Co-Operative Accounting: Purpose and Challenges Co-Operative Accounting: Purpose and Challenges

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Submission Requirements Journal of Co-Operative Editorial Guidelines t Article Title Accounting and Reporting t Author Details (see below) and Biographies Submissions to the Journal of Co-operative t Acknowledgements Accounting and Reporting (JCAR) are made t An Abstract via email to the editor ([email protected]). t Keywords (see below) Co-operative Accounting: Review Process Author Details - Details should be supplied on the Article Title Page including: Purpose and Challenges Each paper is reviewed by the editor and, if it is judged suitable for this publication, it is t Full name of each author then sent to at least two independent referees t Affiliation of each author, at time research for double blind peer review. The decision for was completed publication is made by the editor in consulta- t Where more than one author has contrib- tion with these reviews. uted to the article, details of who should be Introduction the reality that they were never-the-less at contacted for correspondence The purpose of this paper is to reflect on the risk because they were not redeemable if the Copyright t E-mail address of the corresponding author need for a systematic approach to co-operative financial health of the co-operative was weak t Brief professional biography of each author accounting, what we have achieved to date and that if a co-operative were wound up due Articles submitted to the journal should not and to suggest a preliminary map of where we to weak financial health the member shares have been published before in their current or Abstract - Maximum is 250 words, the Ab- need to go and what needs to be done to get would only be redeemed after all creditors substantially similar form, or be under consid- stract should concisely summarize the article. there. were paid. eration for publication with another journal. Keywords - Please provide up to 6 keywords on Authors submitting articles for publication the Article Title Page. In the late 1990’s the idea that co-operatives Co-operatives never-the less accepted the rul- warrant that the work is not an infringement Headings - Headings must be concise, with a might require a rethinking of how they did ing and began adjusting their balance sheets. of any existing copyright and will indemnify clear indication of the distinction between the their accounting was not a point of discussion. Prior to that point one could look at almost the publisher against any breach of such hierarchy of headings. The preferred format is Accounting was accounting. Accounting in any co-operative balance sheet in Canada and warranty. It is the author’s responsibility to for first level headings to be presented in bold a co-operative was seen as the same as ac- find it quite similar to most other co-opera- ensure that all necessary permissions have format and subsequent sub-headings to be counting for any other organization. When tives balance sheets. Share capital was shown been acquired. presented in medium italics. the Canadian Institute of Chartered Accoun- as member equity. After 1998, co-operative Notes/Endnotes - Notes or Endnotes should be tants, Canada’s accounting standards board, balance sheets began to vary. Approaching Manuscript Requirements used only if absolutely necessary and must be announced, in its 1998 Handbook that co-op- a lender, especially one with little experience identified in the text by consecutive numbers, erative share capital could not be regarded as with and/or little understanding of co-op- Format – All submissions should be a Word enclosed in square brackets and listed at the equity (CICA 1998) co-operatives found them- eratives, had become a more daunting task. document end of the article. selves in an uncomfortable position. Their Some did not change their balance sheets Figures - All Figures (charts, diagrams, line balance sheets now had to show share capital and others added notes. Some, with creative Article Length – Articles should be between drawings, web pages/screenshots, and photo- not as equity but as debt. The ruling reflected accountants came up with creative variations. 5000 and 12000 words in length. graphic images) should be embedded in the the judgment that co-operative shares did One farm co-operative separated share capi- document and numbered sequentially. not have the same characteristics as common tal held by members who had more than five Article Title – A title of not more than ten Tables - Tables should be embedded in the shares in an investor owned company and that years to go before retirement age, from shares words should be provided. document and numbered sequentially. they should not be regarded as equity. The belonging to members with five or less years Article Title Page – An Article Title Page References - References to other publications biggest deficiency was that they were redeem- to age 65.1 One was counted as equity and the should be submitted alongside each individual must be in Harvard style and carefully checked able at par value by the cooperative. It ignored other as a liability. article, which should include: for completeness, accuracy and consistency. 1 United Farmers of Alberta (1998-2001) Financial Statements, UFA

4 Journal of Co-operative Accounting and Reporting, V1, N1, Summer 2012 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 5 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges

The ruling did not recognize that the fun- eratives. By and large the standard approach publically traded companies, is paramount. should be treated equally. Past treatment of damental difference between a co-operative to accounting is a set of measurement tools Mutual and pension fund investors are not co-operatives has tended to be biased. Pro- business and an investor driven business, the whose main thrust is to account for how effi- asking about long-term returns whose driv- grams and tax and other incentives have purpose of the business, was dramatically dif- ciently a business uses it resources to maxi- ing forces they are not in a position to know tended to favour investor owned business. ferent and that this fundamental difference in mize its return to its investors – its return to or understand, they are asking for returns in This likely stems from the fact that investor purpose changed the nature and role of capital capital. At worst standard accounting distorts the next quarter and the fund managers who owned firms are, for the most part owned by as well as what constituted ‘risk’. Returns to co-operative’s business decisions away from want their money respond, for the most part, the wealthy, and the wealthy have better access capital in a co-operative are not the purpose their purpose, meeting member and com- by seeking the same short term returns in to government and to the courts. It is also true of the business and this means the role and munity need, and fails to reflect the values response to market pressure. because in the current global economy, co-op- dynamics of capital in a co-operative are dif- and principles that came with the choice of eratives are islands (perhaps large islands but ferent. Member shares might be refundable the co-operative business model. Almost the Modern financial market dynamics militate still islands) in a sea of investor owned firms. upon demand unless the business would be entire body of accounting practice, as we now against taking a ‘long term view’. With com- This has left many co-operative activists call put in financial difficulty, but as many co-oper- know it, is focused on how an investor-owned puters programed to detect and react to sec- for a level playing field. If only, they wish, we ative members could testify, their share capital company uses its resources to achieve its goal, ond by second changes and the susceptibility could be treated equally. was indeed at risk. Unless the co-operative maximizing shareholder value and ensuring of markets to rumors and potentially very was doing well, the fiduciary responsibility that reporting to shareholders on the use of lucrative speculation, the ‘long term view’ But it can be argued that a level playing field, of the board prevented returning share value resources is clear and honest. is a fragile boat that is easily swamped. The if it consists of the same rules for both, will upon request. If a co-operative were to be- issue around what constitutes equity from an always be a playing field designed for investor come insolvent the share capital had last claim As a business structure or ‘technology’ the accounting perspective remains important to owned firms and will act against the interests of on the assets. The comparison to investor investor-owned corporation has only one co-operatives. There are issues as well around co-operatives. Such a ‘level playing field’ may owned common shares was more complicated purpose and one core goal – to maximize the raising capital. If a co-operative seeks to raise be equal but it will not be fair. If, for example, since the shares are not tradable. Capital in a return to invested capital. That is what the in- funds through an issue of preferred shares for a teacher had a class where half the students co-operative was clearly different but account- vestor business community calls “the bottom sale to members should it be treated the same were blind and half were deaf, teaching by writ- ing rules were formulated on considerations line.” There are, to be sure, boards and manag- as a share issue by an investor owned firm? Is ing everything on the board without speaking based on treating it the same as if it were in- ers of investor owned firms who insert ‘other’ the relationship of a co-operative member to would treat all the students equally, but surely vestor owned shares. A considerable interna- goals based on their personal values, but their the co-operative the same as the relationship not fairly. Why? Because the children are tional literature discussing the issue emerged scope of action is limited and if the pursuit between an investor and an investor owned different just as co-operatives and credit unions over the following decades, in which the Saint of those ‘other’ goals is perceived to interfere firm. A clear and strong logical case can be are different in purpose and structure. Co- Mary’s Centre of Excellence in Accounting and with maximizing the rate of return on capital made that the relationship is fundamentally operatives and investor owned business have Reporting for Co-operatives played a strong managers or boards are removed and/or the different and that the purpose of a co-operative different characteristics ad behaviour. role. But this issue was simply the tip of the flow of capital to them is reduced and goals ad- business poses very different and arguably proverbial iceberg. justed to meet investor-owner expectations. In lower risk. What would be the ‘appropriate’ Let us consider the position of credit unions in an investor-owned company pursuit of goals regulation for co-operative preferred shares? the USA when the mortgage backed security The Need for Co-operative Accounting other than the core goal, maximization of What if the shares are being purchased by bubble burst. Credit unions did not produce return on invested capital, is a deviation from another co-operative? Clearly some regula- the ‘toxic paper’. They behaved differently. Accounting is “How a business accounts for the purpose of the business. tion should be in place but a clear case can be They bought some of it (with the approval of the use of its resources to achieve its goals.”2 made that the regulation should be different regulators because it was rated triple A by the If we accept that as a reasonable definition It might be argued that the ‘other’ goals would based on the nature of the risk being different. rating agencies owned by the banks) but they then it would follow that an accounting ap- contribute to the long-term return and there- Another issue based in accounting. did not create it. In addition, credit unions proach designed for investor owned business fore be inextricably linked to maximizing had been much more prudent in mortgage does, at very best, an imperfect job for co-op- return. The reality of today’s financial markets Most government regulators believe that lending. They were after all lending the funds is that the pressure for short-term return, for co-operatives and investor owned business of members who owned them to other mem- 2 Brian Murray, Co-op Atlantic, Interview, October, 1998

6 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 7 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges bers who also owned them. Credit union of resources to achieve other goals that are he achieves the measurable goal and, while s/ mean protecting resources used to achieve mortgage defaults ran between 10-15% during co-equal. This implies an additional require- he may make valiant efforts to achieve others, a higher rate of return on invested capital the Great Recession not because there were ment: co-operative managers need to have if they are seen as attractive. Neither the board and cutting the use of resources for the other a lot of ‘bad’ mortgages issued but because a set of tools, not just to measure the use of nor the manager will have any solid sense of goals. It often means cutting goals related to many members had lost their jobs. This is not resources used to achieve multiple goals, but whether or not they are successful. In the education or community impact or co-opera- to claim that all credit union mortgages were a set of tools to assist them to keep multiple absence of a sense of achievement in relation tion among co-operatives, not because they do perfect but that the reasons and forces driving goals or ‘bottom lines’ in balance. They also to non-financial goals both board and manage- not contribute to the long term goals or finan- credit union and bank defaults are different. need, as part of that wider set of tools, a subset ment interest in those goals is more likely to cial health, but because we do not know their of tools to determine what constitutes ‘finan- wane. Evidence may be gathered to support impact. In many co-operative businesses this The regulatory response was interesting. An cial health’. the efforts made but there is at least the pos- has meant cutting the other goals that distin- unfair level playing field was applied. Even sibility that, the poorer the effort or achieve- guish a co-operative from an investor owned though credit unions were negotiating with If the system of accounting identical to that ment, the more a manager will be motivated business. This means, that on a periodic members to keep them in their homes when- used by investor owned corporations is the to produce mounds of ‘soft evidence’ to offset basis, credit unions and other co-operative ever possible and many banks were simply sole tool available to co-operative managers, it declining interest, effort and performance. businesses reduce the resources devoted to clearing their balance sheets, the regulators is clearly a source of distortion of the purpose those goals that make them different. If they wanted a 30% write down on all bank and of the co-operative business and leaves co-op- There is another important consequence. cease to be different what would be the case credit union mortgage holdings. Credit erative managers without the complete set of Every co-operative must have as a goal that the for their existence? unions were treated equally but unfairly. They tools they require. In fact he or she is left with co-operative be financially healthy. Bankrupt were treated as if the purpose of the business accounting tools that measure how well the co- co-operatives do not meet member need. That From a thoughtful co-operative business were the same and as if risk were the same operative is using its resources to maximize its is very different from maximizing return. The perspective this cutting process, over a period and as if their behaviour was the same. Regu- return on investment. They are thus equipped co-operative’s financial health would surely of time, repeatedly weakens the co-operative latory response was blind to reality. to measure a goal that is foreign to the busi- include accumulation of the financial capacity nature of the business and makes it resemble ness but lacking tools to determine what to invest in technology, plant, equipment and more and more closely its investor-owned I Accounting for Co-operative Goals constitutes financial health for their type of co- skills to meet evolving and changing mem- competitors. Co-operative managers and operative. Using these tools in a co-operative ber need. The definition of financial health boards are then left wondering why ‘members While the overriding purpose of investor undermines the co-operative business purpose will have to vary from co-operative to co-op- don’t have the loyalty they used to have’. The owned firms is to maximize shareholder value, and measures performance as if maximizing erative but there needs to be a core analytical result can often be a weakened co-operative credit Unions and other co-operatives, in con- return was the true purpose of the business. approach. While it may exist in some co-op- business that attracts less and less member trast, exist for other purposes. To be sure they erative somewhere, or it may exist in bits and patronage and investment. A credit union or seek financial health but their core purpose is If a manager is told by his board, ‘We have four pieces in many co-operatives, it has yet to be other co-operative business that is not differ- to meet member and community need. They key goals for you to achieve but we only mea- systematically developed and studied. ent from its investor-owned counterpart is are also expected to contribute to the com- sure one,’ the outcome is predictable. In such simply not needed and of little use to its mem- munity and society by operating in a manner circumstances a manager will ensure that s/ The onset of a business downturn or recession bers or society. consistent with co-operative values and prin- will force cuts in the use of what are now more 3 The argument is made by some that they can give examples of ciples. If a co-operative is to be successful it co-operatives that do not live up to the values and principles and scarce resources. When cuts in use of re- But is the co-operative identity of value in the must meet this wider range of goals.3 Man- examples of investor owned firms that operate in a manner that sources are necessary, from which goals would sense that people regard it as attractive. If a respects values while seeking maximum profits for sharehold- agers then logically need to account for how ers. In the co-operative case the structure, values, principles and the resources most likely be cut? The logical co-operative lost its identity would members they use resources not only for the financial purpose push boards and management to behave in compliance. response is to cut the use of resources where and clients or customers see it as having lost The purpose of an investor owned firm pushes board members health of the business (an essential element of and managers, only to produce maximum return. If an investor their effectiveness is unmeasured and ‘less something of importance? In 2012 the Cana- meeting other goals – bankrupt co-operatives owned firm does behave in an admirable manner it is in spite of certain’ – to cut from where it does not matter. dian Co-operative Association commissioned the legal purpose. In such a case the board and management or credit unions do not meet member needs) deserve enormous credit for their performance. When co-operative In the case of a co-operative business, using a survey of opinions held about co-operatives. but must account as well for the efficient use fail to live up to their purpose, values and principles, they have only standard accounting tools, this would (CCA 2012) It had the following findings: little excuse.

8 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 9 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges bers who also owned them. Credit union of resources to achieve other goals that are he achieves the measurable goal and, while s/ mean protecting resources used to achieve mortgage defaults ran between 10-15% during co-equal. This implies an additional require- he may make valiant efforts to achieve others, a higher rate of return on invested capital the Great Recession not because there were ment: co-operative managers need to have if they are seen as attractive. Neither the board and cutting the use of resources for the other a lot of ‘bad’ mortgages issued but because a set of tools, not just to measure the use of nor the manager will have any solid sense of goals. It often means cutting goals related to many members had lost their jobs. This is not resources used to achieve multiple goals, but whether or not they are successful. In the education or community impact or co-opera- to claim that all credit union mortgages were a set of tools to assist them to keep multiple absence of a sense of achievement in relation tion among co-operatives, not because they do perfect but that the reasons and forces driving goals or ‘bottom lines’ in balance. They also to non-financial goals both board and manage- not contribute to the long term goals or finan- credit union and bank defaults are different. need, as part of that wider set of tools, a subset ment interest in those goals is more likely to cial health, but because we do not know their of tools to determine what constitutes ‘finan- wane. Evidence may be gathered to support impact. In many co-operative businesses this The regulatory response was interesting. An cial health’. the efforts made but there is at least the pos- has meant cutting the other goals that distin- unfair level playing field was applied. Even sibility that, the poorer the effort or achieve- guish a co-operative from an investor owned though credit unions were negotiating with If the system of accounting identical to that ment, the more a manager will be motivated business. This means, that on a periodic members to keep them in their homes when- used by investor owned corporations is the to produce mounds of ‘soft evidence’ to offset basis, credit unions and other co-operative ever possible and many banks were simply sole tool available to co-operative managers, it declining interest, effort and performance. businesses reduce the resources devoted to clearing their balance sheets, the regulators is clearly a source of distortion of the purpose those goals that make them different. If they wanted a 30% write down on all bank and of the co-operative business and leaves co-op- There is another important consequence. cease to be different what would be the case credit union mortgage holdings. Credit erative managers without the complete set of Every co-operative must have as a goal that the for their existence? unions were treated equally but unfairly. They tools they require. In fact he or she is left with co-operative be financially healthy. Bankrupt were treated as if the purpose of the business accounting tools that measure how well the co- co-operatives do not meet member need. That From a thoughtful co-operative business were the same and as if risk were the same operative is using its resources to maximize its is very different from maximizing return. The perspective this cutting process, over a period and as if their behaviour was the same. Regu- return on investment. They are thus equipped co-operative’s financial health would surely of time, repeatedly weakens the co-operative latory response was blind to reality. to measure a goal that is foreign to the busi- include accumulation of the financial capacity nature of the business and makes it resemble ness but lacking tools to determine what to invest in technology, plant, equipment and more and more closely its investor-owned I Accounting for Co-operative Goals constitutes financial health for their type of co- skills to meet evolving and changing mem- competitors. Co-operative managers and operative. Using these tools in a co-operative ber need. The definition of financial health boards are then left wondering why ‘members While the overriding purpose of investor undermines the co-operative business purpose will have to vary from co-operative to co-op- don’t have the loyalty they used to have’. The owned firms is to maximize shareholder value, and measures performance as if maximizing erative but there needs to be a core analytical result can often be a weakened co-operative credit Unions and other co-operatives, in con- return was the true purpose of the business. approach. While it may exist in some co-op- business that attracts less and less member trast, exist for other purposes. To be sure they erative somewhere, or it may exist in bits and patronage and investment. A credit union or seek financial health but their core purpose is If a manager is told by his board, ‘We have four pieces in many co-operatives, it has yet to be other co-operative business that is not differ- to meet member and community need. They key goals for you to achieve but we only mea- systematically developed and studied. ent from its investor-owned counterpart is are also expected to contribute to the com- sure one,’ the outcome is predictable. In such simply not needed and of little use to its mem- munity and society by operating in a manner circumstances a manager will ensure that s/ The onset of a business downturn or recession bers or society. consistent with co-operative values and prin- will force cuts in the use of what are now more 3 The argument is made by some that they can give examples of ciples. If a co-operative is to be successful it co-operatives that do not live up to the values and principles and scarce resources. When cuts in use of re- But is the co-operative identity of value in the must meet this wider range of goals.3 Man- examples of investor owned firms that operate in a manner that sources are necessary, from which goals would sense that people regard it as attractive. If a respects values while seeking maximum profits for sharehold- agers then logically need to account for how ers. In the co-operative case the structure, values, principles and the resources most likely be cut? The logical co-operative lost its identity would members they use resources not only for the financial purpose push boards and management to behave in compliance. response is to cut the use of resources where and clients or customers see it as having lost The purpose of an investor owned firm pushes board members health of the business (an essential element of and managers, only to produce maximum return. If an investor their effectiveness is unmeasured and ‘less something of importance? In 2012 the Cana- meeting other goals – bankrupt co-operatives owned firm does behave in an admirable manner it is in spite of certain’ – to cut from where it does not matter. dian Co-operative Association commissioned the legal purpose. In such a case the board and management or credit unions do not meet member needs) deserve enormous credit for their performance. When co-operative In the case of a co-operative business, using a survey of opinions held about co-operatives. but must account as well for the efficient use fail to live up to their purpose, values and principles, they have only standard accounting tools, this would (CCA 2012) It had the following findings: little excuse.

8 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 9 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges t 84 per cent said co-ops are more likely to What will the rate of depreciation be, and termine how to balance what may often seem Co-operative accounting needs to begin with support the community’s values. what impact will it have on the ‘bottom line,’ to be conflicting goals. One can imagine a a clear statement of the purpose and goals of t 83 per cent said co-ops are more likely give are questions of judgment. What is the real co-operative manager saying, ‘If we spent what the co-operative. What community and mem- people a say on how the business is run. value of buildings, plant and equipment? The the board wants to spend on that ‘co-operative ber needs does it seek to meet? What are the t 82 per cent said co-ops are more likely to measurement of so-called ‘soft goals’ may in stuff’ we would go bankrupt.’ key goals or ends the co-operative wishes to support the local economy. many cases be based on as hard ‘facts’ as those achieve as it meets those needs? For example t 81 per cent said co-ops are more likely to of ‘hard goals’. This way of thinking springs from a concep- a retail co-operative may identify its purpose as sell locally produced products. tual gap. If neither the members nor the meeting the needs of members and the com- t 76 per cent said co-ops are more likely to What are the proper financial goals of a co-op- community valued this ‘co-operative stuff’ munity for food. It might then identify a set of treat their employees better. erative if they are not to maximize the rate of the co-operative would not exist. It would not key goals to be met while meeting those needs: t 72 per cent said co-ops are more likely to return on invested capital? Co-operatives often have been created. If the co-operative is heav- have environmentally sustainable practices. decide they do not need the same rate of return ily engaged in doing things that neither the t Encouraging the consumption of healthy t 70 per cent said co-ops are more likely to as competitors and frequently co-operatives members nor the community value, it is doing food have better customer service. are created where a sufficiently high rate of ‘stuff’, but not co-operative stuff. It is failing t Promoting environmental responsibility t 53 per cent said co-ops are more likely to return to attract investor-owned business is not to account for how it uses its resources to meet t Providing food at fair prices have lower prices. possible, but a need for some type of economic member and community need. Co-operative t Promoting fair trade in the food supply activity exists. If returns to investors in a com- managers lack the accounting tools that would chain These finding are not fundamentally different peting firm are very high, it can often be seen allow them to assess the interaction between t Sourcing food from local suppliers when- from surveys that have been taken around as a good reason to start a co-operative. What goals and what a proper balance between those ever possible the world over a number of decades. While financial performance is needed to achieve goals should be. If you cannot measure the t Providing workers with a fair, safe work- results vary from country to country people meeting member and community need. impact of spending on education, for example, place and meaningful and satisfying work generally view co-operatives in a positive how can a manager know if cutting education t Achieving high levels of member and light and significant numbers see co-oper- Finally, co-operatives have traditionally done spending will positively or negatively impact worker satisfaction and engagement atives ass out performing privately owned a poor job of measuring the effectiveness of financial health? t Achieving financial health for the co-oper- business in respect to variables like trust and spending on goals such as education, the value ative fairness. If co-operative identity is of value of volunteer time contributions and their so- The Challenge: and can be used as a business advantage, how cial impacts on the community. This has often The challenge for co-operative accounting is can accounting help measure how efficiently been the result of a lack of accounting tools. A A key challenge facing co-operatives and credit how to measure these goals and how to appro- resources are used to achieve that goal. How good documentation of a large part of this gap unions is to develop an excellent practice priately report them to members, board mem- can accounting develop measures for each of a and an approach to remedy it can be found in co-operative accounting system that provides bers, workers and the community. Financial co-operatives goals? How can accounting help Quarter, Mook and Richmond’s ground break- a set of measures to account for how credit health must be included in such a list. Mea- a co-operative determine whether it is spending work What Counts: Social Accounting for unions and other co-operatives use their re- sures can be devised for each of these goals. ing the appropriate resources on adhering to Nonprofits and Cooperatives. (Quarter, Mook, sources to meet all of their core goals, includ- It has been argued that financial ‘performance’ its values and principles and spending those Richmond 2002) ing measures of what constitutes a financially will always trump other goals. This is true in resources well? healthy organization that can sustain itself. the sense that the co-operative cannot put it- Another related deficiency is not having at This co-operative accounting system should self into significant financial difficulty and still Traditionally the non-financial goals of a hand any tools to balance financial goals with allow the co-operative to achieve transparent meet other goals. As noted above, bankrupt co-operative are seen as ‘soft’ and difficult to other goals. In an investor owned business and open reporting to the board, membership co-operatives do not meet member need. This measure. It is often forgotten that many of the manager is seldom compelled to balance and community. Finally, it should provide should be seen not as financial performance the measures used in standard accounting ‘multiple bottom lines.’ There is one core goal management with the measurement tools they trumping other goals, but as not allowing poor are estimates and that a great deal of latitude and all other goals are really tactics to achieve need to manage the co-operative on behalf of financial health to undermine or destroy the is left to the good judgment of accountants. that goal. The co-operative manager has to de- the members. ability of the co-operative to meet other goals.

10 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 11 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges t 84 per cent said co-ops are more likely to What will the rate of depreciation be, and termine how to balance what may often seem Co-operative accounting needs to begin with support the community’s values. what impact will it have on the ‘bottom line,’ to be conflicting goals. One can imagine a a clear statement of the purpose and goals of t 83 per cent said co-ops are more likely give are questions of judgment. What is the real co-operative manager saying, ‘If we spent what the co-operative. What community and mem- people a say on how the business is run. value of buildings, plant and equipment? The the board wants to spend on that ‘co-operative ber needs does it seek to meet? What are the t 82 per cent said co-ops are more likely to measurement of so-called ‘soft goals’ may in stuff’ we would go bankrupt.’ key goals or ends the co-operative wishes to support the local economy. many cases be based on as hard ‘facts’ as those achieve as it meets those needs? For example t 81 per cent said co-ops are more likely to of ‘hard goals’. This way of thinking springs from a concep- a retail co-operative may identify its purpose as sell locally produced products. tual gap. If neither the members nor the meeting the needs of members and the com- t 76 per cent said co-ops are more likely to What are the proper financial goals of a co-op- community valued this ‘co-operative stuff’ munity for food. It might then identify a set of treat their employees better. erative if they are not to maximize the rate of the co-operative would not exist. It would not key goals to be met while meeting those needs: t 72 per cent said co-ops are more likely to return on invested capital? Co-operatives often have been created. If the co-operative is heav- have environmentally sustainable practices. decide they do not need the same rate of return ily engaged in doing things that neither the t Encouraging the consumption of healthy t 70 per cent said co-ops are more likely to as competitors and frequently co-operatives members nor the community value, it is doing food have better customer service. are created where a sufficiently high rate of ‘stuff’, but not co-operative stuff. It is failing t Promoting environmental responsibility t 53 per cent said co-ops are more likely to return to attract investor-owned business is not to account for how it uses its resources to meet t Providing food at fair prices have lower prices. possible, but a need for some type of economic member and community need. Co-operative t Promoting fair trade in the food supply activity exists. If returns to investors in a com- managers lack the accounting tools that would chain These finding are not fundamentally different peting firm are very high, it can often be seen allow them to assess the interaction between t Sourcing food from local suppliers when- from surveys that have been taken around as a good reason to start a co-operative. What goals and what a proper balance between those ever possible the world over a number of decades. While financial performance is needed to achieve goals should be. If you cannot measure the t Providing workers with a fair, safe work- results vary from country to country people meeting member and community need. impact of spending on education, for example, place and meaningful and satisfying work generally view co-operatives in a positive how can a manager know if cutting education t Achieving high levels of member and light and significant numbers see co-oper- Finally, co-operatives have traditionally done spending will positively or negatively impact worker satisfaction and engagement atives ass out performing privately owned a poor job of measuring the effectiveness of financial health? t Achieving financial health for the co-oper- business in respect to variables like trust and spending on goals such as education, the value ative fairness. If co-operative identity is of value of volunteer time contributions and their so- The Challenge: and can be used as a business advantage, how cial impacts on the community. This has often The challenge for co-operative accounting is can accounting help measure how efficiently been the result of a lack of accounting tools. A A key challenge facing co-operatives and credit how to measure these goals and how to appro- resources are used to achieve that goal. How good documentation of a large part of this gap unions is to develop an excellent practice priately report them to members, board mem- can accounting develop measures for each of a and an approach to remedy it can be found in co-operative accounting system that provides bers, workers and the community. Financial co-operatives goals? How can accounting help Quarter, Mook and Richmond’s ground break- a set of measures to account for how credit health must be included in such a list. Mea- a co-operative determine whether it is spending work What Counts: Social Accounting for unions and other co-operatives use their re- sures can be devised for each of these goals. ing the appropriate resources on adhering to Nonprofits and Cooperatives. (Quarter, Mook, sources to meet all of their core goals, includ- It has been argued that financial ‘performance’ its values and principles and spending those Richmond 2002) ing measures of what constitutes a financially will always trump other goals. This is true in resources well? healthy organization that can sustain itself. the sense that the co-operative cannot put it- Another related deficiency is not having at This co-operative accounting system should self into significant financial difficulty and still Traditionally the non-financial goals of a hand any tools to balance financial goals with allow the co-operative to achieve transparent meet other goals. As noted above, bankrupt co-operative are seen as ‘soft’ and difficult to other goals. In an investor owned business and open reporting to the board, membership co-operatives do not meet member need. This measure. It is often forgotten that many of the manager is seldom compelled to balance and community. Finally, it should provide should be seen not as financial performance the measures used in standard accounting ‘multiple bottom lines.’ There is one core goal management with the measurement tools they trumping other goals, but as not allowing poor are estimates and that a great deal of latitude and all other goals are really tactics to achieve need to manage the co-operative on behalf of financial health to undermine or destroy the is left to the good judgment of accountants. that goal. The co-operative manager has to de- the members. ability of the co-operative to meet other goals.

Viewed this way financial health is understood levels increase what impact does it have on from food co-operatives to be compared across will behave in ways that are not consistent as the servant of other goals. The purpose of productivity and generating a surplus? Do the food co-operative sector. A co-operative with co-operative purpose, governance and the business is to meet member and commu- healthy finances increase member loyalty or can compare its performance and its perfor- functioning. nity need not to the needs of capital. Co-oper- do less healthy finances undermine it? These mance standards with other co-operatives atives are not capitalist. relationships are complex and developing similar in size and location. The concept of collectively owned assets is an accounting system that helps understand foreign to the investor-owned business model. As noted above the definition of financial them is important. Is such an accounting system simply too In an investor-owned firm all assets are related health will vary from co-operative to co-oper- expensive and something beyond all but the to tradable share values. A co-operative’s pur- ative but there will be some core elements. A While they may be complex they can be mea- very largest of co-operatives? There is also no pose, core goals, principles and values call for preliminary list would include: sured. The Co-operative Bank in the UK de- reason why a co-operative has to produce a some level of collective indivisible assets that veloped as early as the end of the last century sophisticated co-operative accounting system result from the activity of generations and be- t Sound financial accounting and audit pro- sophisticated measures for complex goals. For overnight or even in a year or two. Even the long to a group or ‘community’ and which are cess example they measured how many grams of smallest co-operative can over time develop beyond ‘individualization’. Many co-operative t Production of an operating surplus which carbon dioxide per account the banks oper- a reasonably effective systematic approach members do not see the co-operative as belong- is sufficient to ations generated. They measured whether to measuring the efficiency of its use of re- ing to them in the same way that an investor ◊ Build and maintain a healthy reserve family members of employees saw the co-op- sources to achieve its goals. It should be rea- owned business belongs to its shareholders. fund to be able to respond to adverse erative Bank as a good place for someone they sonable to accept that the accounting system business conditions and competitive loved to work. Many co-operatives and even is should be improved each year. There is also For example, on a recent visit to a large co-op- threats quite a few non-co-operatives have developed no reason why co-operatives cannot share their erative in Italy, SACMI, with a group of stu- ◊ Provision of funds to invest in tech- sophisticated measures of performance. Many accounting methodology and techniques. In dents, it was noted that while the co-operative nologies and new operations to ensure of those measures, once developed and set in fact, co-operation among co-operatives beck- employed several thousand people and had continued ability to meet member need place are not expensive. They are produced ons them to do so. hundreds of millions in assets, it had only 234 ◊ Generation of sufficient funds to allow by computers on command with a few key were members. Why the co-operative presi- key goals to be met at an identified strokes from information already collected but What will emerge over time, and what CEARC dent was asked did the members not just sell standard not previously used to its full potential. and other organizations with a focus on ac- the co-operative and walk away as multi-mil- counting in co-operatives should collaborate on, lionaires. “It is not ours to sell,” responded the I am confident this list can be improved if Computers also make it much easier to de- is an identifiable framework with accepted sets President, “It belongs to our grandfathers and hundreds of co-operative accountants put their velop indexes made up of a number of data of measures for shared goals. Weaker mea- to our grandchildren. It belongs to the com- minds to it. points. The result can be a sophisticated measures and indexes would be discarded in favour munity.” The financial health standards and sure of performance easily understood various of ones which function better and are increas- standards for protection of such capital, need Another area which needs a great deal of people to whom the co-operative performance ingly well understood by boards and members. to be carefully developed. For example there thought and work is how to relate the perfor- is reported. So called ‘hard data’ (sales) might is a need for strong protection against the mance of each goal to other goals. For ex- be combined and weighted with ‘soft’ data Special Accounting Innovations ‘hijacking’ of collective capital that properly ample, most of the goals listed above require (opinion survey results or estimated book belongs to past, present and future co-opera- education and communication. How are these value of assets). These measures will need As noted above the dynamics of co-operative tive members. The objective of co-operative functions measured? All require resources. time to develop and to refine but that process capital are fundamentally different from those accounting is not for weaker protection or lax- Are expenses in these areas ‘productive’ or are can be accelerated by co-operatives sharing that exist in an investor-owned corporation. A ity but for strong but appropriate accounting they underfunded? In a retail co-operative, their techniques and measures. simple adoption of the financial instruments standards and regulatory protection. transactions with unhappy workers are not of investor-owned firms has not and will not likely to produce satisfied members. If mem- The retail food co-operatives in the USA with meet the needs of credit unions and other It can be argued that existing standards of ber satisfaction levels increase what impact brilliant leadership by Coop Metrics and Wal- co-operatives. Such a simple adoption creates reporting did not adequately protect the owners does it have on revenue? If worker satisfaction den Swanson, have pioneered ways for data expectations that these financial instruments of the Saskatchewan Wheat Pools, Farmland

12 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 13 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges or Agway. One could also argue that mem- Conclusion References ber owners of failing community level consumer co-operatives in Atlantic Canada were The key challenges listed above are clearly Abacus Data (2012) Canadians and Co-operatives: International Year of Co-operatives, A survey not adequately advised of the decline in the inter-related. Rethinking one has implications done for the Canadian Co-operative Association, http://www.coopscanada.coop/assets/firefly/ value of their share capital. Members were for rethinking the others. Rethinking will be files/files/Abacus_survey_report.pdf surprised to learn that as a result of prolonged ineffective unless there is ongoing, planned annual losses the value of shares on wind up education for co-operative boards, manage- Canadian Institute of Chartered Accountants (CICA) (1998) Handbook, section 3860 “Financial or merger had in many cases become negative. ment and staff members. Finally, The rethink- Instruments - Disclosure and Presentation”. In publically traded corporations share prices ing of accounting is inter-related with rethink- may not tell you the value of the firm but they ing each aspect of co-operative management. CEARC (2007) http://www.coopaccounting.coop/ The website contains a growing body of re- do tell you what you might expect to get by sell- For example, if we measure our results related search and information on co-operative accounting. ing a share. In a co-operative where shares are to non-financial goals we can better educate not traded members need a reporting mech- our members, market our advantage and Corporate Research, (2008) Public Perceptions of Co-operatives and Credit Unions Research anism that estimates the true value of shares inspire our managers and staff. If we account Study, a survey done for the Nova scotia Co-operative Council and indicates whether share value is rising or for how we use our resources to achieve all our declining. What needs to be done differently? goals we will be able to integrate all of those International Co-operative Alliance (ICA) (2013) Blueprint for a Co-operative Decade, http:// goals into our co-operative businesses rather ica.coop/sites/default/files/media_items/ICA%20Blueprint%20-%20Final%20version%20 Co-operatives have traditionally had problems than seeing them as ‘nice things we ought to issued%207%20Feb%2013.pdf in raising capital by using the traditional finan- do if we have the money.’ cial instruments of investor-owned business. Opinion Research Corporation International, (2012) National Survey on Attitudes Towards Co- The subordinate role of capital in a co-opera- The co-operative values and principles are operatives, survey done for the National Cooperative Business Association, Washington, DC tive makes such difficulties inevitable. One included in Appendix I below. In the introduc- http://www.ncba.coop/ncba/what-we-do/press-releases/1665-national-survey-finds-ameri- implication of developing capital instruments tion we noted that a shaping question in the cans-rate-consumer-cooperatives-more-highly-than-for-profit-businesses-on-measures-of-qual- that are more suitable to the co-operative MMCCU Program is, “If that is how it is done ity-and-service business model will be an increasing ability in an investor owned business how would it to ‘market’ such instruments in the same way be done differently in a co-operative?” It is not Quarter, Jack, Mook, Laurie and Richmond, Barbara Jane, (2002) What Counts: Social Account- that co-operatives who operate their businesses possible to respond to that question without ing for Nonprofits and Cooperatives. Pearson Educational Publishing, Toronto, ISBN 0-13- incorporating a ‘co-operative difference’ find constant reference to and reflection on the 046305-1 that those business practices are increasingly co-operative values and principles. The de- ‘marketable. It is because the Co-operative velopment of co-operative accounting without Somerville, Peter (2007) Journal of Co-operative Studies, 40.1, April 2007: 5-17 Bank in the UK, Oxford Swindon and Glouces- constant reference to co-operative purpose, val- ter Co-operative and Co-op Atlantic’s Agro- ues and principles is not possible to imagine. Symposium on Co-operative Accounting (2004) http://www.smu.ca/webfiles/Symposium2.pdf Food strategy are different that they are attract- Papers presented at the Symposium can be found at the website. ing a more and more positive response from people. Current financial instruments now in use need to be systematically reviewed to determine those which are most compatible with co-operative purpose. Co-operative accountants need to evolve reporting to reflect how reporting may need to be altered as a result of new co-operative financial instruments.

14 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 15 Co-operative Accounting: Purpose and Challenges Co-operative Accounting: Purpose and Challenges or Agway. One could also argue that mem- Conclusion References ber owners of failing community level consumer co-operatives in Atlantic Canada were The key challenges listed above are clearly Abacus Data (2012) Canadians and Co-operatives: International Year of Co-operatives, A survey not adequately advised of the decline in the inter-related. Rethinking one has implications done for the Canadian Co-operative Association, http://www.coopscanada.coop/assets/firefly/ value of their share capital. Members were for rethinking the others. Rethinking will be files/files/Abacus_survey_report.pdf surprised to learn that as a result of prolonged ineffective unless there is ongoing, planned annual losses the value of shares on wind up education for co-operative boards, manage- Canadian Institute of Chartered Accountants (CICA) (1998) Handbook, section 3860 “Financial or merger had in many cases become negative. ment and staff members. Finally, The rethink- Instruments - Disclosure and Presentation”. In publically traded corporations share prices ing of accounting is inter-related with rethink- may not tell you the value of the firm but they ing each aspect of co-operative management. CEARC (2007) http://www.coopaccounting.coop/ The website contains a growing body of re- do tell you what you might expect to get by sell- For example, if we measure our results related search and information on co-operative accounting. ing a share. In a co-operative where shares are to non-financial goals we can better educate not traded members need a reporting mech- our members, market our advantage and Corporate Research, (2008) Public Perceptions of Co-operatives and Credit Unions Research anism that estimates the true value of shares inspire our managers and staff. If we account Study, a survey done for the Nova scotia Co-operative Council and indicates whether share value is rising or for how we use our resources to achieve all our declining. What needs to be done differently? goals we will be able to integrate all of those International Co-operative Alliance (ICA) (2013) Blueprint for a Co-operative Decade, http:// goals into our co-operative businesses rather ica.coop/sites/default/files/media_items/ICA%20Blueprint%20-%20Final%20version%20 Co-operatives have traditionally had problems than seeing them as ‘nice things we ought to issued%207%20Feb%2013.pdf in raising capital by using the traditional finan- do if we have the money.’ cial instruments of investor-owned business. Opinion Research Corporation International, (2012) National Survey on Attitudes Towards Co- The subordinate role of capital in a co-opera- The co-operative values and principles are operatives, survey done for the National Cooperative Business Association, Washington, DC tive makes such difficulties inevitable. One included in Appendix I below. In the introduc- http://www.ncba.coop/ncba/what-we-do/press-releases/1665-national-survey-finds-ameri- implication of developing capital instruments tion we noted that a shaping question in the cans-rate-consumer-cooperatives-more-highly-than-for-profit-businesses-on-measures-of-qual- that are more suitable to the co-operative MMCCU Program is, “If that is how it is done ity-and-service business model will be an increasing ability in an investor owned business how would it to ‘market’ such instruments in the same way be done differently in a co-operative?” It is not Quarter, Jack, Mook, Laurie and Richmond, Barbara Jane, (2002) What Counts: Social Account- that co-operatives who operate their businesses possible to respond to that question without ing for Nonprofits and Cooperatives. Pearson Educational Publishing, Toronto, ISBN 0-13- incorporating a ‘co-operative difference’ find constant reference to and reflection on the 046305-1 that those business practices are increasingly co-operative values and principles. The de- ‘marketable. It is because the Co-operative velopment of co-operative accounting without Somerville, Peter (2007) Journal of Co-operative Studies, 40.1, April 2007: 5-17 Bank in the UK, Oxford Swindon and Glouces- constant reference to co-operative purpose, val- ter Co-operative and Co-op Atlantic’s Agro- ues and principles is not possible to imagine. Symposium on Co-operative Accounting (2004) http://www.smu.ca/webfiles/Symposium2.pdf Food strategy are different that they are attract- Papers presented at the Symposium can be found at the website. ing a more and more positive response from people. Current financial instruments now in use need to be systematically reviewed to determine those which are most compatible with co-operative purpose. Co-operative accountants need to evolve reporting to reflect how reporting may need to be altered as a result of new co-operative financial instruments.

14 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 Journal of Co-operative Accounting and Reporting, V2, N1, Summer 2013 15