Financial accounting is failing us all. Could a gender lens help?

Our financial accounting systems were designed by white men, for white men – and those systems are contributing to an “almost sociopathic” approach to long-term wellbeing, writes our columnist. Could a gender lens help us reshape an accounting system built on empathy and that works for the majority?

Financial reporting provides information for all investors, loan finance providers and suppliers, so they can make resource decisions for a business, in the expectation of financial returns. This underpins financial accounting standards and the IFRS, which oversees these standards, argues that this approach meets the information needs of the maximum number of users. An assumption I question, as this underpinning of financial accounting has become an apologist for exploitation and human rights abuse. 

I have argued elsewhere that financial accounting contributes to inequality and climate change, as the application of these standards leads inevitably to decisions which do damage to society and the environment. Increasingly, I think this understates the problem. 

 

Read: Will accountants save the world? and more articles in Jeremy's Nicholls & Dimes series 

 

So let us be clear: financial accounting, in its current form, damages human rights – not least as it was designed by white men for white men, so until it is changed it cannot meet the information needs of the maximum number of users. Accounting needs to catch up with economics which is now recognising its historical bias. 

This underpinning of financial accounting has become an apologist for exploitation and human rights abuse

Too strong? Financial accounting underpins capital markets – apparently, in the public interest. Capital markets that have led investments in business models that have brought the world to the edge of extinction. It is financial accounting that has led to a world driven by increasing wealth, concentrated in fewer hands, using resources faster, creating climate change and social dislocation at a catastrophic rate. A catastrophe that is already real for millions of people.  

The expectation of financial returns, without a care for anything else, is the basis for financial accounting and the basis for determining profits and business valuations. It does this by externalising cost, and this sometimes means having little regard for the longer-term costs to the people that benefit from those returns – almost sociopathic. 

 

A tumour in society 

This is how we have built our global society. This is not just a dull question of accounting. This is a tumour at the heart of our society. It makes the individual pursuit of more wealth a norm, even when we have more than enough, even when there is little change to our wellbeing from having more. It has been going on since the beginning of accountancy, since the beginning of a patriarchal society, and is still going on despite changes to many other social expectations. 

And most people have not read the foundations of this patriarchal approach – the Conceptual Framework for Financial Reporting which underpins accounting standards – let alone considered it through a gender lens.

The proposed solutions to our current economic crisis are all add-ons to the system, designed to cure not prevent. Corporate reporting is seen as part of the problem and the proposed solution is non-financial reporting. We are adding additional processes, information and legal requirements to address the consequences of our approach which then serves to hide the cause even more. 

One of the key arguments is about who this reporting is for, because each one – say, investors or those experiencing the consequences of a business’s operations – will need the information that matters to them. Perhaps we can have our cake and eat it by saying that the same information will matter to a long-term investor as for the people that experience the impact. I don’t agree and it misses the point. 

The issue is the purpose for which the information is designed. Financial reporting is designed for decisions in expectation of financial returns and nothing else. What is non-financial reporting designed for? It will be for decision making – but for whom?   

 

Changing the purpose of financial reporting

We have to solve the problem at its cause and not keep adding ‘solutions’. We need to go back to basics and start again – and this means changing financial reporting, not just adding on non-financial reporting. Change the purpose to be more than financial and we can integrate the two.  

We have to change the purpose because investors – and this means current and potential investors, which means all of us – are not only interested in financial returns. We are interested in both the returns and the consequences to others. We do care. We are interested in financial, social and environmental returns. Even Adam Smith knew this. 

Secondly, because we don’t only invest cash, we invest time, energy, ideas. And business uses resources that are communally owned which can often not be replaced at the rate they are used. A communal investment for which the community gets no return.

I do agree with the IFRS that the question of what matters should be designed for the information needs of the maximum number of users. The approach to determining useful information is excellent. It is just that I do not believe that IFRS is meeting the information needs of the maximum number of users. There may be some people who are only interested in financial returns, but these are a minority, and basing an economic system on this small group is obviously disastrous. 

This is not a minor issue: it is systematic to an economic system designed by men, for men

At this point I am often told that we should be talking about investment managers, not investors per se. But investment managers are the agents of their principals, the underlying recipients of the returns, and so they should have nothing to do with determining our accounting system. 

For the UK, the Office of National Statistics (ONS) provides some useful information on share ownership which separates investors (principals) from investment managers (agents) but doesn’t have a breakdown by gender (or age, or race, or class). No real surprise given the extent to which there is so much data bias everywhere. 

But this does matter if the purpose of investing is different for different types of people, especially if it's these different people’s information needs that represents the maximum number of users. 

 

Time for gender-lens accounting?

From the 13th century through to the 19th century it was men, and especially white men in the West, who held property and made investments and who were able to develop philosophies, legal systems and technologies that allowed them to ignore the consequences of their actions. 

The 19th century is when the limited liability company takes off and financial reporting really kicks in, the point at which people can invest in companies where they do not know the owners, and where stock markets really develop. In the late 20th century society starts to alter. The need for gender equality becomes recognised in legislation, as part of the work of the United Nations.  

Not so much though in accounting. Even as late as 1999, when the Accounting Standards Board, as it was then, produced the Statement of Principles for Financial Reporting, the committee’s membership was entirely male and yet again are expected to take gender-specific approaches as if they are universal. This critical point is made so well by Caroline Criado Perez in her book, Invisible women: data bias in a world designed for men.

So now it is surely time to test the assumption that accounting meets the information needs of the maximum number of users. To ask: what would accounting look like if we took a gender lens? 

Women and younger people are more likely than men to be interested in social and environmental returns as well as financial returns. A report by the UK’s Department for International Development in 2019, Investing in a better world, found that 68% of people in the UK would likely choose sustainable investments if they could. This rose to 70% for women and 74% for millennials. 

Women and younger people are more likely than men to be interested in social and environmental returns as well as financial returns

This is because women are more empathetic than men. We’ve seen this in how countries led by women have managed the Covid-19 more effectively than those led by men. And because there is research to back this up. As one researcher writes: ‘Females may be more empathic because they really understand your predicament, your emotional state. They feel it almost under their skin.’

An accounting system that is built on empathy would, over time, make us all more empathetic, in the same way that an accounting system that has built in individual self-interest has made us all more self-interested.

Women are significantly more likely to work in care, nursing and education – sectors where people take care of others and have a direct interest in their well-being – and on which we rely. But sectors where levels of pay are notoriously low. 

What does our accounting system have to do with this?

Accounting is not interested in the consequences of investments for others but it is also not interested in the things that a business depends on, but for which it doesn’t have to pay. 

The Capitals Coalition, a global collaboration redefining value to transform decision making, supports the Natural and the Social and Human Capital protocols. These provide an approach for business to consider the impacts of the business on these capitals, and consequently on people’s wellbeing, and the dependencies of the business on these capitals. We need investments to move towards those business models which do not depend on the use of scarce and irreplaceable resources especially where this use has consequences for other people – impacts and dependencies are related. And from a business perspective a dependency on the use of these resources is a risk to that business model.  

But we need to recognise that we are also dependent on the other capitals. Covid has shown us how dependent we are on low paid jobs, predominantly being done by women. But the even bigger issue is the extent to which we are dependent on unpaid work. 

Every day the average woman puts in three more hours of unpaid domestic and care work than the average man. This result is also reflected in the 2018 International Labour Organization report on care work and care jobs for the future of decent work. The issue is also recognised within Sustainable Development Goal 5 on gender equality, with a target (5.4) to recognise and value unpaid work, supported by the ILO.  

Men’s dependency on women is deeply ignored by financial accounting

An economic system that allocates resources without accounting for such a dependency will allocate resources to business models that are only profitable because of that unpaid work. This is not a minor issue: it is systematic to an economic system designed by men, for men. Occasionally society does something about this: child benefit in the UK was originally paid direct to women; in Uruguay the Care Act provides a right to access care for all children, people with disabilities and elderly people. We tend to forget that legislation plays a fundamental role in creating markets but some, like the market for care, mainly provided by poorly paid women, is still considered something of an extra to the economy. Others, like the accounting profession, mainly highly paid men, but also dependent on legislation that requires the preparation and audit of financial accounts, are seen as key to the economy.   

As pressure on household incomes increases and there are more work opportunities elsewhere, who will end up providing this care? Will it then be seen as a financial imperative and accounted for? Perhaps we do not need to go so far as to argue that our economic system is built on men’s dependency on women, but it is important to recognise that the dependency runs deep. And it is deeply ignored by financial accounting. 

 

Shifting resources

Not only, then, are women more empathetic but they are also the people on whom our economic system is dependent. The conclusion must be that the information needs of the maximum number of existing and potential users would only be met if we considered financial returns to those users, and the consequences for and the dependencies on others. An accounting system which took these into account would have to recognise these costs in calculating profits, which would mean those investment managers would shift resources to businesses with lower negative impacts and lower dependencies.

And if anyone is this mystical long-term investor, it is probably a woman. But we would need to start accounting with a different motivation to make it real. 

This is why the information needs of current and potential investors, so clearly stated in the Conceptual Framework for Financial Reporting, is so important. We don’t know what those needs are exactly – ONS don’t have the statistics – but there is a gender wealth gap, and, in the UK, women’s pensions are only 40% of men’s, so we can take a punt. The information needs of women, especially those women on whom our economic system depends, are not being met. International accounting standards need to change to meet the stated objectives of the IFRS trustees.

There is, though, a fly in the ointment. The world’s population is getting older. The UN’s report on World Population Ageing 2019 expects 16% to be over 65 by 2050, up from 6% in 1990. As investors, the current position, only interested in financial returns, is more likely to be true for this group. That said, it may be that it’s less about age and more about future generations, and today’s millennials may retain their interest in social justice for longer. And women live longer than men. 

There are many reasons why society is becoming less communal and more individual. There is a decline in community life. But financial accounting, increasingly hidden under all those solutions, is built on individualism. 

Well, while we’re waiting for the IFRS trustees to step back and think again, we can do a few other things. We can get everyone interested in accounting and the need for a gender (and race and class) lens. We can raise awareness that accounting is ours to change, and accountants are the caretakers, not the owners (or the caregivers). Somehow, we need to excise the tumour. And not forget that the long-term investor is a probably currently a young woman. 

 

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