Social Impact and Challenging The ‘Sacred Cow’ of How Financial Accounts Are Presented

Changing the way financial accounts are presented to show the amount of time, money and resources that have been used by social enterprises in furthering their social and community aims could have a number of benefits, writes Alan Kay, from the Social Audit Network.

Definition: “Sacred cow” (noun) – a belief, custom, etc. that people support and do not question or criticise. Example: They did not dare to challenge the sacred cow of parliamentary democracy (Cambridge Dictionary).

Challenging “sacred cows” is a bit of a dodgy business and may get me into hot water. But I take courage from the work of John Pearce and his life’s work which was always challenging the status quo and trying to approach economic, social and community problems in a different, innovative and often pragmatic way.

I had the privilege of working with John Pearce for most of my working life. In many ways he was quite a complicated character – forming alliances, charming people, making enemies, challenging the norm… But always taking the side of the dispossessed, those with fewer advantages and the folk that are made to feel like pawns in, the supposedly “normal”, economic system.

John and the work that he did was ways ahead of his time. I recognise that this is a cliché but it is on record that he started and developed initiatives that were only appreciated much later by the established mainstream. Here are some examples:

• In the 1970/80s he proposed that community development had to include local economic development in a much more tangible way. Money, earning power, “good” work was integral to social change within communities – and he believed that local folk could take control of their own economic activity for the wider benefit. John, along with others, started the community business movement in Scotland.
• He thought that acting locally but thinking globally was crucial to avoid community and national introversion. John, again along with other like-thinking people, established COMMACT (an international network dedicated to sharing community development practices).
• In 1990 he pushed for the establishment of a fund owned and controlled by the community business movement to enable community businesses to have access to capital which was not being provided by high street banks or traditional investors. John led on the formation of the Scottish Community Enterprise Investment Fund which was active for 10 years before it was incorporated into the Charity Bank.
• He recognised that organisations with a central core purpose of social and community change had to get better at explaining and reporting regularly on their social and community impacts as well as their values, approach and credentials. John initiated the process of social accounting and audit running alongside financial accounting and audit. This moved him (alongside others) to found the Social Audit Network (SAN).

I could go on explaining some other aspects of John Pearce’s approach and work but they have been documented elsewhere and resurface annually in the John Pearce Memorial Lecture.

Essentially, John’s work often challenged the “sacred cows” of traditional economic community development. He believed that social and community enterprises/businesses should do things differently and not “ape” traditional business. He pushed for business planning to become a more relevant form of social enterprise planning; for social capital to be part of a local community enterprise strategy; and for social benefits to be recognised as having an integral and tangible value.

And this latter point brings me to an area that John worked on but never really followed through. It has remained an idea, I believe, that is yet to come. It is about changing the way financial accounts are presented to show the amount of time, money and resources that have been used by social and community enterprises in furthering their social and community aims.

Back in 2004, he referred to this in a short paper included in the Social Accounting and Audit Manual and called it the Social and Economic Impact Accounts.

What John was trying to show was that financial accounts could be presented in a way that separated out the Trading Costs from the Social Benefit Costs.

Please bear with me and I shall try to explain using an example of a community-owned shop and cafe. In the interests of illustration, I have used a table – which is rarely normal, and the figures are made up…

John reckoned that this simplified but traditional accounting of profit and loss could be recast. The re-cast shows Revenue Costs divided between Trading Costs and Social Benefit Costs. By illustration, as follows:

The “sacred cow” of financial accounting presentation has, of course, been subject to examination and change before. Academics, in particular, often re-do traditional financial accounts to take account of environmental and social change. They refer to this as “shadow accounting”.

Similarly, the Office of the Scottish Charities Regulator (OSCR) asks for charitable financial account to separate out governance from charitable activities. I seem to remember that the new economics foundation presented their accounts in their annual report some years ago, applying a similar principle to the example I outlined above the one above.

I realise that thinking along the lines John outlined, will require a lot more work by qualified accountants and their respective bodies – but hopefully, the principle could still be applied.

If social and community enterprises adopted this as a regular practice there are a number of clear benefits, namely:

• there is an openness in understanding the social and community enterprise priority towards social and community benefit;
• it can help a board of directors make more transparent decisions over resource allocation;
• it can, to a degree, help in our collective understanding of what a “social enterprise” is actually doing; as opposed to what it says it is doing;
• it can lead to better management of a social or community enterprise as it can assist a social enterprise assess just how much social benefit it can afford to engage in without compromising its financial sustainability;
• it might help when an enterprise asks for funding for its social and community aims as opposed to requesting funding for the overall expansion of its business;
• it can counter the argument for Social Return on Investment (SROI) that has received considerable support in recent years. This alternative approach requires a focus on the real costs of providing social impact rather than trying to monetise all the outcomes into an impact score; and
• it is especially useful for a social enterprise whose audited accounts show that it is only marginally viable (or even loss-making) whereas the true picture is that it is fundamentally profitable but devoting (perhaps too much) surplus to social benefit.

I admit that the Social and Economic Impact Accounts are based, to a degree, on assumptions and allocative decision-making within the enterprise. But at least there would be greater clarity and more understanding of the type of organisation it is, and how much it focuses on social aims.

Back to John Pearce. I mentioned at the start of this piece that he was “complicated”. True. But he was someone with a clarity of vision and a clear idea of how we, through working collectively together, can change things for the better. He believed that the way to do this is within your own community – and if along the way you take a poke at a sacred cow or two, so much the better…

About the author: Alan Kay has more that 30 years of experience in community development and social enterprise support in the UK and overseas. His background is in overseas development and he has lived and worked in East Africa and South East Asia attached to a variety of different organisations including HelpAge International, Action Aid and VSO. Since returning to Scotland in 1988 he has mainly worked with community-owned enterprises and social enterprises. He is an associate lecturer at Glasgow Caledonian University and assisted them to establish a Diploma and MSc in social enterprise. He is also a director of CBS Network, is the treasurer for the Community Development Journal and is a member of the Institute for Economic Development. He has worked with social accounting and audit for many years and helped to found the Social Audit Network. He co-authored the 2005 Social Accounting and Audit Manuals and more recently wrote the New Guide to Social Accounting and audit.