Management Accounting

by | Sep 5, 2025 | Economics & Finance Insights | 0 comments

Management Accounting

ACCO 1095

Introduction

The concept of sustainability emerged in 1987 in a report named “Our Common Future” (Brundtland Commission,1987) which was started by the United Nations. The report stated that “sustainable development is development which meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Building on this foundation, the concept of sustainability reporting emerged as a means for companies to disclose accurate and transparent data about their economic, environmental, and social performance. Heemskerk et al (2002) defined it as issuing reports of companies’ activities on the above dimensions to both internal and external stakeholders. The emphasis on the disclosure of accurate data towards sustainable development was also highlighted by Agama & Zubairu (2022).

This essay explores development of sustainability reporting, highlighting the significance in addressing morality which traditional accounting system neglected. Furthermore, it will discuss the rise of sustainability reporting as an increasing demand for transparency and accountability. Lastly, it examines whether sustainability reporting brings back morality into accounting by taking BP Deepwater Horizon Oil Spill as an example.

Traditional Accounting Systems: Limitations in Addressing Morality

Traditional accounting systems, despite being essential in measuring the financial metrics of the company, fall short in reporting the impact of their operations in subjective and moral aspects. In other words, these systems primarily focus on financial outcomes such as profits, costs, and the efficiency. They are limited to account for the ethical implications of business decisions (Gray,2007). Moreover, the extensive focus on the financial aspect of companies often disregarded the environmental issues, and social matters were considered the responsibility of the public sector. (Laine et al., 2021)

The ‘Enron Scandal’ illustrates how traditional accounting systems that focused on financial metrics failed to adhere to ethical standards leading to a remarkable downfall in history. When the scandal was revealed in October 2001, it eventually led to the bankruptcy of the company. It used mark-to-market (MTM), a revised traditional and cost accounting method to hide its losses and debt from the investors and creditors (Li, 2010).

The American energy-trading company based in Houston, Texas was the world’s largest audit and accountancy partnership. In late 2001, the company handled 25% of energy trading in the United States. It transformed from being a gas pipeline operator to a financial intermediary, and its annual revenue surged from $13.5 billion in 1991 to more than $100 billion in the year 2001 (Petra & Spieler, 2020). However, in the mid-2000s, the stock price dropped from $90 per share to $1 per share at the end of 2001, resulting in the shareholders’ loss of about $11 billion. Later it suffered the largest bankruptcy in American history, running into losses of up to $586 million (Li, 2010).

The main cause of the scandal was a lack of truthfulness in reporting the health of the company. They used SPEs (Special Purpose Entities- a set of assets as collateral) to hide the debt and losses of the company from the stakeholders. Accounting rules allow the company not to report the SPEs if the independent party has at least 3% of the SPEs assets. Enron guaranteed their bank debts by using SPEs as their collateral it enabled them to convert loans and assets into revenue. Also, it transferred the stock to SPEs giving them additional assets. However, the liabilities owed were not reported in the financial statements. In turn, the SPEs were in short debt when the stock price plummeted (Benston & Hartgraves, 2002; Li, 2010).

Another tool used was Mark-To-Marketing, where the company recognised the present value of future cash inflows of a long-term contract, and the costs associated with it were expensed. Furthermore, any changes in the market value of these contracts were reported later as annual earnings in the financial statements. The main challenge associated with it was estimating the present value of future cash flows of contracts which lasted 20 years (Palepu & Healy, 2003). In other words, the company by recognising all the revenues of the future cash flows, which might not happen or are not realised yet, overestimated the profits misleading the financial results. The example stated by Palepu & Healy (2003) shows how the company acknowledged its profits of over $110 million for a 20-year deal with Blockbuster Video to stream entertainment, neglecting the market demand and the practicality of the deal. Furthermore, to satisfy investor trades kept forecasting high future cash flows and low discount rates (Li, 2010).

Finally, Enron Scandal highlighted the failure to address the ethical implications, by focusing on the technicality. Their focus on making profits, lack of transparency in the financial reports, and using tools to hide their losses caused their downfall leading to insolvency. This Scandal signifies the need for moral responsibility and integrity. The emphasis on traditional accounting ruling out morality was also mentioned by Kraus, Mikes, and Véliz (2024), which highlighted that when companies focus on monetisation, they tend to overlook moral concerns, and lead to decision-making only on the monetary terms.  

Rising Trends in Sustainability Reporting

In recent years, there has been a rising interest in sustainability reporting among companies as they realise the impact of their operations on the environment. There is a greater demand for transparency, accountability, and corporate governance as the trust in the businesses declines (Dilling, 2010). Furthermore, organisations are aligning their reports with the frameworks of sustainability reporting such as the UN SDGs and the GRI frameworks. They provide global guidelines to the business and the government in integrating, people, planet, and prosperity (United Nations, 2022). Additionally, the GRI framework introduced in 1997, draws attention to the significance of stakeholder engagement and established reporting process for businesses to identify and prioritize their impact on social factors (GRI, 2020). A survey conducted by KPMG (2022), reveals the surge in the reporting from 64% in 2011 to 79% in 2022 of N100 companies, while the reporting of G250 companies remained the same to 96% from 2020.

Does Sustainability Accounting Bring back Morality into accounting?


Although there has been a rise in sustainable reporting among businesses, does this truly indicate organisations are making real progress toward sustainability? The case of the BP Deepwater Horizon Oil Spill (2010) acts as an example where sustainability reporting failed and shows that it depends on the authenticity of the company in striding towards sustainability and the reporting they have done.

The Deepwater Horizon Oil spill occurred on April 20, 2010, in the Gulf of Mexico. Nearly, 4.1 million barrels of oil were spilled into the ocean for 87 days before the well was sealed, which made it the worst environmental disaster in US history. The series of explosions led to the death of 11 workers and injured many others (Fourcade,2011). The spill caused severe environmental impact leading to contamination, including deep-ocean communities and over 1600km of shoreline. It resulted in the stoppage of fishing up to 20 million hectares in the Gulf of Mexico (Makocha et al., 2019).

Before the disaster, BP had been recognised as a top sustainability reporter aligning with GRI frameworks and received awards for its reporting. Despite presenting reports with high values and integrity between the years 2005 to 2009, it failed to reveal, important facts and opinions (Lewis, 2011). In its 2009s annual report, the company highlighted its commitment to safety and development, reducing carbon emissions, investing in renewable energy, and minimising its environmental impacts (BP, 2009). However, the reports did not disclose the risks involved in the drilling operations and they failed to implement safety measures.
The disaster exposed the reality of BP’s safety culture, as opposed to the image of sustainability and safety. News articles suggest that BP has made money-saving shortcuts that compromised safety and increased the risk (Lewis,2011; Press, 2010). However, this contradicts the commitments outlined in BP’s sustainability report (2008), where they stated new Operating Management Systems were implemented to address the safety and environmental risk.

Another root cause for the oil spill was BP’s rush to finish the well which was delayed by several weeks, as explained by Oil industry expert and geophysicist Roger N. Anderson in an interview. The decision to replace the heavy drilling mud with seawater, despite the objection of the superintendent, led to a massive explosion (Shavelson, 2025). Their decision to rush the well undermines their commitment as they promised – “no accidents, no harms to people and no damage to the environment” (BP Sustainability Review, 2008, p.10).
This case illustrates the disparity between sustainability reporting and the actions taken by the organisation. Despite company’s claims to have efforts in sustainability reports, their actions led to the disaster which contradicts, revealing significant gaps between their values and practices. The example also emphasises that sustainability reporting doesn’t necessarily bring morality into accounting, as it was used to create positive image of the company, rather than genuinely incorporating sustainability practices (Wagner et al. 2009). Moreover, Oliver Boiral (2013) emphasises that the reliability and the transparency of sustainable reports remain a question.

Conclusion

In a nutshell, Sustainability Reporting surged to overcome the pitfalls of Traditional Accounting Systems, in addressing the ethical, moral, and environmental implications as shown in the case of Enron’s Scandal. Although conceptual frameworks such as GRI and UN SDGs aim to promote transparency and accountability of their impacts, real-world scenarios like BP’s Deepwater Horizon Oil Spill showcase the difference between the reporting and the company’s behaviour in stride for it. Finally, it depends on the company’s authenticity in fulfilling the commitment outlined in their reporting.

References

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