By Marcus Coetzee and Dr Roger Stewart, February 2008.
Nonprofit organizations readily embrace the value of financial accounting. They understand the need to keep careful financial records, have them audited independently and send copies to their investors. Because these financial statements are prepared and audited according to accepted standards, they are in turn accepted as an accurate reflection of an organization’s finances – and can indicate opportunities for improvement. The question that nonprofit organizations should be asking themselves is: “Do we account for our social impact?”
In this article we will examine why organizations need to start accounting for their social impact. We will introduce the concept of social accounting and its value to nonprofit organizations. We will also examine the different steps in the social-accounting procedure.
What Exactly is Social Accounting?
Social accounting is a structured process that organizations can follow to report on the social outcomes of their activities. It involves measuring how well organizations have applied their resources to fulfill their purpose and uphold their values as good corporate citizens. The social-accounting process also provides the basis for meaningful communication with stakeholders.
The purpose of social accounting is to:
- allow organizations to demonstrate the social impact of their activities and outputs as they pursue their purpose;
- provide investors with a credible account of how organizations have used their resources;
- facilitate engagement between organizations and their stakeholders; and
- provide organizations with information on how to improve their efficiency and effectiveness.
Social accounting is increasingly popular amongst proactive nonprofit organizations. These organizations have realized the need to provide impartial evidence of their value. They know that simply believing in their cause and providing anecdotal evidence of their successes is no longer enough to attract the wise social investor. These organizations are therefore willing to draw upon the rigour and credibility of financial accounting, and apply relevant principles to their social purpose.
A number of different models and sets of standards for social accounting have been evolving since the 1970s and appear to be converging. Organizations such as the Social Audit Network, the AccountAbility, the New Economics Foundation and Community Enterprise Consultancy & Research have led the way and trained practitioners throughout the world.
What are the Important Steps in the Social Accounting Procedure?
We have reviewed the various social accounting models and standards, and have extracted the key steps that organizations need to follow when preparing their social accounts.
1. Define organizational purpose and measurable social outcomes.
Organizations need to clearly define their purpose in measurable terms. An organization’s purpose is the reason it exists and the difference it intends to make in the world.
Unfortunately, many organizations have lost their purpose in their abstract and jargon-laden vision and mission statements. Such organizations will need to re-state their purpose in simple and clear language that highlights the exact state they plan to bring about, rather than how they intend to do it.
Organizations should then define the specific outcomes they need to achieve in order to fulfill this purpose. Be careful not to confuse outputs with outcomes (a common affliction). While outputs are the immediate product of activity, outcomes are what the outputs have created.
Consider an organization intending to reduce the levels of TB in a community. Its outputs could be the numbers of workshops it has run or the number of treatment supporters it has trained. In contrast, its outcomes could be the improved functioning of clinics or the numbers of new patients presenting with TB.
Remember: effective organizations can show they are achieving the outcomes that demonstrate their progress towards their social purpose. Organizations that cannot do this are likely to be ineffective.
2. Identify and genuinely engage with stakeholders.
Organizations need to start the process of engaging with their stakeholders, if they are not doing this already. This is an important part of the social-accounting process.
It allows organizations be good corporate citizens and act responsibly towards their stakeholders – the organizations and people who have an interest in them. These stakeholders have a right to engage with an organization about how it affects them, and whether the organization is upholding its values and duty as a good citizen. This is also in the best interest of organizations, since a failure to act responsibly places them at risk.
It also allows organizations to gather information about how the organization could better fulfill its purpose. Stakeholders see organizations from different perspectives and will frequently have information and insights unknown to the organization.
A frequent challenge is for organizations to understand their stakeholders’ expectations, and to find convergence amongst seemingly divergent expectations.
3. Develop indicators for outcomes and for the effect on stakeholders.
Organizations need to develop valid indicators for each of their desired outcomes and their effect on their stakeholders.
Outcomes’ indicators are used as a measurement of how well an outcome has been achieved, in much the same way as the consumer price index is used to indicate the “consumer” inflation rate. Indicators act as measurable representatives of complex outcomes. Using our earlier example, a “sputum” test would be a good indicator of whether a patient has TB. Likewise, the time taken to help a patient could be one of the indicators of how well a clinic functions.Organizations will also need to develop indicators for the effect they are having on their stakeholders. This is best done together with their stakeholders. For example, an indicator of how well an organization has acted responsibly towards its staff could be whether or not these staff feel appreciated.
4. Design a research procedure and methods.
In the fourth step in the social-accounting process, organizations develop the research procedure and methods for how they will prepare their social accounts. (Be mindful that it takes considerable skill to conduct good research and that research has its own strict standards.)
What is the difference between research procedure and research methods? Research procedure is the sequential process for researching how well an organization has achieved its outcomes, and how well it has acted towards its stakeholders. Research methods are the blend of qualitative and quantitative tools and sampling techniques that researchers will use to find this information.
The best research procedure and methods to use will depend on an organization’s resources (time, money and expertise.) Within these parameters, organizations should select the research procedure and methods that offer them the most depth and rigour.
Remember: social accounts prepared on a foundation of poor research are invalid and lack credibility (in other words, are not worth the effort).
5. Conduct research
In the fifth step in the social-accounting procedure, organizations or their appointed agents conduct the research, following the procedure and methods designed in the previous step. This must be done properly for it to have any value.
6. Analyze and compare findings, and determine the degree of effectiveness.
The sixth step in the social accounting procedure is for organizations to compare their research findings with the findings in their previous years’ social accounts. (There is a parallel between this process and how companies analyze their management and financial accounts.)
These findings will tell an organization what progress has made towards achieving the outcomes that demonstrate progress towards its social purpose – how effective it currently is. They will also tell an organization whether it is using its resources efficiently. Has it provided its investors (including donors) with a suitable social return on their investment?
These findings will also tell an organization how responsible its stakeholders think it has been. Has it honoured its duty as a good corporate citizen? Stakeholders who have been properly engaged are also likely to offer organizations useful advice on how they should become more responsible and effective.
These research findings are an organization’s draft social accounts.
7. Audit results.
As with financial accounting, an organization’s draft social accounts need to be audited by an independent auditor. This audit tests that these accounts were prepared according to accepted accounting standards, and reports on non-compliance, including suspicious accounting behaviour.
Organizations that did their own research must get their findings audited by an objective party with no vested interest in the organization – a specially trained auditor or independent panel if there are no certified social auditors available. This auditor or panel will verify that your organization followed social accounting standards and rigorous research practices.
Organizations that outsourced the preparation of their social accounts to an independent and credible research organization, which is familiar with the social accounting process, may get their accounts audited by that same research organization.
Depending on the audit results, organizations may need to do further research and/or revise their social accounts.
8. Share your social accounts with stakeholders.
Organizations should then share their audited social accounts with their stakeholders. This is a duty of a responsible organization. It is also a useful way of communicating with stakeholders. Organizations may also find that this improves their relationship with their stakeholders, and helps to market their successes. It proves that the organization has been responsible and can demonstrate how well it has used its resources and achieved its outcomes.
A Final Word on Social Accounting
Social accounting is most likely to appeal to those organizations that want to demonstrate the effect they are having on the world. These organizations want to be proactive and market themselves, and to build honest relationships with their stakeholders. These organizations are prepared to account for their social impact.
Marcus Coetzee is a business strategist who helps leaders to think clearly about the future.