” phrase is (technically speaking) an accurate description of Coca-Cola’s water utilization patterns. But a behavioral accountant may protest that the vaguely defined phrase invites selective interpretation.
A Universally Admired Example of Behavioral Accounting
Ben & Jerry’s provides a contrasting illustration to the controversial food and beverage example of Coca-Cola’s environmental accounting practices. The ice cream manufacturer is often credited with producing the world’s first Corporate Stakeholder report (i.e. Integrated Report) more than two decades ago.
Using an internally developed proprietary format that the firm called Social & Environmental Assessment Reports (SEARs), Ben & Jerry’s published sustainability data on its web site for many years until concluding the practice in 2018. The reports employed colorful graphic imagery to express its core values, its focus on its social mission, its multiple year planning processes, its goal setting practices, and its outcomes. It also hired an independent public accounting firm to prepare annual independent review reports on the information.
The playful graphics, the earnest social messaging, and the metrics all served to reinforce the impression of Ben & Jerry’s as a socially conscious firm that made business decisions in support of the public interest. The behavioral impressions that were produced by the SEAR Reports undoubtedly supported the decision by Unilever to purchase the firm on friendly terms.
From The Past To The Future
Why did Abraham Lincoln begin his 1863 Gettysburg Address by noting an event that occurred “four score and seven years ago,” instead of simply beginning with the phrase “in 1776”? He must have known that his audience would have leaned into the arithmetic calisthenics of computing the year, thereby placing them in an appropriate frame of mind to focus on his intellectual argument about the war’s threat to democracy.
And why did he end his Address by vowing to protect the “government of the people, by the people, for the people”? Why didn’t he simply vow to protect “democracy”? Once again, he must have anticipated that the repetitive rhythmic triadic cadence would be more memorable to his audience. It’s also why Martin Luther King repeated “I Have A Dream” nine times in his immortal address, and “Free At Last” three times at the very end of the speech.
Lincoln and King both knew that the levels of the persuasiveness of the information that they conveyed to their audiences were just as important as the objective validity of their logical arguments. Such knowledge continually inspires today’s behavioral accountants to redefine traditional profitability measurements into more esoteric metrics like Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Adjusted Consolidated Segment Operating Income (ACSOI).
From Abraham Lincoln to the Chief Financial Officer of Groupon, the principles of behavioral accounting have been widely used to influence the decisions of stakeholders. Indeed, it is not sufficient for an accountant to simply “get the numbers right.” It is also important for an accountant to “persuade the user of the numbers to behave in a desirable manner.”
Sunday, June 7, 2020
Thursday, May 21, 2020
Tuesday, May 12, 2020
Due to COVID-19 restrictions and the continuing uncertainty regarding in-person gatherings, the Sustainability Investment Leadership Council (SILC) will not hold our fifth annual conference on May 14th. However, please do not despair! We would like to offer you a different deal.
Drawing upon the wealth of informative content that we planned to present on May 14th, we are developing a series of free webinars to be web streamed throughout the year. During next month’s webinar, Cornerstone Capital Group Founder and CEO Erika Karp will converse with Houston Baptist University Professor Michael Kraten.
In July, the following month, Ropes & Gray Partner Michael Littenberg, PKF O’Connor Davies, LLP Financial Services Partner-in-Charge Marc Rinaldi, and COSO Chairman Paul Sobel will speak to Dr. Kraten.
To join our conversation, please send Michael.Kraten@
We are now arranging to reverse the credit card charges of any individual who has already registered for our May 14th conference. Please review your credit card statement at the end of the month; then let us know if you do not see the appropriate reversal.
Most importantly, please be healthy and stay safe. We may not be able to welcome you in person on May 14th, but we look forward to seeing you in cyberspace!
Sunday, April 19, 2020
Wednesday, April 8, 2020
The piece has also been published on the Blog of the Public Interest Section of the American Accounting Association (see AAAPublicInterest.blogspot.com), and on Dr. Kraten's professional blog (see SaveTheBlueFrog.com).
As Queen Elizabeth makes her emergency address to the British people from her safe zone in Windsor Castle, and as the U.S. Surgeon General Jerome Adams warns the American people of an impending “Pearl Harbor Moment,” is it reasonable to ask why governments and businesses were caught blindsided by the coronavirus catastrophe?
Perhaps it’s unfair to expect foresight in the face of such a menace. But why weren’t health care providers and other organizations prepared to respond promptly? Why the shortages of such basic items as face masks and nasal swabs? Where was the contingency plan to increase production of such essentials at a time of dire need?
If we review the reporting standards of the Global Reporting Institute (GRI), we can find disclosure requirements that address these readiness considerations. GRI Standard 204 on Procurement Practices, for instance, states that:
“When reporting its management approach for procurement practices, the reporting organization can … describe actions taken to identify and adjust the organization’s procurement practices that cause or contribute to negative impacts in the supply chain … (these) can include stability or length of relationships with suppliers, lead times, ordering and payment routines, purchasing prices, changing or cancelling orders.”
Consider the many health care providers that rely on unstable Asian suppliers to provide face masks under terms that permit long lead times, uncertain ordering routines, and the imposition of extreme price increases when products are scarce. If they are required to disclose these procurement relationships under GRI Standard 204, we would be aware of the resulting social risk.
Likewise, GRI Standard 403 on Occupational Health and Safety states that:
“The reporting organization shall report … whether the (occupational health and safety management) system has been implemented based on recognized risk management and/or management system standards / guidelines and, if so, a list of the standard guidelines.”
Consider the employees of our food and delivery companies who are now protesting that their employers are not providing satisfactory protections against the coronavirus. If the employers are required to disclose the standards and systems that they utilize to keep their employees healthy and safe, we would be aware of the extent of their preparedness (or lack thereof) in the face of pandemic threat.
There are other GRI Standards that come close to addressing pandemic concerns, but that fall just short of the mark. GRI Standard 201 on Economic Performance, for instance, states that:
“The reporting organization shall report … risks and opportunities posed by climate change that have the potential to generate substantive changes in operations, revenue, or expenditure, including a description of the risk … a description of the impact associated with the risk … the financial implications of the risk … the methods used to manage the risk … (and) the costs of actions taken to manage the risk.”
Although Standard 201 refers to climate change, it would represent an ideal disclosure requirement for pandemic preparedness if the GRI simply adds the words “and pandemics” to “climate change.”
It may be comforting to know that disclosure defining entities like the GRI have issued standards that address our readiness to fight the current pandemic. But we cannot reap the benefits of these disclosure requirements if organizations simply ignore their reporting responsibilities.
Friday, January 31, 2020
Apparently, we have a debate on our hands! What do you think? You are welcome to join the conversation by simply replying to this message and sharing your thoughts with us.
Of course, you are also welcome to attend our Annual Conference on May 14, 2020 in midtown Manhattan. We look forward to seeing you there!
In an otherwise fine blog post (A Little Optimism) Dr. Kraten falls into a popular trap, applauding the intervention of the heavy hand of government "But they would not remain a purely voluntary framework for long!". (Exclamation point in the original!). All nations, those enjoying a free market economy and those not, have learned that government's track record barely reaches 50% in making the lives of their citizens better and not worse. Underlying the philosophy of SILC is the notion that voluntary activities by business entities, non-profits and communities should strive to solve society's problems and invite governmental aid only where those activities fall short. Given the proven productivity of the business community and the often dismal effects of government programs, this history should be recognized rather than ignored.
A second trap, but not in our bailiwick, is the oft-repeated complaint about "wealth inequality". This datum is almost always misrepresented but is far less important than the improvements among the working poor in the past decade. If a family's net disposable income has improved from, let's say $52,000 per year to $66,000 per year (after adjusting for inflation), that family is far less concerned about what the top 1% is earning (which is also part of the cause of widespread prosperity) than having a few bucks for a vacation or new sofa for the first time.
Stanley Goldstein, CPA
Tuesday, December 31, 2019
The piece will also be published on the Blog of the Public Interest Section of the American Accounting Association. See AAAPublicInterest.org.
As the calendar flips from 2019 to 2020, it’s easy to feel a bit depressed about the metrics that have challenged us during the past decade. The aggregate debt of the United States federal government, for instance, has exploded from $13 trillion to $24 trillion. Wealth inequality has also grown, and the number of American citizens without health insurance has resumed its climb after years of decline. Meanwhile, increases in sea levels, meteorological instability, and ocean temperatures are threatening our natural environment.
It’s a grim set of trends, isn’t it? But if we choose to focus on these dismal metrics, we’ll lose sight of the broader picture. There were, after all, many events that occurred during the 2010s that should encourage optimism among those who support the public interest.
At the start of the decade, for instance, the standards of the Global Reporting Initiative (GRI) merely provided a voluntary framework of reporting guidelines. But they would not remain a purely voluntary framework for long! In 2013 and 2014, the European Union issued a pair of directives on non-financial reporting. They required many of the world’s largest corporations to begin to include a wide variety of non-financial information in their annual reports, starting in 2018.
Furthermore, at the start of the decade, the Sustainability Accounting Standards Board (SASB) didn’t even exist. Launched in 2011, the SASB now promulgates detailed sets of standards for 77 industries, including sample disclosure language for inclusion in corporate annual reports. The SASB’s framework and standards, like the European Union’s directives on non-financial reporting, have served to impose sustainability reporting requirements and expectations on the world’s largest for-profit entities.
Meanwhile, the Task Force on Climate-related Financial Disclosures (TCFD) was launched by the Financial Stability Board in 2016 to recommend voluntary practices. Chaired by Michael Bloomberg, the Task Force presented its final recommendations the following year, and then remained in place to launch a Knowledge Hub, a pair of annual Status Reports, and a Consortium. The TCFD, like the GRI and the SASB, now focuses on developing and supporting private and public initiatives to enhance financial reporting practices.
The most startling development during the past decade, though, may have been the dramatic growth of the ESG investment industry. According to Fidelity, Socially Responsible Investing assets in the United States have quadrupled since 2010, rising roughly from $3 trillion to $12 trillion; the size of this asset market now exceeds $30 trillion worldwide (see fidelity.com/viewpoints/active-investor/strategies-for-sustainable-investing).
If you believe in the power of money, this final metric may be the most impressive one of all. After all, government entities and standard setting bodies may be able to protect the public interest against public apathy and private sector opposition. However, the re-direction of billions of dollars in investment funds can only occur if public opinion and the private sector support the movement.
So let’s try to maintain an optimistic perspective as we enter the next decade of the 21st Century. After all, the decade of the 2010s have produced an impressive array of positive occurrences. It is entirely possible that the upcoming decade of the 2020s will likewise give birth to many new trends that support the public interest.
Friday, November 29, 2019
Rebounding From Tragedy: SILC Club Co-Hosts Panel Discussion About Foundations That Were Formed After The Loss Of Loved Ones
We would appreciate your feedback about the session. If there is significant demand for it, we would be delighted to dedicate future Club meetings or Annual Conference sessions to this topic.
The Sustainability Investment Leadership Council (SILC), working in collaboration with the NYS Society of CPA's Family Office Committee, chaired by Phil Strassler, presented a panel on sustaining families in times of tragic loss. IceMiller generously hosted the breakfast meeting; it was attended by 42 people, including representatives of 20 family offices. Stanley Goldstein was the panel moderator.
Each of the three panelists prematurely lost a son; the causes were an opioid overdose, a car crash, and a drug addiction / suicide. The panelists launched foundations in memory of their deceased sons; they have devoted enormous efforts to sustaining and building those entities.
The presentation was well received. The foundation entities are well-balanced, with one brand new, one mature with no goal of getting larger, and one highly successful with major aspirations. There was a good deal of advice on raising money; two of the foundations have found significant success doing so. Interestingly, all of the families survived their tragedies intact, and are now stronger for their experiences. This is not typical, though; parental divorces and sibling sufferings are a great deal more common.
We touched upon the relationships of the charitable entities to the causes of the tragedies. The opioid addiction entity does major work in publicizing the problem, working with legislatures to reduce the causes of addiction, and to educate the public. The car crash and suicide charities do important community work; they keep alive the memories of the decedents, but they do not address the causes of the tragedies.
The audience was fully attentive and involved; many people spoke to the speakers privately. There is much more work to be done, whether under SILC auspices or elsewhere.