This is a post by CMA R.Veeraraghavan. He is a Fellow of the ICWAI, Dy. CAO at the Mumbai Port Turst and also a moderator in this portal.
Lack of transparent performance measurement and reporting in the business world is the main reason for the global financial crisis that we are witnessing in the recent past.
Performance measurement has two aspect one is measurement of resources and the other is enumerating its cost for a business activity.
Except in the Indian law, given below none of the legislation has a pervasive clause of performance measurement, performance measurement is tool for measuring cost and consumption of resources, where as triple bottom line are dimension or areas of such measurement pervasiveness.
Integrated Reporting-Triple Bottom line_CSR and Environment reports,green reporting as they are often referred to, would be an inadequate exercise,if devoid of or not supplemented by a good costing system in place , and a good cost management Reporting.
Simply capturing expenditure and reporting the proportion to revenue spent from transaction accounts would not serve the real purpose of sustainability under a holistic model.
Business survives on value created out of the environment -whether it impacts the environment or the other way round-sometimes businesses build environment.
Environment are of three kinds :
1.The Green.-Physical.The Colour that represents fertile feature.
2.The Yellow.-Social.The colour that represents prosperity.
3.The White.-Economic. The colour that represents transperancy.
All these types of environment enriches on the cost sunk and the resources that gets exploited through business activity.
Business principle is to minimise cost - optimise resource consumption and maximise Value creation.
Transaction Accounting(financial Accounting)with its inherent deficiency cannot address the above concerns, it is when the cost Accounting gets rolled out in a systematic and continuous exercise format would the business truthfully and transparently run value to the stakeholder.
It is thus of prime concern that all our efforts across the globe is to develop a system of universally accepted cost accounting principles and make entities observe these principles and give credence the integration of reporting mechanism.
Sustainability reporting is the practice of measuring,
disclosing, and being accountable to internal and
external stakeholders for organizational performance
towards the goal of sustainable development.
‘Sustainability reporting’ is a broad term considered
synonymous with others used to describe reporting on
economic, environmental, and social impacts (e.g., triple
bottom line, corporate responsibility reporting, etc.).
Where it builds on:
Economic- material and labour and other items of cost. this other items of cost is expansive to include social and environmental cost and concumption and ideally they are overheads to the product and processes and impact their sustainability at strategic and operational levels.
Integrated Reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.
Costing improves performance in organizations-IFAC-PAIB.
1. IGPG Document.
The creation, operation, alteration, and cessation of every action and function in an
organization – whether within the private, public, or voluntary sector – all consume
economic resources. Measuring, accumulating, and assigning those resources to the
organization’s various processes and outputs allows the structure and operation of the
organization to be explained, understood, and improved. Costing, the accounting term
that embraces these processes and expresses them using money as a common language,
lies at the heart of managerial accountancy and, exercised intelligently, is among the most
powerful disciplines available to professional accountants in business (PAIB).
1.2. Costing contributes to an understanding of how profits and value are created, and how
efficiently and effectively operational processes transform input into output. It can be
applied to resource, process, product/service, customer, and channel-related information
covering the organization and its value chain. Costing information can be used to provide
feedback on past performance, and to motivate and change future performance. Costing is
thus an essential tool in creating shareholder and stakeholder value. Given its importance
and breadth of scope, it is unsurprising that many different costing methods exist, both in
the literature and in practice. This can create confusion and uncertainty for managers, and
PAIBs need a sufficient understanding of sound costing principles to be able to select and
apply useful approaches.
1.3 The basic building blocks of costing are operational measurements of consumed resources
(resources include people, space, equipment, and consumables, these being the drivers of cost
and levers of change). Such measurements enable managers to draw conclusions and make
judgments about why (a) the organization’s results turned out as they did (performance
evaluation), (b) what this means for the future (planning), and (c) the probable results of
available courses of action (analysis of alternatives) all of which comprise essential
information for effective decision making. The principles in this International Good Practice
Guidance (IGPG) support the application of judgment in providing good decision support. In
turn, this calls for the professional accountant in business to clearly understand why cost
information is to be used.
http://bit.ly/qSj5LU costing continuum.
Deficiency in laws under various geographies:
UK company Law 2006
386 Duty to keep accounting records
(1) Every company must keep adequate accounting records.
(2) Adequate accounting records means records that are sufficient—
(a) to show and explain the company’s transactions,
(b) to disclose with reasonable accuracy, at any time, the financial position
of the company at that time, and
(c) to enable the directors to ensure that any accounts required to be
prepared comply with the requirements of this Act (and, where
applicable, of Article 4 of the IAS Regulation).
(3) Accounting records must, in particular, contain—
(a) entries from day to day of all sums of money received and expended by
the company and the matters in respect of which the receipt and
expenditure takes place, and
(b) a record of the assets and liabilities of the company.
(4) If the company’s business involves dealing in goods, the accounting records
(a) statements of stock held by the company at the end of each financial
year of the company,
(b) all statements of stocktakings from which any statement of stock as is
mentioned in paragraph (a) has been or is to be prepared, and
(c) except in the case of goods sold by way of ordinary retail trade,
statements of all goods sold and purchased, showing the goods and the
buyers and sellers in sufficient detail to enable all these to be identified.
Australia Corporations act 2001
Part 2M.2—Financial records
286 Obligation to keep financial records
(1) A company, registered scheme or disclosing entity must keep written financial records that:
(a) correctly record and explain its transactions and financial position and performance; and
(b) would enable true and fair financial statements to be prepared and audited.
The obligation to keep financial records of transactions extends to transactions undertaken as trustee.
Note: Section 9 defines financial records.
Period for which records must be retained
(2) The financial records must be retained for 7 years after the transactions covered by the records are completed.
Strict liability offences
(3) An offence based on subsection (1) or (2) is an offence of strict liability.
Note: For strict liability, see section 6.1 of the Criminal Code.
California Code for corporations:
1500. Each corporation shall keep adequate and correct books and
records of account
This report shall contain a balance
sheet as of the end of that fiscal year and an income statement and a
statement of cashflows for that fiscal year, accompanied by any
report thereon of independent accountants or, if there is no report,
the certificate of an authorized officer of the corporation that the
statements were prepared without audit from the books and records of
209. Books of account to be kept by company.—
1[(1) Every company shall keep at its registered office proper books of account with respect to—
(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;
(b) all sales and purchases of goods by the company; 2[***]
(c) the assets and liabilities of the company; 3[and]
3[(d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed if such class of companies is required by the Central Government to include such particulars in the books of account:]
Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.]
Thus there is an urgent need to address the concerns of governance through- ethics transperancy and a good measurement tool that lay in implementation of a cost accounting system mandated across the globe by different geography to supplement the reporting mechanism of business processes.