Social and ethical accounting

Social implications of accounting decisions

A decision that improves profit may harm others:

• Local community: closing a branch or moving production abroad causes local unemployment and less spending in local shops.
• Environment: a cheaper production method may create more pollution or waste; disposal costs may be pushed onto society.
• Workforce: replacing staff with machines, cutting overtime or moving to piecework changes pay, security and morale.
• Health and safety: cutting maintenance or training saves money but raises the risk of accidents, fines and compensation claims.
• Natural resources: using non-renewable materials or water heavily may be cheaper now but unsustainable.

Stakeholders and non-financial factors

Ethics in accounting

Ethics means doing what is right, not just what is legal or profitable. Professional accountancy codes set out principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

Ethical issues in accounting include:

• creative accounting or window dressing: choosing policies or timing transactions to make results look better (delaying payments to suppliers at the year end to inflate cash, overvaluing inventory);
• misreporting profit to tax authorities or lenders;
• paying suppliers late to boost the business's own cash flow;
• sourcing from suppliers with poor labour standards.

In an evaluation, weigh the financial gain against the effect on stakeholders and reputation, then reach a judgement.

Worked example

A sole trader can save £18,000 a year by closing his town-centre shop and selling only online, making four staff redundant. Give one financial and two non-financial points.

1. Financial: profit rises by up to £18,000 a year, less redundancy costs and any lost sales from customers who prefer the shop.
2. Non-financial: four local people lose their jobs, affecting the community and the trader's reputation.
3. Non-financial: loyal customers who value face-to-face service may switch to competitors.

Answer: A judgement should weigh the saving against job losses, reputation and possible lost sales.

Check yourself

1. A business plans to move its factory to another country to cut labour costs. Which stakeholder group in the original town is most directly harmed?
   • The owner
   • The new country's government
   • Local employees and the community
   • Customers
   Show answer

   Local employees and the community. Jobs and local spending are lost.

2. At the year end a business delays paying its suppliers so that its bank balance looks higher in the statement of financial position. This is an example of
   • window dressing
   • the prudence concept
   • an error of principle
   • a provision
   Show answer

   window dressing. Window dressing makes the year-end position look better than normal.

3. Cutting the machine maintenance budget would increase profit. Which non-financial factor is most relevant?
   • The money measurement concept
   • The rate of inventory turnover
   • Health and safety of workers
   • The trade payables payment period
   Show answer

   Health and safety of workers. Poorly maintained machines risk accidents and injuries.

4. An accountant is asked by the owner to overstate closing inventory to help obtain a bank loan. Which ethical principle would be broken?
   • Materiality
   • Integrity
   • Going concern
   • Consistency
   Show answer

   Integrity. Integrity means being honest and straightforward; overstating inventory misleads the bank.

5. Explain one way an accounting decision could affect the environment.
   Show answer

   Choosing the cheapest supplier or production method to cut costs may increase pollution and waste, harming the local environment.. Link the decision to a specific environmental effect.

6. Explain why a business might reject a cheaper supplier even though it would increase profit.
   Show answer

   The cheaper supplier might use poor labour conditions or give lower quality, which could damage the business's reputation and lose customers.. Give a non-financial reason and its effect.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.