The Historical (And Yet Contemporary) Importance of Behavioral Accounting

The field of behavioral finance studies the behavior of the investment markets. Similarly, the field of behavioral economics studies the behavior of the global economy and the numerous national, regional, and local economies.

But what of the field of behavioral accounting? How does it resemble the fields of behavioral finance and economics? And how does it differ?

Behavioral accountants, like their colleagues in the other financial professions, focus on elements of human characteristics that can be identified in aggregate data sets. They recognize that organizations, like markets and societies, are composed of individuals who make personal decisions in often-predictable ways. Thus, because behavioral researchers can understand and predict individual decisions in various situations, they are also able to understand and predict the impact of aggregate decisions.

Accountants, though, specialize in the development of organizational reports that describe the conditions of organizations. Internal and external users of their reports rely on them to make important decisions that impact the well-being of those organizations. Thus, at times, accountants feel inherent tensions between the goals of “measuring and reporting data accurately and objectively” versus “measuring and reporting data that persuades the user to make decisions that help the organization.”

Individuals study to become public accountants to learn how to implement measurement and assurance procedures in support of the first goal. Separately, they study to become behavioral accountants to learn how to support the second goal. These goals overlap, but they are not mutually exclusive. In certain situations, they are perfectly aligned. In other situations, though, they have little in common, and they may even conflict.

A Controversial Example of Behavioral Accounting

A prime example of controversial behavioral accounting is commonly known as “greenwashing” in sustainability circles.1 Organizations cherry-pick data that appear to portray them as responsible guardians of the environment, and then present that data to persuade readers that they are responsible stewards of the natural world.

Volkswagen’s notorious collection of falsified emissions testing data is an obvious and egregious illustration of greenwashing behavior.2 Other illustrations are more subtle in nature, generating healthy debates over whether the content is misleading at all.

Consider, for instance, the pledge that was made by E. Neville Isdell, Chairman and CEO of The Coca-Cola Company. In 2007, he declared that “Our goal is to replace every drop of water we use in our beverages and their production.”3

On the one hand, the firm produced data that indicated the successful achievement of that goal.4 But on the other hand, investigative reporters have noted that “… ‘every drop’ includes only what goes into the bottle. The company does not count water in its supply chain — including the water-guzzling sugar crop — in its ‘every drop’ math.”5

Indeed, a public accountant may be able to provide assurance that the “drop for drop” phrase is (technically speaking) an accurate description of Coca-Cola’s water utilization patterns. But a behavioral accountant may protest that the vaguely defined phrase invites selective interpretation.

A Universally Admired Example of Behavioral Accounting

Ben & Jerry’s provides a contrasting illustration to the controversial food and beverage example of Coca-Cola’s environmental accounting practices. The ice cream manufacturer is often credited with producing the world’s first Corporate Stakeholder report (i.e. Integrated Report) more than two decades ago.

Using an internally developed proprietary format that the firm called Social & Environmental Assessment Reports (SEARs), Ben & Jerry’s published sustainability data on its web site for many years until concluding the practice in 2018.6 The reports employed colorful graphic imagery to express its core values, its focus on its social mission, its multiple year planning processes, its goal setting practices, and its outcomes. It also hired an independent public accounting firm to prepare annual independent review reports on the information.

The playful graphics, the earnest social messaging, and the metrics all served to reinforce the impression of Ben & Jerry’s as a socially conscious firm that made business decisions in support of the public interest. The behavioral impressions that were produced by the SEAR Reports undoubtedly supported the decision by Unilever to purchase the firm on friendly terms.

From The Past To The Future

Why did Abraham Lincoln begin his 1863 Gettysburg Address7 by noting an event that occurred “four score and seven years ago,” instead of simply beginning with the phrase “in 1776”? He must have known that his audience would have leaned into the arithmetic calisthenics of computing the year, thereby placing them in an appropriate frame of mind to focus on his intellectual argument about the war’s threat to democracy.

And why did he end his Address by vowing to protect the “government of the people, by the people, for the people”? Why didn’t he simply vow to protect “democracy”? Once again, he must have anticipated that the repetitive rhythmic triadic cadence would be more memorable to his audience. It’s also why Martin Luther King repeated “I Have A Dream” nine times in his immortal address, and “Free At Last” three times at the very end of the speech.8

Lincoln and King both knew that the levels of the persuasiveness of the information that they conveyed to their audiences were just as important as the objective validity of their logical arguments. Such knowledge continually inspires today’s behavioral accountants to redefine traditional profitability measurements into more esoteric metrics like Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Adjusted Consolidated Segment Operating Income (ACSOI).9

From Abraham Lincoln to the Chief Financial Officer of Groupon, the principles of behavioral accounting have been widely used to influence the decisions of stakeholders. Indeed, it is not sufficient for an accountant to simply “get the numbers right.” It is also important for an accountant to “persuade the user of the numbers to behave in a desirable manner.”

1. For a concise scientific definition of greenwashing, see Scientific American’s “How Can Consumers Find Out If a Corporation Is "Greenwashing" Environmentally Unsavory Practices?” It appeared in the publication’s Earth Talk column on June 29, 2013; it is available at https://www.scientificamerican.com/article/greenwashing.

2. For concise coverage of greenwashing and the VW scandal, see Columbia University’s “VW Scandal Just the Tip of the Greenwashing Iceberg” It appeared in the Marketing section of the University’s online publication Ideas and Insights on October 23, 2015; it is available at https://www8.gsb.columbia.edu/articles/ideas-work/vw-scandal-just-tip-gr....

3. Isdell and other representatives of Coca-Cola declared this goal in many venues. See, for instance, coverage of Isdell’s speech at the 2007 Annual Meeting of the World Wildlife Fund. The WWF’s article “The Coca-Cola Company Pledges to Replace the Water it Uses in its Beverages and Their Production” was published online on June 5, 2007; it is available at https://www.worldwildlife.org/press-releases/the-coca-cola-company-pledg....

4. As of June 3, 2020, Coca-Cola continues to publicly declare that “We promised to return 100% of the water we use to make our drinks. We met that goal and continue to regenerate more water than we use each year.” See https://www.coca-colacompany.com/sustainable-business/water-stewardship.

5. The Verge published the article “Coke Claims To Give Back As Much Water As It Uses. An Investigation Shows It Isn’t Even Close” on May 31, 2018. It is available at https://www.theverge.com/2018/5/31/17377964/coca-cola-water-sustainabili....

6. SEAR reports for 2006 through 2018 are available at https://www.benjerry.com/about-us/sear-reports.

7. The National Park Service publishes a complete copy of the brief address at https://www.nps.gov/abli/learn/education/lincoln-gettysburg-address.htm.

8. The Martin Luther King, Jr. Research and Education Institute at Stanford University publishes a complete copy of the lengthy speech at https://kinginstitute.stanford.edu/king-papers/documents/i-have-dream-ad....

9. Although EBITDA is utilized by many financial analysts, ACSOI is a relatively rare metric that gained notoriety when it was utilized by GroupOn during its “high flying” valuation period. CNN Money, for instance, published the article “Groupon updates IPO filing, admits it's unprofitable” on August 10, 2011; it is available at https://money.cnn.com/2011/08/10/technology/groupon_accounting/index.htm.