A General Theory of Social Impact Accounting: Materiality, Uncertainty and Empowerment

ABSTRACT

This paper argues that social impact accounting is different from financial accounting practice in terms of two key materiality issues: the uncertain nature of its material data; the empowering processes by which materiality is established. Drawing upon some detailed empirical analysis, this paper develops a new general theory of social impact accounting to suggest that successful social impact accounting processes both give voice to service users and produce more accurate performance data. The paper advances research in both social impact accounting and in critical approaches to accounting more generally.

KEYWORDS:

• Materiality
• social impact
• accounting
• service user voice
• empowerment

Acknowledgments

I would like to thank Jeremy Nicholls for his important input into early versions of this research. I also acknowledge the helpful comments on a presentation based on this work by the Accounting Group at LSE. Specifically, I offer further thanks to Matthew Hall, Michael Power and Julia Morley for their insightful and generous comments on draft versions of this paper. In addition, I am grateful to Chris Chapman and Richard Barker for their insightful observations.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. In this research, ‘social impact’ is defined as the measurable outcomes of material changes experienced by target populations as the result of deliberative organizational action. As such, it does not include externalities or accidental consequences that are not material to target stakeholders. Such impact can also be either good/positive or bad/negative. In this context, social impact accounting represents a system that aims to capture the relative importance of outcomes and effects that are not adequately accounted for by the conventions of financial accounting and that cannot be captured in prices in conventional markets. Social impact accounting, therefore, recognizes that financial accounting alone does not provide sufficient information for effective decision-making or effective resource allocation to maximize benefits to all stakeholders. Finally, social impact accounting offers a means of rebalancing power relations in accounting settings by broadening the range of actors who determine materiality beyond those who have financial interests and resources (see Lukes’ analysis on the dimensions of power, 1974).

2. These two organizations combined in 2015 to form Social Value International.

3. The concept of ‘materiality’ in social impact accounting used here is directly analogous with financial accounting practice: namely, material information is data or evidence without which an investor cannot make a properly informed decision. See further below.

4. SROI has its critics too see Luke et al. (2013) and Maier et al. (2015).

5. In social impact accounting more generally, most reports are bespoke or highly context or organization specific making sample construction very difficult.

6. The need to demarcate materiality in terms of a binary categorization of stakeholders suggests that SROI fails to accept that there is a continuum of importance of different stakeholders. This may be a response to the uncertainty of stakeholder data.

7. Reasons for excluding stakeholders varied and included: the impact on them was considered to be too small to be measured; the impact could be measured but could not be isolated as a deadweight effect; the impact was only mentioned by one or two individuals and was, therefore, discounted; the target stakeholder group could not be reached for reasons of access or confidentiality and could not provide data.

8. These data reflect the specific costs associated with a given social impact.

9. What this means in practice is that those who create social impact – the investors in, and owners, managers and employees of, socially entrepreneurial organizations and projects – do not typically expect to appropriate the benefits of the impact for themselves. Rather, they accept that other actors – end-user beneficiaries, clients, communities or society at large – will benefit from the social impact they create. Whereas the rationale for conventional accounting and reporting systems is primarily to provide reliable information to investors/owners/managers – since they expect to appropriate the majority of the value of their inputs – the rationale for social impact accounting tends to be to collect such data from (and, then, to report relevant analysis back to) end-user beneficiaries, clients or other third parties – since they will appropriate the social impact created. This highlights a very different principle–agent relationship in social entrepreneurship compared to mainstream businesses (Nicholls 2010b). A further consequence of the separation of value creation and value appropriation is that effective social impact accounting requires close attention to exogenous data – beneficiary/client materiality judgements, inputs and accountabilities. Moreover, these are populations that are not usually prioritized in established accounting conventions that focus on providing accounting data to owners or investors based primarily on internal organizational performance data.

10. ‘Accuracy’, here, means data that most closely reflect the real changes experienced and articulated by end-user stakeholders themselves. This notion of accuracy is also inherently empowering – giving precedence to end-user voice (see further below in terms of Habermasian claims to data validity).

11. This is consistent with institutionalist critiques of financial accounting that suggest that the use of particular reporting and valuation schemes may be advocated for by powerful groups for the purpose of transferring value primarily to themselves (e.g. Perry and Nolke 2006).

12. In another important distinction, the bifurcated issue of stakeholder relevance/irrelevance that is central to materiality in social impact accounting contrasts with practice in financial accounting where materiality focuses more on the amount of relevant activity that is identified in terms of key stakeholders.

13. This desire to use SROI as an empowering mechanism shares some affinities with Grimes’ (2010) research exploring how impact measurement processes helped social entrepreneurs in sense-making within their funding relationships.

14. There will, of course, be actors who are more or less committed to acting in ways that are consistent with Habermas's framework for effective communicative action in practice. But these ideal type principles allow epistemic communities to arrive at notions of validity in social impact accounting as a form of agreed standards.