Environmental Auditing

EXECUTIVE SUMMARY

APPENDICES

LIST OF ABBREVIATIONS

REFERENCES

BIBLIOGRAPHY

EXECUTIVE SUMMARY

Businesses have become increasingly aware of environmental implications on their operations, products, and services. Environmental risks may have serious consequences for the prospects of a company, with particular financial consequences such as clean up costs or fines if a company fails to meet regulations. Environmental sensitive industries such as oil companies, waste management, or chemical industries are especially jeopardised.

Various pressure groups, such as the public, investors, customers, employees, media, or business partners are interested in the environmental activities of a company. Greater attention is paid to the way the company manages and improves its environmental performance. In some countries, such as Sweden, Denmark, and the Netherlands, there exists a complex and strong legislation regarding environmental behaviour. Companies are required to meet certain conditions to continue their operations and various standards have been developed in order to compensate for the lack of legislation in other countries. These standards are for example the British Standard for Environmental Management in the UK, ISO 14001 from the International Standards Organisation, or the European Union’s Eco-Management and Audit Scheme. These standards demand the establishment of an environmental management system, which is a framework of environmental objectives within which a company has to operate, and include the compliance of environmental regulations and statutes.

Internal environmental audits have to be carried out to ensure the effectiveness of the environmental management system. These help to estimate the risk of environmental impacts, to prevent pollution, to allocate the source of pollution or to quantify liability accruals for known environmental issues. External environmental audits are required to validate reports being published and the information found during the internal audit.

Environmental auditors both internal and external are required to have a far-reaching knowledge and sufficient competence. But some environmental issues are too complex and only professionals, such as engineers for example, can deal with them.

The environmental audit becomes an essential and vital component of the environmental management profession. The demand for skilled auditors has been risen, but a professional body of environmental auditors to ensure the competence of an environmental auditor does not exist. Various approaches to tackle these circumstances have been made. The ISO Standard provides guidelines for qualification of environmental auditors. The International Auditing and Assurance Standards Board (IAASB), a committee of the International Federation of Accountants (IFAC) developed International Standards on Auditing (ISA’s) which aim to improve and harmonise the audit procedure and with it the procedure for environmental auditing. The Association for Professional Environmental Auditing (APEA) tries to establish a profession of certified environmental auditors. However, problems such as the costs of establishing a system of professionals or potential consequences of professional environmental auditors on the existing auditing profession, are still present.

The importance placed on environmental issues has increased during the last two decades. Different organisations, both national and international, as well as governments in various countries have recognised that environmental protection is a major issue with regards to well-being of mankind on the planet is concerned. This paper describes the necessity for environmental behaviour and the different pressure groups which influenced it. Different approaches to implement environmental protection are described, by focussing on industrial environmental regulation in Scandinavian countries and comparing those with that of the UK. The main part of this work concentrates on environmental auditing. Standards are described, which were developed because of the lack of legislation as far as environmental reporting was concerned. The problem of an exact definition of environmental audit is discussed before the different types of audits (internal and external environmental audit) and the impact of this relatively new area on the accounting profession are explained.

Concern today about the environment becomes more and more common. Brooke (1990) identifies three main strands of concern, planetary issues, national/international concerns, and local issues (Appendix 1). The term ‘sustainable development’ was established by the UN Brundlandt Commission in 1987. It describes the satisfaction of the “needs of the present without compromising the ability of future generations to meet their own needs” (VROM, 2003a). The concept won the recognition of international organisations which made sustainable development the objective of various agreements at conferences such as the ‘UN Conference on Environment and Development’ in Rio in 1992 (VROM, 2003a). Sustainable development is a matter for the population as a whole, but particularly for business companies operating in environmental sensitive industries such as oil companies, waste management or chemical industries. It is important for industries to cope with environmental issues, because environmental risks are regarded as one of the most important risks which threaten companies; especially as the financial consequences of failure to meet environmental expectations may be serious. For example, industries may have to change their production lines, provide for clean up costs, or pay fines (Davies, 2002).

Environmental behaviour is a trend to which business and industry have to respond. Renger (1992) describes the change in attitudes towards the protection of the environment as the ‘Green Revolution’. Approaches regarding environmental reporting are built on the demands of the stakeholders of a company. Abt (1977) identifies five interest groups whereas Maltby (1997) explains that there are different points of view about the stakeholder groups. Azzone et al. (1997), for example name academics, employees, environmental NGO’s, the financial community, regulators and policy makers, shareholders, and trade and industry as the most important parties. Businesses have to meet the expectations of certain core groups regarding responsible behaviour to assure their reputation; otherwise the long-term success of a business could be damaged. For example, consumers may not buy companies’ products which will then reduce profits. Companies might find it difficult to attract and retain skilled employees or find new business partners. Shareholders and investors may not decide to hold their shares in the future (Business Impact, 2002). The great impact of the stakeholders concerning green issues puts pressure on businesses as well as on local authorities and the governments.

Industrial environmental legislation is diverse in different countries. Dobers (1997) mentions that in Scandinavian countries the most important driving force for environmental behaviour and improvement is political action. For example, the Dutch Government issued in 1972 the ‘Urgency Policy Document’. It focused on pollution of surface water, air pollution, soil contamination, and waste substances. During the following years the Netherlands created a policy framework, a system of laws and regulations, to tackle these environment problems (VROM, 2003b). In 1989 the Ministry of Housing, Spatial Planning and the Environment (VROM) established the first National Environmental Policy Plan (NEPP1). During the next years NEPP Plus (1990), NEPP2 (1993) and NEPP3 followed (Gouldson & Murphy, 1998). Currently NEPP4 has been prepared and just has to be ratified by the Lower and Upper Houses of Parliament (VROM, 2003b) (Appendix 2). The NEPP documents are part of a wider policy framework and can be seen as an overall strategy within which specific regulations must operate. If the framework of mandatory environmental regulation is considered, two important acts have to be mentioned. These are the Environmental Management Act (EMA) and the Pollution of Surface Waters Act (PSWA). Companies have to apply for an environmental license to perform their operations in accordance with this legislation (Gouldson & Murphy, 1998).

In Denmark the Green Accounts Act was passed in 1995 as an addition to the Environmental Protection Act. Similar to the Netherlands, industries are required to have a license to operate and must prepare an annual green account. The essential thought was that the public should obtain information about how industries deal with environmental issues and managers should be motivated to enhance environmental improvement. The green accounts should be a written report and must include the use of energy, water and raw materials in the production process and the type and quantity of emissions (Nyquist, 2003). The controlling authority is the Danish Environmental Protection Agency. It operates under the Ministry of Environment and carries out the administration of the environmental regulations (MST, 2003).

In Sweden the Environmental Code entered into force in 1999. It is the “first coordinated body of environmental legislation” and the “main legal instrument for achieving the environmental objectives” (Swedish EPA, 2003a). These environmental quality objectives (Appendix 3) aim at solving major environmental problems within one generation and function as benchmark for all environment-related developments in Sweden (Swedish EPA, 2003a). The Environmental Code is an amalgamation of various previous central environmental acts (Appendix 3). An addition to the Annual Accounts Act was also introduced in 1999. It required that firms must give information about the impact of their activities on the environment. According to the Environmental Code in Sweden firms must have a license to operate and report on environmental issues, similar to the above mentioned countries. The report should contain environmental issues of importance for the present and future prospects of the company, information about what activities the license concerns, and the environmental impacts like emissions to water, air or ground through waste or noise. Infringements of the environmental rules are subject to sanction charges (Nyquist, 2003).

Compared to the above mentioned Scandinavian countries the approach of the UK is completely different. The Environmental Protection Act of 1990 introduced Integrated Pollution Control (IPC) in England and Wales. IPC referred to emissions to air, water and land and required that operators of these processes have to apply for IPC authorisation, but they are not subject to external scrutiny. Gouldson & Murphy (1998, p. 136) state that “the UK has traditionally been reluctant to take precautionary action to protect the environment” and that the policy framework in the UK is weak. It has been influenced by the free market doctrine in the early 1980’s and the mid 1990’s. Thus, the level of Government intervention was minimised which led to voluntary rather than mandatory approaches regarding environmental regulation (Gouldson & Murphy, 1998).

In absence of a widespread regulatory framework, different standards have been developed. These standards help to improve the concept of corporate governance, because they strengthen the responsibility of the board to the environment. One of the standards, for example, is the British Standard for Environmental Management Systems (BS 7750) published in 1992. BS 7750 aims at setting up an effective management system to improve environmental protection and environmental performance. According to BS 7750 the management has to set up an environmental policy and objectives which are regularly reviewed. The standard requires active support by top management and continuing improvement and development of the environmental policy (Renger, 1992). The operation of the environmental management system is subject to a recurring internal audit, which should be performed by staff within the organisation but independent from the areas being audited (Maltby, 1995).

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