Enhancing Corporate Accountability

What is the role of financial reporting in enhancing corporate accountability?

 Explain the importance of financial reports being true and fair and what this means
for enhancing corporate accountability.
 Give your opinion on how financial reporting should respond to the increasing
emphasis on enhancing corporate accountability in relation to the pursuit of
sustainability goals.

Financial Reporting is a fundamental aspect of accounting; it is the recording and reporting

of all transactions within a business over a set period. This information is usually displayed
in the three primary statements which help to give an overview of the financial position of a
business. Corporate accountability is the idea that businesses need to take more
responsibility for their social and environmental impacts within society.

Financial reports are used by many different stakeholders, all of which have contrasting
interests within a business. However, one thing that is likely agreed upon between
stakeholders is that the information published must be true and fair. Statements provided
should accurately and faithfully represent the true financial position within a corporation
(True and Fair, 2014). Investors, lenders and shareholders use these reports as a foundation
for making decisions, where substantial sums of money can be at risk. Consequently, it is
critical that the reports provide immaterial information to ensure that uncertainty and
scepticism don’t surround a business. Therefore, corporations can be held to greater
accountability when accounts are true and fair because stakeholders will have a better
understanding of the firm’s true position and thus feel more confident responding with an
appropriate reaction to hold the firm accountable.

Firms regularly exaggerate financial and non-financial information within reports to make
themselves appear more attractive. The language used in reports can potentially change the
readers perspective of a situation. In 2021, Exxon Mobile announced in their annual letter to
shareholders, that the business would invest $2.5bn a year in low carbon technologies for a
period of 6 years. Whilst this was made to seem significant in the letter, in the same report,
revenues of $276.7bn were announced, making their environmental investments seem
minor (Exxon Mobile Annual Report, 2021). This ability within firms to exaggerate future
obligations and financial information reduces how true and fair financial reports are as they
are failing to provide a faithful representation of that business, limiting the extent at which
firms can be held accountable.
Current accounting methods can be traced back to 1494, where Pacioli created the idea of
double entry accounting (M. Smith, 2018). Despite our world facing a set of very different
threats than those in the 15th century we still use the same outdated accounting techniques.
Businesses are failing to disclose their true social and environmental impacts as they are not
currently required to do so. Newer innovative accounting methods such as ‘environmental
financial accounting’ could be implemented so that firms periodically report the
environmental liabilities they are responsible for such as carbon emissions and level of
resource degradation (Muralikrishna and Manickam, 2017). Once comparability is achieved
within these newly updated financial reports, it will be easier for stakeholders to identify
worst polluters and thus hold organisations more accountable for their sustainability.

In conclusion, whilst it seems clear that firms can exaggerate and inflict bias on their
financial reports, there are clear rules set out by the ICAEW to prevent materiality within
statements (Materiality in the Audit of Financial Statements, 2016). Furthermore, its
critically important for firm’s financial reports to be true and fair so that stakeholders can
make decisions based on true and accurate information, increasing the importance of
accounts being true and fair. On top of this, newer reporting methods should be introduced
alongside existing techniques to hold corporations more accountable for their climate
impacts. Whist this will likely come at a larger cost to firms to record and publish this
additional information, I believe the benefits to greater society far outweigh the potential
costs to firms.

Reference List:

1) True and Fair. (2014). Financial Reporting Council.

2) Exxon Mobile Annual Report. (2021).

3) Smith, M. (2018). Luca Pacioli: The Father of Accounting. SSRN.

4) V. Muralikrishna, I. and Manickam, V. (2017). Environmental Management. Science

Direct.

5) Materiality in the audit of financial statements. (2016). ICAEW.