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Environmental accounting

Term Paper 2008 12 Pages

Business economics - Miscellaneous

Excerpt

INTRODUCTION

As an issue, the environment has been growing in significance in the minds of the community and, more recently, in the minds of business. Everyone remembers the Exxon's Valdez[1] disaster, Shell's run-ins with Greenpeace and Nike's sweatshop scandal. Whether or not these events represented true ecological or social disasters is hotly debated, but one thing is not – they all hit the major news outlets and were public relations nightmares. To avoid such nightmares, many companies are opting for transparency not only in their financial statements, but also in their nonfinancial information, such as reports on their environmental record, social responsibility and sustainability (McCrary, 2002) . In this context the aim of this paper is to examine the nature of environmental accounting and to describe how companies are responding to pressures to keep accounting records of the impact that their productive processes have on the environment.

THE ISSUE OF ENVIRONMENTAL ACCOUNTING

Accounting, at the level of an organisation, can be broadly defined as the collection and

aggregation of information for decision makers, both internal (e.g. managers) and external

(investors, regulators, lenders, and the broader public) to the company. There are usually two types of accounting within a company:

- Financial accounting (FA) tends to refer to accounting activities and the preparation of financial statements directed to external stakeholders, such as investors, tax authorities and creditors, thereby focusing on monetary information as regulated by the so called international ‘Generally Accepted Accounting Principles’ (GAAP);
- Management accounting (MA) deals both with monetary and physical information, and “primarily focuses on satisfying the information needs of internal management”, in order to “inform management decisions and activities such as planning and budgeting”, and promote an “efficient use of resources, performance measurement, and formulation of business policy and strategy” (IFAC, 2005, p. 12). Because MA is generally not regulated by law, each company is able to decide how it wants to organise and implement its internal performance system.

Although considered as parallel information flows, there are in practice many interlinks

between financial and management accounting systems within an organisation. As underlined,

by the IFAC, “bookkeeping can be seen as a data collection process that generates information for both internal and external audiences” , for “most companies, particularly small and medium-sized ones, do not have an independent MA system; they simply use data initially developed for FA purposes for internal decision making as well as for external reporting” (IFAC, 2005, p. 13).

Information systems such as accounting are particularly strong behavioural drivers within the

context of a corporation where profitability is the main daily concern. Thus, in order for

environmental concerns to become more emphasised, they need to be included within these

accounting systems. Doing so will motivate behaviour towards linking environmental management with everyday business. This understanding of the necessity of linking environmental data to accounting systems by both environmental and accounting practitioners favoured the birth of ‘Environmental Accounting’ as a subset of the broader accounting systems (Jachnik, 2006). The common definition of environmental accounting is “the identification, measurement, and allocation of environmental costs, the integration of these environmental costs into business decisions, and the subsequent communication of the information to a company's stakeholders” (AICPA, 2004). Typical environmental costs include off-site waste disposal costs, cleanup costs, litigation costs, and other related costs (Stanko et al., 2006). Therefore it is sometimes also called “green accounting”.

Based on this definition and according to the traditional separation between FA and MA, the split can also be made between:

- ‘Environmental Financial Accounting’ (EFA), which is aimed at external reporting of environmental and financial benefits in (sometimes verified) corporate environmental reports or published annual reports; and
- ‘Environmental Management Accounting’ (EMA), which has no single, universally accepted definition, but according to IFAC’s Statement Management Accounting Concepts (2005), is “the management of environmental and economic performance through the development and implementation of appropriate environment-related accounting systems and practices”. It considers the financial impacts of environmentally related activity such as the implementation of environmental protection expenditure (UK Environmental Agency, 2006), and aims to take corrective management actions to reduce environmental impacts and costs, and is therefore “a tool for environmental cost control and management in order to positively correlate economic and environmental performance” (Jachnik, 2006).

Expanding on the given definition EMA consists of “the identification, collection, estimation, analysis, internal reporting and use of materials and energy flow information, environmental cost information, and other cost information for both conventional and environmental decisionmaking within an organization” (EMARIC, 2006). It includes both physical information on the use, flows and destinies of energy, water and materials (including wastes) and monetary information on environment-related costs, earnings and savings (IFAC, 2005, p.19).

Company accountants are concerned with environmental accounts from the point of view of both financial and management accounting. Nevertheless, management accountants view environmental accounting from a different perspective than financial accountants. For example, while a financial accountant may be interested in detecting energy emissions and material waste disposal costs because of the impact they have on profits, management accountants are interested in these costs because they must be monitored and controlled. Another aspect of the management accountant's role is assessing the life cycle of products and identifying where environmental improvements may be made to reduce their environmental impact at every stage of life. As an example, the construction and the design of a car that may be easily re-cycled at the end of its life (Emery, 2002).

Environmental accounting commenced in the period between 1971 – 1980 in the form of “social responsibility accounting”, which tried to establish the degree of responsibility that companies should have towards stakeholders other than the firm's shareholders. Part of this responsibility concerned the interaction between the firm and the ecological environment. During the period 1981 – 1990 the emphasis in the accounting literature shifted from ‘social responsibility accounting’ to ‘environmental accounting’, reflecting the strong interest in the latter (Emery, 2002). Environmental accounting began when the U.S. Environmental Protection Agency produced some initial guidance in the early 1990s. But neither the federal government nor the country's standard setters have done much since then, however, and any new developments – and interest – have occurred outside the United States. Germany and Japan have been especially active in EMA, “which has combined well with the detailed materials flow cost accounting common in those countries” (Cheney, 2005). Countries like Denmark and the Netherlands require companies to produce a ‘green account’ or ‘environmental report’. The Philippines had such success with an EMA educational program for professionals that it went on to require EMA content in college curricula, making it the first country to do so (Emery, 2002).

As environmental legislation becomes more intense, companies are required to take a cleaner approach to production. The environmentally responsible firm will seek to reduce waste wherever it can by introducing improved and more cost effective processing methods (Emery, 2002). In late 2005 Gordon Brown said: “Best practice is, of course, for companies to report on social and environmental strategies relevant to their business” (Martin, 2007). But have businesses really adopted best practice? The truth is that many are still turning a blind eye to environmental risk management because they think the identification, assessment and control of such risks and their associated liabilities, will result in “bad news in the short to medium term” (Martin, 2007). Therefore, the true environmental exposure is unknown in many cases merely because the company concerned has not taken appropriate action to quantify it. For that reason more than any other, environmental disclosures are still absent from companies’ annual accounts.

[...]


[1] An oil tanker that gained widespread infamy after the March 24, 1989 when it spilled an estimated 11 million gallons of crude oil. This has been recorded as one of the largest spills in U.S. history and one of the largest ecological disasters.

Details

Pages
12
Year
2008
ISBN (eBook)
9783640192052
ISBN (Book)
9783640192328
File size
389 KB
Language
English
Catalog Number
v116913
Institution / College
University of Glamorgan – Business School
Grade
72% (1,5)
Tags
Environmental Issues Management Accounting

Author

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Title: Environmental accounting