Reform of corporate accounting will create a new social infrastructure in Japan

Accounting as a basis for the fair distribution of wealth

In 2020, the coronavirus pandemic allowed a variety of problems to gush out in Japan. One of them is the fact that many people have had difficulty in their work and lost their income stream.

For example, trade related to dining and sightseeing has been severely battered. Those involved in such businesses are really working and straining to conquer this ordeal. Their efforts are terribly painful, so they might wonder why they are forced to go through such a hardship.

Indeed, people in these industries have no responsibility for the onset of this pandemic. Rather, it is just an unexpected calamity that plagues them.

On the other hand, the industries of services and products that do not require physical contact are in the midst of a unique boom.

That is to say, this pandemic has produced those who gain and those who lose regardless of their past efforts. It is mere fate, there is no other way to describe it.

In Europe, when an unexpected and extraordinary change happens, such as the overturning of common sense, people call it a black swan. A black swan, which has not been believed to exist, comes into being.

However, in looking back over the past few decades, we can see that black swans have sometimes appeared, such as the Great East Japan Earthquake, the Lehman shock, the September 11 terror attacks and the collapse of the Berlin Wall.

When such extraordinary change occurs, it is very likely that those who are lucky and those who are unlucky emerge. Supporting the unlucky is one of the important functions of society. In Japan, as a matter of fact, benefits are currently distributed among needy people to help them.

It is pointed out, however, that the benefits are not fair. That is because the distributed handouts are all even, irrespective of the size of the lost income, which should differ from person to person. It means that social wealth is not fairly redistributed.

Redistribution per se is an issue of politics. We all have to think about how to make it fairer. Accounting, which is my specialty, can furnish materials for consideration.

For example, added value statements should be one of those that are needed now.

To put it simply, added value is the subtraction of the purchase price of products from the sales price of the products. For example, if a company purchases various parts at 100 as a total cost, puts them together into a product, and sells it at 300, then the difference of 200 is its added value. It means that the company adds a value of 200 to the various parts that are 100.

Adding value requires production facilities and a labor force. Therefore, corporations carry out capital spending and make distributions among employees by way of wages. Then, they use the remainder of the added value for tax payments, dividends for shareholders, and internal reserves.

In reality, there are thought to be many large enterprises that conduct added value calculations like this. However, they are rarely disclosed as a part of financial statements. They are turned into a black box.

Because of that, it can hardly be seen if a company that is fortunate enough to enjoy a boom caused by the pandemic provides its employees who suddenly become busy with such distribution that matches its added value.

In addition, disclosing added value statements is very effective for monitoring the activities of large corporations in modern times, where large companies have huge social influence.

Uncovering unfair earnings structures of multi-national corporations

In recent years, tax avoidance by, what is called, multi-national digital companies, including GAFAM, has been a global issue. They conduct their businesses globally and make tax payments in accordance with the law of each country. However, their tax payments are said to be extremely small in contrast to their profits.

For example, company A which operates an EC business in Japan does not have a permanent establishment including a factory in Japan, still less a branch office. All it has in Japan is warehouses to store purchased goods.

Since warehouses are not subject to corporate taxes under current international tax rules, profits that company A generates in Japan are not taxable income.

The branch office that administers its profits in Japan is located in a different country, whose corporate tax rate is much lower than that of Japan.

In short, those multi-national companies avoid taxation or reduce tax rates by making crafty use of loopholes in laws.

Their industry is a typical one benefitting from a unique boom in this pandemic while their behavior of tax avoidance remains unchanged.

Now, each country is formulating tax laws such as taxation on digital businesses. That is to say to use political power to establish rules for fair taxation.

However, some point out that hiring employees at very low wages enables them to gain profits that can be too excessive anyway.

Take the United Kingdome for example. It initially invited GAFAM in an aggressive manner. It expected them to pay taxes and produce jobs as a new industry replacing decaying manufacturers.

Their headquarters are splendid and employees there engaging in creative work receive high compensation. On the other hand, there are mere facilities in not-headquartered-countries where only simple labor is carried out, and workers there receive very low wages. Eventually, these facilities are filled with immigrant workers.

As mentioned earlier, a lack of a system to disclose actual labor costs prohibits us from studying how low the wages are and how the unfair profits are generated.

As it is important for corporations to pay dividends to shareholders in capitalism, current financial statements are designed to clarify that purpose. Therefore, labor costs are treated as expenses.

However, companies bear heavy responsibility not only to their shareholders but also for their workers because they are very influential in today’s society. It is thought to be their responsibility to disclose added value statements that clarify the amounts of wages. This applies to Japan as well, in addition to the United Kingdom.

Added value statements will relate to a social infrastructure

When Japan was in its high economic growth stage, the majority of employees were regular employees. Costs of regular employees can be extracted from conventional financial statements. However, costs of non-regular employees, whose numbers have been rapidly increasing in recent years, are currently black boxed.

Thus, there is no clue as to how low their wages are. When an extraordinary event such as a pandemic occurs, they are the first ones who take the brunt. As the reality cannot be known, support programs, including benefits, can fall into unfair distribution as mentioned earlier.

In recent years, corporate social responsibility (CSR) has been emphasized, and the number of companies boasting CSR activities has increased. However, the terms of CSR activities used by many enterprises seem to become vague because they do not clearly understand its meaning and significance.

If that is the case, the first thing to do is to revisit the form of financial statements that prove corporate activities.

Creating and disclosing added value statements will clarify to society how the enterprises distribute the added value that they produce.

In other words, companies disclosing how much is distributed among their employees and how much they donate to their community will naturally relate to activities that are worthy of CSR.

In other words, these activities will add to distributions to personnel, including non-regular employees, and contributions to society. They will supposedly be connected to a foundation on which a social safety net will be built, which is namely social infrastructure.

However, it may be difficult for small and medium sized enterprises to create and disclose added value statements. Reasons for their existence cannot be expressed numerically, because they often involve rewarding work, and communication with and contribution to communities.

Therefore, it may be an idea to make it mandatory for enterprises larger than a threshold to disclose added value statements.

Accounting considers rules to express corporate activities numerically so as to make them transparent. This way of thinking can apply to individuals in addition to enterprises.

There should be many people, for example, who want to become rich or to save money for eventualities. To achieve this, it is best to keep household accounts. But it is hard to keep every record of daily ins and outs.

Therefore, it is recommended to create an inventory of property once a year. This will allow you to see where the earnings came from and how they were spent in the year.

It will lead to self-reflection and, as a result, will help cut waste and find what more can be done. These procedures will lead to necessary savings for emergencies.

The way of thinking in accounting can be used for a family infrastructure.

* The information contained herein is current as of June 2021.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

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