Reparations are long overdue – accountancy must change to repair the mess it helped to create

Historic abuse of human rights is hardwired into our financial accounting systems, says our columnist. So-called solutions are merely wallpapering over the cracks: to reverse the effects of colonialism we must strip out structures that reinforce inequality.

Over the last couple of years there have been growing calls for reparations for historic human rights abuses. As recently as December 2021, NBC News asked if global powers would finally listen to the calls for reparations, quoting Olivia Grange, Jamaica’s Minister of Culture, Gender, Entertainment and Sport:

“Our African ancestors were forcibly removed from their home and suffered unparalleled atrocities to carry out forced labour to the benefit of the British Empire. Redress is well overdue.”

The idea of reparations was born out of World War One and subsequently broadened to cover crimes against Jews during World War Two. It has now expanded to cover taking land from indigenous people and enslaved people and their descendants. There has been recognition of the injustice and apologies but no material compensation. Systemic abuses of people’s human rights continue and our global economy continues to depend on unpaid and underpaid labour. Even in wealthy countries gender pay inequality persists, and is more unequal for indigenous people and for the descendants of enslaved people.   

 

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

 

Priya Lukka, writing in Open Democracy, goes further:

“… Reparations mean questioning why people are living in poverty and rejecting political decisions that underscore our acceptance of its causes. This is not just a call for monetary compensation; it’s also a demand for radical and justice-driven change. Reparations activism is organised around challenging the acceptance of today’s vast inequalities and looking at the enormous culpability of colonialism.”

It’s easy, or perhaps convenient, to forget just how much our global economic system is dependent on colonialism. The resources, often taken, rarely paid for in what would be recognised as a free market, helped establish the financial institutions on which the economic system now depends.

It’s easy, or perhaps convenient, to forget just how much our global economic system is dependent on colonialism

Although slavery was formally ended in 1865, racism did not end: segregation, the Jim Crow laws and the US prison system continued. Racial equality seems as far off now as ever. The economic system that was created on the backs of enslaved people hasn’t changed. Wealth begets wealth, especially in a system where investment managers’ fiduciary duty is to their clients for their financial returns. Profits continue to be made at the expense of people who have had no say in the decision to invest. The investment decisions made to generate financial returns inevitably generate social and environmental consequences for the investors, though perhaps fewer consequences, as yet, for their agents, their investment managers.

Our financial institutions also established the way in which capital markets now operate, and the laws and regulations that prescribe their operation. The first capital market that covered both bonds and stocks was started in Holland to finance the activities of the Dutch East India and Dutch West India companies, but other countries were quick to follow suit. All pursuing activities which were hardly arms-length transactions and where trade and the musket went hand in hand.    

Our financial institutions are still creating the same abuse that will only lead to calls for further reparations in the future. Calls that will find it equally difficult to be heard. One of the ‘institutions’ that continues to do so much damage is accountancy, an approach that perpetuates existing power structures by allowing untrammelled wealth accumulation, that calculates profit and so returns with no recognition of the consequences of those returns and assumes that the information needs of the maximum number of users of accounting information exclude those consequences. All of which may have been seen as reasonable or true in 17th century capital markets – but is not fit for purpose in the 21st century.

 

Avoiding liability

This abuse is hardwired into financial accounting. The purpose of financial accounting is to help investors (as well as providers of loan finance, and suppliers) make decisions to provide resources to businesses in the expectation of financial returns. And by default, those decisions are made without any interest in the consequences of those investments for others – consequences to people’s (now shorter) lives from working unpaid or underpaid, or as the environment is polluted and biodiversity collapses. These consequences only mean that, over time, the scale of these consequences gets so large for some groups of people that there are calls for society to make reparations. This is basically off-balance sheet financing where the liability is unlikely to be recognised or enforced simply because accounting does not require it.

Specifically the Conceptual Framework for Financial Reporting, paragraph 4.29, having defined liabilities in relation to an entity’s obligations, then defines obligation:

‘An obligation is a duty or responsibility that an entity has no practical ability to avoid.’

This suggests that an entity can avoid a moral, social or ethical duty, and therefore avoid liabilities relating to these. This is astounding. 

And yet if accounting had addressed these consequences when it was first developed and required businesses to consider and account for these consequences, many of these abuses would not have occurred, or at least not at the scale that has led to calls for reparations.

If accounting had required businesses to consider and account for these consequences, many of these abuses would not have occurred

Reversing the ongoing effects of colonialism means stripping out the structures that still reinforce the inequality and will result in future calls for reparations for abuses that are happening today, as for example has continued under the Covid-19 pandemic. And that means making changes to accounting as well. But this hasn’t happened. We continue to miss the opportunities to change accounting and as accountancy has become more complex it becomes increasingly hard to notice the fundamental problem. Not that the fundamental problem of irresponsible financial returns hasn’t been noticed, but that the current solutions leave the calculation of profit untouched and only add accretions to the financial system that further bury the problem.

 

Ignoring dependencies

We ended up with an approach to accounting that ignores consequences when we separated common law from equity law. This goes all the way back to the 13th century. Common law is the body of customary law based on judicial decisions. In England, the law of equity dealt with situations where those judicial decisions might not apply or be equitable. If you thought this was the case you had to petition the monarch. As this became too much to deal with a separate court was established, the Court of Chancery, and by the 14th century the process had been separated from the monarch.

An example of a law of equity is the law of unjust enrichment. If someone is enriched at the expense of another in circumstances that the law sees as unjust, in this situation the recipient has to make ‘restitution’. Though the language is not reparation, the result is the same. All these equitable issues, excluded from common law, became what economists now call externalities, the other consequences of doing things. Not really external to economics, or to the economy, but external to common law and its focus on contracts. It is our legislation that decides what is economic or not. Perhaps inevitably, as accounting developed, there was a focus on accounting for contracts, aligned with common law, and neither the consequences of those contracts for anyone else nor on any dependency on the commons or on unpaid labour were included. Contracts become economic; equity, or other consequences, become social or environmental; dependencies were ignored.

The damage was done. And now, instead of petitioning the monarch, we now have to petition democratically elected governments for those reparations.

 

Built on the backs of slaves

The accounting profession really took off in the 19th century with the formation of the first Institutes of Accountants, and the start of discussions to standardise practice. Beyond keeping the books, the initial focus of a professional accountant’s work was on protecting creditors, especially in the event of bankruptcy when it was important to make sure creditors were paid before the owners. Again, and understandably, the focus was on contracts and not on the consequences of those contracts for others.

The background for this growth in accounting is of course the industrial revolution, which drove the massive increase in global GDP, as pictured below. And of course a reliance on fossil fuel which has brought us to the edge of extinction.

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Leaving aside the challenges with how GDP is used as measure of progress, on the face of it, rising living standards is surely all good? Not if it’s unevenly spread: there are still roughly the same number of people living in absolute poverty (around 800 million) now as in the mid-19th century, when global population was around 1.5bn. And there are 3bn people now living on less than US$10 a day – double the total population before this increase in GDP started.

And industrialisation is only half the story. This increase in living standards came off the back of western imperialism, colonisation and slavery and was mirrored by a significant shift in the distribution of GDP.

 

Above: Distribution of share of global GDP among selected countries/regions (source: List of regions by past GDP (PPP) per capita on Wikipedia)

 

But the results are shocking.

North America, Europe and East Asia, with a combined GDP of nearly $75tn, now make up 80% of the world’s GDP in nominal terms. The US state of California alone accounts for 3.7% of the world’s GDP, which ranks higher than the UK’s total contribution of 3.3%.

This happens as a result of colonialism and slavery. Taking people and moving them somewhere else. This transfer of resources is still going on. Research in 2017 found that sub-Saharan Africa received $161bn from loans, remittances and aid but $203bn left the continent, some direct through trade, some through tax management.

In 1837 the UK government passed the Slave Compensation Act and paid out £20m in compensation payments. And yet again language reinforces the difference between contract law and equity law, between contracts and externalities. For payments relating to contracts, read compensation. For payments relating to equity, read reparations. £20m may not seem much today, but this was around 5% of GDP – and was the government’s biggest payout until the 2008 financial crash. The payments were financed by bonds which UK taxpayers only finally repaid in 2017. Enslaving people was big business. Research by Klass Ronnback, using a value-added approach, suggests that it grew from 3% to 11% of the UK economy by the end of the 18th century.

And if slavery was big business in the UK, it was even more important to the economy of the United States, and by the start of the Civil War, as much as 60% of its exports coming from cotton grown and harvested by enslaved people. As the historian Edward Baptist points out, until the beginning of the Civil War,

The slave economy of the US South is deeply tied financially to the North, to Britain, to the point that we can say that people who were buying financial products in these other places were in effect owning slaves, and were extracting money from the labour of enslaved people.”

To quote from Akala in his book, Natives: Race and Class in the Ruins of Empire:

“It wasn’t free trade or open markets but military rule, forced servitude, national monopolies and absolutely no semblance of democracy that helped modern Europe and America to develop. Racism gave slave owners the justification for an unprecedented experiment in the denial of liberty and forced servitude and this racism, far from being marginal or just a side effect, has been absolutely central to developing Euro-American prosperity.”

Not surprising then that financial accounting developed so that the cost to slaves could be ignored. With free market ideology writ large in the selective perspective of Adam’s Smith invisible hand, and a collective need to justify the level of exploitation that underpinned those markets, it is hard to see how it would have been different. In its early stages, accounting focused on book-keeping. Given the scale of economic activities that depend on enslaved people, it shouldn’t be a surprise that the practice of book-keeping developed alongside enslavement. Book-keeping was required to provide management information on sugar and cotton plantations, often for owners who were not present, and always to increase profits.

Not surprising then that financial accounting developed so that the cost to slaves could be ignored

Those owners could of course control and change enslaved people’s activities at will. And so, as Caitlin Rosenthal writes in Accounting for Slavery, “slavery became the laboratory for the use of accounting because neat columns of numbers translated more easily to life on plantations than they did to many other early American enterprises”.

The next stage, linked to the professionalisation of accounting, was a focus on creditors. The end of the slave trade, as industrialisation picked up, led to closures and bankruptcies in sugar plantations, and then in cotton as production soared and exceeded demand. This was the next big chance to address the problem and get accounting to consider consequences. But it was missed. The focus was on protecting creditors. The ICAEW,  the Institute of Chartered Accountants in England and Wales, was established in 1880 and granted a Royal Charter in part as having a public interest. The original Charter, though substantially updated in 1948, included the following statement:

‘The profession of public accountants in England and Wales is a numerous one and their functions are of great and increasing importance in respect of their employment in the capacities of Liquidators acting in the winding-up of companies and of Receivers under decrees and of Trustees in bankruptcies or arrangements with creditors and in various position of trusts under Courts of Justice as also in the auditing of the accounts of public companies and of partnerships and otherwise.’

Auditing gets a final look-in, but again this reinforced accounting’s focus on contracts and not on the consequences of those contracts.

And as the profession grew, standardisation had to be a good thing, right? Since the second world war, initiatives led by the US, UK and Canada reflecting both the concentration of the profession but also the interests of those countries have sought to standardise accounting practices, because they make financial reports comparable.

By the time the International Accounting Standards Committee (IASC) got around to thinking about standardisation in 1973, the problem of accounting ignoring consequences was already deeply embedded. The IASC was an independent private-sector organisation that sought “to achieve uniformity in the accounting principles that are used by businesses and other organisations for financial reporting around the world”. Their goals were to “formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance”.

But they have also embedded the underlying assumptions in capital markets and made them ever less visible and far less easy to address. They have casually used the phrase ‘in the public interest’ without having to ever provide evidence that this has been met, let alone met effectively.

If accounts had had to include the liability to enslaved people, or to any other people whose human rights were abused, from the start, there wouldn’t have been any profits to be made, there wouldn’t have been that shift in the distribution of global GDP. We wouldn’t be in the mess we are. 

Combine the unequal distribution of wealth – a distribution of wealth that did not arise from free markets – with accounting standards that specifically exclude the consequences of investments on others, and especially disassociate wealth inequality from those consequences, and colonialism continues to be hardwired into capital markets. And the cost of this is increasing.

Monetary compensation for enslaved people has been currently estimated at anywhere between $6tn and $14tn. And this in the context of an SDG financing gap, the amount required to meet the UN Sustainable Development Goals by 2030, now of over $3tn per annum. Some groups have been able to negotiate some compensation. The Maori people have at least negotiated settlements with the New Zealand Government. The total paid under these is $2.4bn. Not such a lot. Especially as this is the same as only one month of the subsidies that the New Zealand Government paid to support enterprise during the Covid pandemic.

Even if they were commensurate with the liability, reparations are only partly about financial transfers. Reversing the effects of colonialism means stripping out the structures that still reinforce the inequality. On this measure, leaving aside the scale of any reparations, those seeking reparations have not generally been involved in the design of reparations. If they were, this might include more substantive changes to the structures that legitimised the abuse and which continue today.

 

Whose interests?

Recently we have had another chance to fix this. The International Financial Reporting Standards Foundation (IFRS) was set up on 1 April 2001 to look after accounting standards. And now this body is going to look after “sustainability” standards as well. IFRS’s mission is “to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world”. It says that its work “​​​​​​serves the public interest by fostering trust, growth and long-term financial stability in the global economy”.

This is relatively new. But it built on earlier work on accounting standards and unfortunately is built on, and continues to reflect, our history and an approach that drives inequality and environmental destruction. So much for acting in the public interest.

IFRS have set out their approach to the public interest which states:

“IFRS strengthens accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Our Standards provide information that is needed to hold management to account. As a source of globally comparable information, IFRS is also of vital importance to regulators around the world.”

As ever, it is what it doesn’t say that matters. Ironically information is missing from this statement that would matter to users.

Accountable for what?

Accountable for financial returns but not for the consequences of those returns.

While it is understandable that accounting has developed as it has, it must be asked – surely by those sitting on the IFRS Council or the IFRS Monitoring Board – is public interest really being met and exactly whose interests are being served? The IFRS Monitoring Board was set up to provide a formal link between the trustees and public authorities, though limited to capital markets’ authorities, and is ultimately responsible for setting the form and content of financial reporting.

And, if not asked by those bodies, then surely by the national governments (and the EU) that nominate people to the International Organisation of Securities Commissions (IOSCO). Ironically the performance of the IFRS is never tested in the same way as the users of their standards are tested for the financial performance. Are accounting standards ensuring that capital markets deliver wellbeing for the public at the rate the public can reasonably expect? If IFRS is going to be responsible for both financial returns and sustainability disclosures, the governance needs rethinking.

Any reflection on how wealth inequality has increased and how colonial patterns of trade and finance persist would have to conclude that capital markets operate in the interests of the few with a trickle-down to the many. Not exactly in alignment with inclusive growth. We need an accountability framework that holds capital markets accountable for creating wellbeing, where it is recognised that financial returns can both contribute to or reduce that wellbeing.

 

Fixing for the future – and repairing for the past

The increasing recognition that something needs to be done has led to the current boom in environmental, social and governance (ESG) investing and the creation of the International Sustainability Standards Board (ISSB). But, yet again, the chance to go back to the drawing board and change the fundamentals has been lost. There could have been a wider discussion as to whether the assumption that financial returns, and nothing but those returns, represent the interest of the maximum number of investors. Instead, we have added another layer and we continue to wallpaper over the cracks, while all the time arguing that this incremental approach is the only way forward and that anything else is simply naïve.

Say that to the women who fought for the right to vote, for the men and women who fought for union representation, for the people who have died fighting apartheid. Even after emancipation, in the UK, encouraging trade union activity, activity to ensure an equitable distribution of value, activity to protect employees’ human rights, were all still punishable by transportation to Australia.

The chance to go back to change the fundamentals has been lost. Instead, we have added another layer and we continue to wallpaper over the cracks

Again, perhaps not surprising – given financial markets and accounting are now so wedded together that it becomes hard to see any alternatives. But we need to change how we see and calculate ‘returns’. We can fix for the future but perhaps we also need a principle to repair for past financial gains, recognising that business models are continuing to make money on the back of enslaved people, to ensure restitution for unjust enrichment.

The problem is that if we want to move to a world that is sustainable, where resources are invested in ways that account for trade-offs being made between positive and negative impacts as well as between financial returns and the consequences for other people’s lives, we are going to have to live in a very different world, and we are going to have to want that world.

The sustainable development index gives us a clue as to what this might look like. This index is a mix of the Human Development Index, climate change data and materials use data. Those ranking most highly are those that achieve relatively high human development while remaining within or near planetary boundaries. Of the top seven countries, five are in South America – Costa Rica, Panama, Peru, the Dominican Republic and Cuba.

There are many issues that the index doesn’t capture. There are other SDGs which would need to be included, and what is positive would have to be assessed in the context of planetary thresholds and social norms (social norms including, for example, racial equality).

But the key point is that the richest countries’ use of materials is not sustainable, and access to those materials depends on markets developed on the back of colonialism, materials that are accessed at costs that do not recognise the dependency on colonialism, let alone current dependencies on workers whose labour is neither decent nor equitable, and who are often women and often unpaid. Take all this away and it would be a different world. In the UK, the Commons Environmental Audit Committee has recently argued for a tax on carbon footprint of imports. ICAEW played a key role in the formation and development of the Capitals Coalition, which has created protocols for accounting for these consequences.

It is possible for us to have that sustainable world, but we need to have a public discussion about changing the basis of financial accounting if we’re going to get there.

  • Jeremy Nicholls is the assurance framework lead for the UNDP SDG Impact Standards and an ambassador for the Capitals Coalition.

 

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