SOCIAL AND ENVIRONMENTAL ACCOUNTING: THE EXPANDED VALUE ADDED STATEMENT by Laurie Ingrid Mook A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy Department of Adult Education and Counselling Psychology Ontario Institute for Studies in Education of the University of Toronto © Copyright by Laurie Ingrid Mook (2007) Social and Environmental Accounting: The Expanded Value Added Statement Doctor of Philosophy (2007) Laurie Ingrid Mook Department of Adult Education and Counselling Psychology University of Toronto Abstract The Expanded Value Added Statement (EVAS) makes a significant contribution to the field of accounting by highlighting hitherto invisible dimensions and integrating them into a single accounting statement This, in turn, helps to tell a much richer performance story of organizations and opens up new possibilities for organizational and social change The EVAS recognizes established traditions in the field of accounting, but at the same time pushes the envelope aiming at viable changes in accounting practices that nurture a more sustainable society It provides a considerable advance in social accounting by integrating economic, social and environmental factors in a format that is applicable to different organization types, time dimensions, and contexts The EVAS has four main influences: mainstream accounting, critical accounting, social accounting, and sustainability Mainstream accounting, particularly the progressive practice of value added accounting, highlights the wealth created (or destroyed) and distributed through the results of labour and capital in transforming external goods and services Critical accounting contributed with two insights: that accounting is not a neutral activity, and that accounting practices are shaped by and can in turn can shape social reality Social accounting, especially the subfield of integrated social accounting, has provided a significant precedent for the EVAS by broadening the range of items ii included in accounting statements to take into account externalities Finally, the concept of sustainability provided the conceptual and normative framework that guided the selection of variables included in the EVAS In this manuscript-based dissertation, the EVAS is applied to three case studies The first looked at the value added of volunteer work and un-reimbursed out-of-pocket expenses in ARNOVA, a non-profit scholarly association The second case study, a construct of 33 sustainable buildings in the USA, shows the costs and benefits of building in sustainable ways versus using traditional building techniques The third case, based on a master-planned community in Vancouver, includes an economically targeted investment, a non-profit community police centre, a non-profit neighbourhood house, and municipal government agencies, and shows how the EVAS can integrate economic, social and environmental impacts and help to make investment decisions that support sustainability iii Acknowledgements I am indebted to many friends and colleagues who have inspired and supported me while undertaking this graduate work First and foremost, I would like to thank my supervisor, Jack Quarter, who provided unfailing support and guidance throughout the entire process As a mentor, colleague and friend, he is unparalled I would also like to thank the members of my committee Joel Amernic, Brenda Gainer, and Femida Handy provided valuable feedback and support My external examiner, Ted Jackson, provided a thorough evaluation of the thesis and raised very thoughtful questions at my defence Your insightful comments helped to enrich my understanding of this work from different disciplinary backgrounds, and I would like to thank you all for your helpful suggestions to move this work forward At the Ontario Institute for Studies in Education, I was lucky to be part of Jack Quarter’s thesis group, which meets monthly to provide mutual support My thanks go to group members Sherida Ryan, Jorge Sousa, John Whitman, Peter Elson, Kunle Akingbola, Brenda Elias, Suzanne Cook, Clement Jumbe, and Nancy Linley for their friendship, advice and encouragement Thank you also to the administrative and technical staff at OISE, for providing an environment that encourages and facilitates innovative and important work I would wish to thank my friend and colleague Betty Jane Richmond for her pioneering work in this area It was through her that I was first introduced to social accounting iv I would also like to express my sincere gratitude to all of the organizations and people who participated in this research Without your belief in the importance of this work, this dissertation could not have been written I would also like to acknowledge the financial support I received from the Social Sciences and Humanities Research Council and the University of Toronto My most heartfelt thanks go to my husband Daniel, who provided incredible support and feedback throughout the years, and my children Alejandro and Ana, who were almost as excited as I that I am now Dr Mook Last but not least, I thank my parents, Leo (19321992), and Henny Mook, for their love and encouragement, and for being environmental activists since before I was born v Table of Contents Abstract Acknowledgements Table of Contents Chapter One: ii iv vi Introduction Background Rationale for the Study Purpose of the Study and Research Questions Research Design and Methodology Rationale for Case Selection Data Collection Organization of the Dissertation Chapter Two: 1 11 Literature Review and Conceptual Debates Introduction Approaches to Accounting Progressive Mainstream Accounting: The Value Added Statement Social Accounting Models Integrated Social Accounting: Two Waves The First Wave of Integrated Social Accounting The Second Wave of Integrated Social Accounting Accounting Education Adoption of Alternative Accounting Models Rationale for an Expanded Value Added Approach The Expanded Value Added Model Chapter Three: Case #1 13 13 15 19 22 22 23 28 35 38 40 41 45 The Value of Volunteering for a Non-profit Membership Association: The Case of ARNOVA Abstract Introduction Organization: Choice and Background Data Collection: The ARNOVA Survey Findings: Volunteers at ARNOVA ARNOVA: Value Added by Volunteers Expanded Value Added Statement (EVAS): Introducing the Model Estimating the Value Added by Volunteers in ARNOVA Distribution of Value Added Summary of the Expanded Value Added Statement (EVAS) Additional Observations Discussion of Findings vi 45 45 47 49 50 51 52 54 61 62 64 67 Chapter Four: Case #2 71 Integrating and Reporting an Organization’s Economic, Social and Environmental Performance: The Expanded Value Added Statement Abstract Introduction The Main Assumption: Accounting as a Change Agent Social Accounting The Expanded Value Added Statement Sustainable Building Example Income Statement The Expanded Value Added Statement (EVAS) Value of Outputs Subtracting External Purchases Value Added Ratio of Value Added to Purchases Distribution of Value Added Employees Customers Society Organization Summary of EVAS Discussion Chapter Five: Case #3 71 71 72 74 76 78 83 85 86 87 89 89 90 90 90 90 91 91 92 94 Social Accounting and Reporting for Economically Targeted Investments: The Expanded Value Added Statement Introduction Economically Targeted Investments and Fiduciary Responsibility An Introduction to Social Accounting The Expanded Value Added Model An Economically Targeted Investment: Collingwood Village Neighbourhood Amenities Collingwood Community Neighbourhood House Collingwood Community Policing Centre Case Example: Community Village Construction Operations Rental Management Condominium Management Community Centre Community Policing Centre Taxation Statement of Operations vii 94 95 99 101 106 111 111 107 112 114 114 114 115 116 116 117 117 Value Added Statement Identifying Social and Environmental Impacts Transit-oriented Development Active Lifestyle Crime Prevention Impact of Purchasing Decisions Putting it All Together Discussion 119 120 121 124 125 126 128 129 Chapter Six: 132 Comparative Cross-case Analysis, Recommendations and Conclusions Revisiting the Research Questions Question One: The EVAS in the Accounting Context Question Two: Comparing the Three Cases Common Elements across the Case Studies Varying Elements across the Case Studies Redefining Wealth: Items Included Recommendations for Accounting Education and Policy Recommendations for Further Research Epilogue: The Model in Use Conclusions and Limitations References Appendix A: Valuation Methods 132 133 134 136 137 143 145 146 148 151 174 List of Tables Table 2.1 The Value Added Statement Table 2.2 The Expanded Value Added Statement in the Context of 20 24 Integrated Social Accounting Table 2.3 Elements of the Expanded Value Added Statement Table 3.1 Calculation of Volunteer Non-reimbursed Out-of-pocket 42 57 Expenses Table 3.2 Expanded Value Added Statement for ARNOVA Table 3.3 Reconciliation of Expenditures on Audited Financial 59 61 Statements to Purchases of External Goods and Services on Value Added Statement Table 4.1 Financial Benefits of Green Buildings (per ft2 ) viii 81 Table 4.2 Income Statement Table 4.3 Financial Benefits of SBC Project A (17, 500 ft2/1625.75 m2) Table 4.4 Expanded Value Added Statement – Sustainable Building Co 83 84 88 (SBC) Table 5.1 Rates of Return, Mortgage Fund One, 1995-2004 (%) Table 5.2 Breakdown by Percentage of Expenses of Rental Buildings Table 5.3 Breakdown by Percentage of Expenses of Condominiums Table 5.4 Statement of Operations Table 5.5 Value Added Statement for Community Village, for the Ten 109 115 116 118 120 Years Ending December 31, 2004 Table 5.6: Transportation Cost Factors (in 1996 US dollars) Table 5.7 Average Cost of Property Crime to Victims, by Type of Crime 122 125 (1996$) Table 5.8 Comparison of ENERGY STAR and Non-ENERGY STAR Table 5.9 Expanded Value Added Statement for Community Village Table 6.1 Summary of Expanding the Boundaries Common to all Cases Table 6.2 Summary of Expanding the Boundaries Specific to each Case 127 130 138 140-41 List of Figures Figure 1.1 Case Study Methodology Figure 2.1 Expanded Value Added Statement in Context Figure 2.2 Graphical Representation of Inflows and Outflows of 10 14 35 Resources of the Socioeconomic Impact Statement Figure 3.1 Monetary and Non-monetary Contributions Figure 3.2 Proportion of Total Activity Hours by Volunteers and Staff Figure 4.1 Graphic Depiction of Value Added Showing Traditional and 63 64 91 Sustainable Building Methods Figure 5.1 A Graphic Illustration of Profit Figure 5.2 A Graphic Illustration of Value Added Figure 5.3: Distribution of Value Added ix 102 103 120 CHAPTER ONE INTRODUCTION Background The purpose of this thesis is to examine the limits of traditional accounting and to develop and apply an alternative accounting framework called the Expanded Value Added Statement (EVAS) This framework allows organizations to estimate their economic, social and environmental value added I locate the Expanded Value Added Statement in accounting theory, and particularly reformist accounting theory I intend to demonstrate that the Expanded Value Added Statement can be effectively applied to nonprofit, for-profit and public-sector organizations to signal an organization’s commitment to sustainability, defined here as improving quality of life and reducing environmental degradation I was introduced to this topic several years ago, when I was exposed to the idea of measuring socio-economic impacts of non-profit organizations on their communities (Richmond, 1999) This led me to delve deeper into the limitations of traditional financial accounting, and initiated my own interest in social accounting Since I am a former accountant and accounting supervisor, my background was well suited to connecting the practical and theoretical dimensions of this field Around the same time, I was invited to 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Specialist Approach; and Modified Specialist Approach (Mook & Quarter, 2003) The Generalist Approach makes the assumption that all volunteer tasks should be treated equally, and is the simplest of the three methods to apply The Specialist Approach on the other hand, targets the value of a volunteer’s role to the market value of the exact task Its strength is its precision — comparisons are made for each volunteer task and the market rate for paid work in that category is used These rates can be found in labour market data generated by government agencies The limitations are that organizations may not have access to the information needed to make such comparisons, and may lack the personnel the analysis The Modified Specialist Approach targets the rate for a volunteer task to an organization and the general skill level of the volunteer task This approach is simpler than the specialist approach and, arguably, more practical This was the method used in the Community Village case In the ARNOVA case, an additional approach called a modified opportunity cost method was considered In this method, respondents were asked what they thought a reasonable wage rate would be for someone doing what they had been doing while volunteering The ARNOVA case considered all three methods of replacement cost as well as opportunity cost, and applied the Specialist approach Valuation of Social and Environmental Factors In the Sustainable Building case, the valuation method was provided by Kats et al (2003), who reviewed the cost and benefits of 33 green buildings and compared them to the costs and benefits of traditional designs for those buildings This was the first report of its kind to fully aggregate the costs and benefits of green buildings Kats et al found sufficient data in the literature to put together reasonable estimates of the value of many green building attributes In all areas, they used conservative assumptions to come up with estimates The general approach they used was life cycle costing (LCC), which considers the costs and benefits over the life of a particular product, technology or system Using this approach, they provided a calculation in today’s dollars for 20 years of financial benefits discounted by a percent real interest rate and assuming an inflation rate of percent a year Overall, they were able to quantify the impact of lower energy, waste, and water costs, lower environmental and emissions costs, lower operations and maintenance costs, and savings from increased productivity and health Energy, waste and water savings were fairly predictable, and could be calculated with a high degree of accuracy Productivity and health benefits were relatively uncertain, but the conservative estimates that were made were judged to be reasonable In the end, the results of their study estimated that the average premium for building these green buildings was minimal, about $3-5/ft2, much less than the common perception Most of this increased cost was due to design time to integrate sustainable building practices into projects; however the earlier green building gets incorporated, the lower the cost Benefits, on the other hand, were conservatively calculated to be $48-67/ ft2 In the third case, Community Village, the social and environmental characteristics accounted for in the Expanded Value Added Statement included the impact of transitoriented development; opportunities for an active lifestyle; crime prevention measures; and the impact of making environmentally-conscience decisions in purchasing energyusing devices An excel spreadsheet was used to build a model of a master-planned community that incorporated these factors alongside economic ones over a period of ten years Details of the valuation methods follow Valuing impact of transit-oriented development The data used to estimate values for the impact of transit-oriented development were taken from two sources: census data from 2001 for an area adjacent to rapid transit was used to determine the percentage of residents who used public transit to commute to work (Statistics Canada, 2001); and the an extensive study of individual and societal transportation cost factors was used to estimate a value for this benefit (Litman, 2005) Valuing an active lifestyle To estimate the value of an active lifestyle, census data and two academic studies were used One study, Craig, Russell, Cameron, & Beaulieu (1999), found that almost two-thirds of Canadians are physically inactive A second study looked at effects of physical inactivity on coronary artery disease, stroke, colon cancer, breast cancer, type diabetes mellitus and osteoporosis, and estimated the cost of physical inactivity to the Canadian health care system (Katzmarzyk, Gledhill, and Shephard, 2000) The same study found that reducing physical inactivity by 10 percent has the potential to reduce these expenditures by percent Census data were then used to calculate this reduction in health care costs per citizen Valuing cost of crime Using data from Statistics Canada, the average direct cost of property crimes in Canada and the associated cost of pain and suffering were determined (Brantingham & Easton, 1998; Leung, 2004) Crime rate data were obtained from Vancouver Police Department Planning and Research Section (City of Vancouver, 2003) Valuing CO2 emissions and electricity costs To place a value on reducing CO2 emissions, eleven alternatives were considered, which provided rates ranging from $11/tonne to $835/tonne (in U.S dollars) The rate used in this study was an average of these rates, $45.79/tonne (Canadian) (Wigle, 2001) A CO2 equivalent emissions factor for electricity was obtained from Natural Resources Canada, as was the national average cost of electricity (Natural Resources Canada, 2006) The calculations of savings due to the use of ENERGY STAR devices were done using the ENERGY STAR Simple Savings Calculator, originally developed by the U.S Environmental Protection Agency (EPA) and Department of Energy (DOE), and modified by Natural Resources Canada for use in Canada (Natural Resources Canada, 2006) Across all the cases, data to estimate values were available from reliable sources, much of it from national statistics agencies The cases show that placing a value on items typically not found in traditional accounting is possible If assumptions are stated clearly, this work could go forward and be further refined In order to this, however, spaces have to be created to enable dialogue on these issues