-: Hello and welcome to this session
on module five and we're climbing into the start
of corporate accountability.
So you're at the end of the first subject for most people,
ethics and governance
and the key thing here
is to start thinking more broadly
about what accounting is.
Now, this is a really important picture
that sets the scene about what we're looking at
and this is the debris, I guess what we saw afterwards
in Rana Plaza,
at a textile manufacturer
after a fire had gone through.
One of the key things we need to weigh up
as accountants is what price productivity,
what price efficiency?
If that means making people go back
into a workplace that's dangerous,
that's unsafe, is this okay?
How do we rank making a dollar
with doing the right thing?
So throughout this semester,
you've been looking at all of the different objectives
and as you did module one,
we covered off objective one and two
and then module two covered off objective three,
these are the subject objectives
you're going to be examined on.
So now we're heading into objective seven and eight,
the strategic, the leadership, the global issues.
So these big picture ethics,
decision making, environmental sustainability,
social outcomes and also,
how does corporate social responsibility
and the reporting of that actually work?
How can we contribute to helping improve the climate,
rather than harming it?
So that's the key focus of module five.
So module five starts with I think a fantastic outline
of these goals that have been developed.
And I just want to touch on them carefully.
You might have seen this picture
as you open module five
but take a bit of time
to think about what this means.
No poverty.
Zero hunger.
And then good health and well-being.
Now, think about that for a moment
because when we look at supply chains,
and we look at how businesses make money,
one of the things we've got
is we try and maximise our profit
and that is often at the expense
of a supplier or a customer.
So how can there be no poverty
unless there are jobs that pay a living wage?
How can there be zero hunger
unless we're growing our food
and then distribute it carefully
and appropriately and price it fairly?
How do we have good health and well-being
if people don't have a job?
If they don't have money?
They can't buy food
and so what about the business you're in?
What about the decisions you make?
Is that helping people achieve these goals
or does it actually make it harder?
So key and obvious areas are going to be things
like the coffee industry, the textile industry.
Every time you consume chocolate,
where did that chocolate come from?
Did you participate in a supply chain
that keeps people in poverty or lifts them out?
We'll look at education,
gender equality and clean water.
All of these things
which we normally take for granted are critical.
From there, energy.
When the lights go off, when there's a blackout,
we get really upset and frustrated
and yet for some people,
that's the normal way of living.
Reducing inequality, sustainable cities.
Responsible consumption.
And in this time, I guess of absolute pandemic,
it's a one in literally 100-year event.
We haven't seen anything like this
in just about all of our lifetimes.
What does it mean to be in society,
to be in community?
What are the things that are essential
and what are the things we used to think were important
but aren't so much?
So that climate action, it's been amazing to see clean air
in all these different cities
but there's an economic cost, isn't there?
We're going to see fewer road deaths,
we're going to see fewer other accidents
and lives saved.
What does it mean about strong institutions
and life on the land and in the sea?
So these are goals worth dwelling on
and saying, "How in my life,
"my personal life, do I contribute here?
"How in my life, in my business life,
"do I contribute?"
And luckily, a lot of businesses lift up
and improve these areas.
There's some amazing stuff going on
and going back to the coronavirus,
the quick and rapid development,
for example, of these machines
that help people breathe,
the amazing science and innovative low-cost approaches
to saving lives is incredibly exciting
watching people solve real-life problems.
But we also have others willing
to take advantage of people in a poor situation
for the love of money
and how can we steer away from that?
So as you choose your goals
and this is the outcome.
We talk about the Millennium Goals
and the Development Goals
and all these beautiful goals
and yet, we so often see these kinds of disasters
where money is what we were serving.
Making more money, increasing shareholder wealth,
shareholder primacy, which we see throughout module five.
So how do we get that in balance?
So the preview for module five says we need
to have sustainability
and it has two parts to the definition.
First part, meeting today's needs.
Now, the second part,
we are not supposed to meet the needs
of the people in the future
but we need to leave enough
for them to be able to take care of themselves.
If we deplete everything that's available now
and destroy it, consume it and spit it out,
there's nothing for them
so that is the key to sustainability.
Now, this applies economically
as well as socially and environmentally.
We can't just consume today.
Imagine an orchard.
You chop it all down, sell the wood for firewood.
Okay, that worked once
but it's not sustainable 'cause next year,
we have no orchard to grow and eat fruit.
It's the same concept for economics,
as for the environment.
So we need to broaden our thinking.
Accountants are not bookkeepers,
we are not number crunchers,
we are so much broader.
We have financial, environmental, social
and also governance responsibilities.
So the module says to us,
well, where do we fit?
So we do the reporting.
We report on inputs, outcomes, impacts
so we're reporting on this corporate social activity
but the other thing accountants need to do
is be more involved in the decisions
and that's where module two is so critical.
Is this ethical?
Is this appropriate?
Should we be doing this?
Am I okay with this?
We should go beyond just making profit
and also ask not just is it legal
but is it right?
And so is accounting evolving
to meet these needs?
As we go through the module,
you will see the different things in place
to make that happen.
Now, there's a lot of words in module five.
Some of them you will never have seen before.
So I'm going to put some of these up on the screen
and you might be wondering why publish a list
or an index for you?
And the answer is of course not.
But I will encourage you
to build your own list, your own definition
and don't write this down
so you can read them in the exam,
write them down and learn them
before you walk into the exam.
So as you see all these words,
thematic investment, stakeholder theory
and nexus of relationships, what does that even mean?
As you get to normative
and homogenization, integrated thinking.
Some of these are great.
Isomorphism, mimetic, coercive.
Fantastic stuff.
And then the GIR, our GHG Protocol, CO2 equivalence.
We'll talk a lot of these in the session
but as you read the study guide,
if you see a word you don't know,
highlight it, put it in the Excel spreadsheet,
put the page number, the definition
and your own explanation there as well.
So now let's take a look at part A.
Financial reporting and its limitations.
And this is kind of like a critique going
into your financial reporting.
So for your next couple of subjects that you choose from
is financial reporting,
we'll be looking at this in module one.
And if we go back to module one of ethics and governance,
we have more of the critique view,
we have the traditional view of professions
but also the market control view.
And we also need to critique
how we do financial reporting in the same way.
So we've had a shareholder primacy perspective
for a long time.
The purpose of business is to generate wealth,
profits for the owners
but we're discovering, which is a bit sad,
we're a bit slow,
that stakeholders are just as important.
They have a legitimate interest in organisations.
So the suppliers, the community
where you operate, the government,
the customers, the employees,
all of these stakeholders also have a say
in what's going on
and are impacted by organisations
and sometimes are really upset
when organisations don't act appropriately.
So this part A actually ties in with objective number five
for the module.
So you need to be able to tick off each of these objectives
and this one is the limitations of financial accounting.
So 5.1 looks at the scope of reporting.
And what we've got.
If we don't understand financial reporting,
now, we're taking a little bit of time
to explain a very short section of the study guide
but I want you to have a good picture in your mind.
We've got Mary.
She wants to invest in Timber Plantations.
Now, why do I ask that?
Because these are known for people investing
and losing billions of dollars.
So the answer is don't, don't, Mary, don't do this.
But the next thing we have is ANZ Bank,
this is a true bank
who loaned hundreds of millions
to a childcare centre company called ABC Learning.
Should it do this?
And we know from the facts
that it really should not have done this.
And we've got Frank.
Frank's going to do some consulting
to a company on credit.
What credit term should he offer
and that's a trick question.
Frank should not sell his services on credit.
He should get cash in advance
because it's too risky.
But what have I introduced here?
We have an investor, a lender,
and a potential creditor
and they have decisions to make.
And that brings us to the objective
of financial reporting.
So the objective of financial reporting
is to provide financial information
about a reporting entity,
that's just the business,
that is useful, useful to who?
Frank, Mary and the ANZ Bank,
the investor, the lender, the creditor.
Useful how?
So they can make decisions.
Mary, do I invest?
ANZ Bank, do I lend?
Frank, do I sell my services on credit?
And this is about buying or selling
or holding equity or debt,
providing loans or other forms of credit.
So you can see that financial reporting
is very specific.
It focuses, number one, on the investor
and then number two, the lender,
number three, the creditor.
Lenders, creditors, kind of the same thing,
it's the liabilities, right?
We don't see anything about the customer,
the community groups, the supplier,
the employees, the broader what's going on in society?
And that is the problem with the scope
of financial reporting.
It is too narrow.
So instead of looking at all of these stakeholders,
I've grabbed this figure from module three,
we are shareholder primacy perspective
and that means we're only really reporting
on short-term factors, profit for the period
and we have to stretch that,
we have to broaden what accountants do here.
So that brings us to the elements of financial reporting.
Now, of course, we'll cover these in more detail
in financial reporting
but the elements are just the key components
of the income statement and balance sheet,
the assets and liabilities.
The income and expenses.
So first thing we've got.
An asset, pretty complicated, fancy words
for a definition.
A present economic resource controlled
by the entity of past events.
You might have seen a variation of this,
future economic benefits controlled by the entity.
Now the Conceptual Framework updated
the definition slightly in 2018.
So what have we got?
A right to economic benefit.
A past event and control.
It's not the physical item,
it's not the car or the truck
or the piece of furniture,
it's the rights the past event can control.
So it's kind of weird.
But one of the problems we've got with this
is it ignores things
that we consume that we don't really pay for or control.
We don't control air.
But we use it.
We don't control water
but it's used a lot in our processes.
We don't control a lot of these natural products
so they're not assets on our books
but we either use them
or we hurt them or destroy them
if we dump waste into a river.
If we make land too salty or toxic.
If we pollute the air.
So we are consuming or polluting external resources
outside the entity.
And that's not captured in these definitions
and financial reporting principles.
So expense is another area.
Decreases in benefits
in the form of outflows that deplete our assets
or we degrade liabilities
that decrease our equity.
Very long terminology.
You don't have to spend too long learning the definition.
That's not what you're going to be examined on.
You'll be examined on the concept.
It's this depletion of assets
or increase in liability.
But what about toxic waste?
What about pollution?
This expense does not appear
in your profit and loss
if you can push that cost onto the community.
So these are the key problems
with financial reporting.
It only looks at the entity,
it doesn't tell the whole story
which means we don't make the best decisions.
A specific example to liabilities
is discounting of cash flows.
Now, here's a toxic oil spill.
This actually comes from the Exxon Valdez
oil waste into Alaska.
But let's say that you've built a mine
or a factory or a warehouse, whatever it might be
and in 30 years, there's $100 million worth
of cleanup costs.
Now, that $100 million, represented in your accounts,
is not going to be showing at 100 million
because we discount those liabilities
to today's present value.
So I've got a discount table up on the screen.
What we can see is if you have a 10% discount rate,
you're only going to show 5.73 million
on your balance sheet as a liability
if we're only paying out 100 million in 30 years' time.
Now, guess where the creativity kicks in.
Of course, if you want to understate the liability,
you would choose a much higher discount rate.
So for example, you could choose 20%
as your discount rate
and your liability would only be 420,000 now
for a $100 million payout in 30 years.
So of course, you can see accountants
will be getting quite creative
about hiding the future real cost of fixing problems
and the other thing we've got
is whether we even bother to recognise that liability.
So in section 5.4, we look at relevance
and faithful representation.
Once again, we cover this
in module one, financial reporting.
But just here,
we look at relevance, faithful representation.
These are the two fundamental, qualitative characteristics
that financial reporting information should have.
And relevant means important, material
to the organisation.
So it's going to help Mary make that decision,
it's going to help Frank decide whether to sell on credit.
It's going to help the ANZ determine whether to invest.
It's important, useful, relevant
and faithful representation.
It's when our reporting paints a proper picture
of what's going on.
So this is the image I'm showing you.
This is actually a painting.
It's not a photograph
but it's a painting of a photograph.
And it's a great concept
for showing a faithful representation.
It's truly giving you a picture
of exactly what's going on.
Now, do our financial reports
really talk about what's going on?
So you think about those chocolate companies,
those textile companies, those shoe makers,
those coffee, whatever part of the supply chain.
Some of those mining companies
where there's kids mining.
If you watched the module two video on tobacco farming
where there's children getting nicotine poisoning,
does the annual report of the company
tell the real story about what's going on?
So when we recognise liabilities
so things like cleaning up,
recognise means put in the balance sheet
or the profit and loss for an income or expense.
But not everything gets recognised
and the recognition criteria actually changed.
It used to be measurable and probable.
Not it's become a bit more vague.
It now says that we recognise
if the information is useful.
And so that introduces the scope for more creativity
because we can say well,
useful needs to be relevant,
needs to be faithful representation.
And I can't really measure that liability.
I don't have a true estimate of what it's going to cost
so maybe I just won't record it for now at all.
So there's some real problems
with financial reporting.
One other issue is the focus on short-term results
instead of focusing on the future
and we can see this with the rising sea levels
and other activity.
We only think about now.
It's very hard for humans to think about what's going to happen
in six weeks or 12 weeks or two years' time.
With the world changing as it does,
something like 1/3 of Australian
who have bought a house
are struggling with their mortgage
because with jobs lost and the economy going into turmoil,
they haven't had any funds set aside
for the future for a rainy day
for difficult times
because we've only lived for now.
So that's a problems for individuals
but for businesses and for governments
and the whole of society.
And the final part of this part A,
we talk about the entity assumption.
Now, we're sort of introduced that already
with this idea of we only care about things
within our financial statement.
So if it's not an expense to us,
it doesn't really matter if there's some pollution going
into the air or wasting into the waterways.
If we can't recognise that liability problem,
it's not our problem either.
So the entity approach is really good for accounting
from a profit perspective
'cause it works out what's profitable for you
and what's included but it ignores these externalities,
these impacts on society.
So I hope you found that tour
of the start of module five,
the preview and part A, helpful
because that's going to help us interpret the rest
of the module, thank you.