Question

Corporate Social Responsibility Problem Unlike financial reporting that requires all reported

amounts to be expressed in monetary terms, Corporate Social Responsibility (CSR) reporting is

often more qualitative than quantitative. This has caused some individuals to discount the CSR

reports as too subjective.

Directions

a. Can you identify any subjective areas within a financial statement prepared under GAAP?

b. Discuss the reasons both financial reporting, and to a larger extent CSR reporting, allow sub-

jective estimates to be part of the report

Answer 1

Non-financial parameters inclusion in annual company reports of all major companies have been a major change which has been welcomed by shareholders and analysts alike. While in modern management, returns to shareholders and profitability had been the only guiding sticks for making decisions, scams like Enron & WorldCom made it amply clear that financial measures based on accounting tools cannot be the only way to judge a company's performance. Financial measures need to be corraborated with other measures which give an insight into company's investment into building solid ground for future growth. Need was also felt for measures which could help tie company's vision into actionable goals which could be measured. Mahatma Gandhi once said that means should justify the ends. Non-financial measures allow measuring of the means and hence are as important as financial measures.

Non financial measures have unique advantages over financial measures. Number one is that non-financial measures focus on long term performance rather than short term/annual performance as is focussed by financial measures. For e.g. balanced scorecard will often have projects or actions linked to compnay vision that might have 2-3 years completion period. Construction of a new facility to invest in new bio-technology sector is one such example. Such projects or focussing efforts on long term gains do not bring in immediate financial gains and are often a drain on company's resources for quite some time but they are essential to long term growth. Non-financial measures help in measuring these parameters which are essential for long term growth. Number 2 advantage is that non-financial measures help in measuring or making qualitative assesments on things like "goodwill" or "intellectual property". For e.g. financial benefit of an intellectual property or a patent could be estimated by making valid business assumptions and by dollarising the asset which is not possible under standard accounting rules. Moreover dollarising a given in-tangible asset brings it under the eye of analysts and stakeholders who are then free to question the assumptions and working of the company thus bringing in greater transparency. Number three benefit is that non-financial measures help in identifying potential areas that company should focus on for long term growth. Customer satisfaction will never figure in a standard financial measure report but non-financial measures will report important issues like that so that compnay can focus on them in order to get the future right.

While the benefits are clear for non-financial measures, they do come with their own unique set of costs. Number one cost is increased cost in collecting and analyzing the data which is non-standard in nature. To establish some measures around non-financial performance measures, companies need to find parameters which need to be tracked separately than normal financial data. This brings in additional costs in terms of man-power, softwares and time spent. This could be the primary reason why reporting of non-financial performance measures is only taken seriously by large coorporations who can afford the extra cost. Number 2 dis-advantage or cost of reporting non-financial performance measure is that these measures can get lost in a sea of bureaucracy unless supported by top management. Monitoring these measures needs a lot of push and constant engagement at all managerial levels and any loss of momentum from top can lead to complete momentum being lost and return to status quo of non reporting of such important measures. It is extremely hard to institutionalize non-financial performance measures and its take time and perseverance to see them through.