Accounting

A Closer Look at Business Education OCTOBER 2006 ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ : Accounting INTRODUCTION: The centrality of accounting in business practice makes it an ideal field within the MBA curricula for the infusion of social and environmental perspectives. This edition of A Closer Look investigates the current status of accounting in this context. Accounting fraud became a mainstream public concern in the wake of the numerous scandals in recent years. Consequently, many business programs around the country reconsidered the manner in which social, environmental, and ethical issues were integrated into accounting curricula. Our analysis identifies two principal types of new curriculum—those that emphasize legal, governance, and ethical considerations, and those that are arguably more forward-looking and value-creating, including topics such as full cost accounting, differential accounting standards, and social auditing. Non-traditional accounting is also increasingly prevalent in mainstream business. A recent report by F&C Management and UBS examined different accounting methods by which to assess future financial effects of HIV/AIDS on international businesses.1 Toshiba integrates environmental perspectives into accounting practices regarding what constitutes an asset or liability.2 THE BOTTOM LINE: ■ ■ ■ Matters of ethics, legality, and governance are increasingly integrated into accounting curriculum; social and environmental issues generally are not. Quantitative measures for non-financial performance are slow to emerge from both academia and private practice. Managers’ performance is judged in financial terms; non-financial incentives typically must align with financial goals in order for companies to reward good corporate citizenship. A FACULTY POINT OF VIEW: Dr. Marc J. Epstein is Distinguished Research Professor of Management at Jones Graduate School of Management at Rice University. Among his fourteen books are What Counts: Turning Corporate Accountability to Competitive Advantage and Measuring Corporate Environmental Performance: Best Practices for Costing and Managing an Effective Environmental Strategy. He recently spoke with the Aspen Institute about current accounting curriculum in MBA programs. On the gap between accounting pedagogy and practice: “We have learned over the last decade the challenges of financial measurement. Now, accounting includes an increasing array of non financial measures, and social and environmental issues are an added challenge. Managers are being evaluated on financial performance, but their bosses are saying ‘Be good corporate citizens.’ Academics have not done enough to help develop measures for them.” On developments in the discipline: “ There is a lot we can do in the classroom both to encourage more disclosure and better management accounting. 9/11 and Katrina made managers realize that issues “HIV/AIDS Beyond Africa: Managing the Financial Impacts.” Study by F&C Asset Management and UBS. May 2005, pp. 28-31. . 2 1 See . A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ beyond their control impact their company’s financial performance. How do we think about mitigating and responding to risk? Reputation risks, for example, need to be thought through. Not many business schools are seriously integrating this into their curriculum.” On legalities versus value-creation: “Scandals are of primary importance for a number of reasons: more jobs were created in accounting, student interest increased and more students are enrolling in accounting courses, and the importance of accounting was highlighted. There’s not a lot happening, though, on the social and environmental front. It tends to be more focused on governance and ethics concerns.” NOTABLE COURSEWORK: The following course descriptions are drawn exclusively from Beyond Grey Pinstripes, a research survey conducted biennially by the Aspen Institute. ■ Columbia University, Managerial Accounting (Core Course) “This course addresses social and environmental issues. Social issues – course examines and develops an understanding of accounting and how accounting information is used. By doing so, it creates ‘educated’ consumers of information who assess information wisely. We often hear about people investing on information such as “hot tips,” usually with bad consequences (i.e. losing savings, retirement, etc.). Being educated to assess accounting info helps make better choices and improves social welfare. Specific topics that relate to both social and environmental concerns are: full cost accounting; differential accounting standards; integrity and accountability reporting; potential conflicts in accounting; Sarbanes Oxley.” Duke University, Financial Accounting (Core Course) “For the core financial accounting class, we discuss the following social related issues: differential accounting standards, integrity and accountability in reporting systems, and potential conflicts of reporting standards in global businesses. There is also a specific case and lecture dedicated to fraud and ethical behavior as it relates to financial reporting. For environmental related issues, a case and discussion on environment liability accounting and disclosures is included.” University of Vermont, Accounting and the Environment (Elective Course) “The class explores the interrelationship between accounting and managers decisions and activities regarding environmental-related issues. Managerial topics covered include product costing, capital expenditure analysis, and performance evaluation. External reporting and disclosure requirements are also explored, along with the effects of those requirements on firm valuation. Alternative methods for reporting environmental performance will also be introduced. The field is dynamic and new topics may be added during exploration.” Cornell University, Managerial Cost Accounting (Elective Course) “Focus on activity-based costing systems and how to analyze the cost of perceived social and environmental ‘externalities’ that cannot be tracked with traditional accounting methodologies.” Curtin Business School, Financial Management 550 (Elective Course) “You will be better able to interpret financial statements to ascertain the financial position of an organization regarding its liquidity, profitability and financial backing and performance as well as the corporate social and environmental performance. Organizations worldwide are recognizing that longterm economic performance is inextricably linked with social and environmental performance. Increasing concern and interest in environmental issues in the last 25 years, coupled with the challenge of globalization have propelled environmental accounting, triple bottom line (TBL) accountability and sustainability into the core business of organizations and the community. Increasingly, this TBL concept forms the basis for decision-making by communities, governments and forward-thinking business. It involves integrating decision-making in development, ■ ■ ■ ■ -2- A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ environmental and social areas, and publicly reporting on performance. Practically 20% of this course is dedicated to environmental issues in accounting, corporate accountability and triple bottom line (TBL) reporting.” ■ The George Washington University, International Accounting (Elective Course) “This course includes attention to global harmonization of accounting standards, social and environmental goodwill, transparency, and accounting and culture.” University of Colorado at Boulder, Financial Statement Analysis (Elective Course) “The course addresses these aspects of social responsibility: how a firm’s strategy with respect to social responsibility can affect the value of its securities, ethical issues related to management/manipulation of earnings to meet analysts’ earnings expectations, and the integrity and informativeness of both audited financial statements and unaudited disclosures regarding social performance.” ■ NOTABLE TEACHING MATERIALS: These teaching materials, available as part of Caseplace.org’s Corporate Governance and Accountability Project, bring together case studies, references, teaching notes, and more. All are offered for free download to registered faculty members. ■ ■ ■ Sarbanes-Oxley Act: How Did We Get Here? This collection was prepared by Elizabeth Keating, Assistant Professor of Public Policy at Harvard. Earnings Management: Causes, Techniques, and Transparent Financial Reporting This collection was prepared by Dr. Steven Mintz, Professor and Area Chair, Cal Poly, San Luis Obispo. Sarbanes-Oxley Act: What Has it Wrought? This collection was prepared by Elizabeth Keating, CPA, and Eli Goldston, Lecturer at Harvard Law School. NOTABLE CASE STUDIES: Cases referenced are meant to represent the diversity of related teaching materials available at Caseplace.org. All are offered for free download to registered faculty members. ■ First National Bank Corp. (A) (Harvard Business School Publishing) First National Bank Corp., a major regional bank in the Northeast, must decide how large a provision for credit losses to accrue in its 1990 financial statements. The recession in New England has caused serious problems in its loan portfolio. Teaching Objective: Introduce concepts of allowance and provision for bad debts; present manager/independent auditor relationship; raise ethical issues about accounting judgments without clear answers and with important social effects. Industrial Products, Inc.: Measuring Environmental Performance (The World Resources Institute) Industrial Products, Inc. was a highly diversified, privately held manufacturing company that sought to decrease environmental impact while increasing return to equity. These cases examine management's efforts to design and implement a management system for measuring the environmental impacts of its operations. Arthur Andersen LLP (Harvard Business School Publishing) ■ ■ -3- A Closer Look at Business Education _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ This case highlights the history of Arthur Andersen and the collapse of the firm following the Enron Corp. audit and the Department of Justice obstruction of justice conviction. To encourage the discussion of the role of audit firms, the accounting industry, and internal controls. ONGOING QUESTIONS: ■ ■ ■ ■ Will companies (due to external considerations such as public relations) or educational institutions lead the way in creating new social accounting practices? What relationship exists, if any, between modern organizational sustainability and social and environmental accounting practices? With so many recent publications on environmental accounting and the fields’ growing popularity in practice, why haven’t the number of elective classes in this area increased? What will be the tipping point for social and environmental accountancy to be used in more companies’ internal decision-making? RESOURCES: BeyondGreyPinstripes.org – World’s biggest MBA database, including detailed records on 1,672 courses, 1,730 extracurriculars, and 216 research articles at 128 schools on six continents. CasePlace.org – Free, online library of business school case studies, background readings, and teaching notes on accounting and many other topics. _________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ A Closer Look is now a monthly series of briefing papers on topical issues in MBA education, based on the research and programs of the Aspen Institute. The Aspen Institute Business and Society Program works with senior corporate executives and MBA educators to prepare business leaders who will effectively manage the financial, social, and environmental impacts of the private sector. Contact Justin.Goldbach@aspeninstitute.org to order reprints or to offer feedback. -4-