While traditionally, accountants mainly work for the financial aspect within an organization, with the increased concern regarding sustainability, they are playing an increasing significant role in environmental accounting within an organization. According to my personal experience and knowledge, accountants act as initiator, participants, practitioner, and analyzer in the course of environmental accounting, and details are illustrated in the following sections.
According to the research by WWF International report in 2010, people use natural resources at a 1.5 rate of renewal and Australians use natural resources at around two times than the average.(van Dijk et al., 2014)The natural resources are the foundation of the economy for a country and if not protected properly, organizations within a country cannot sustain for a long time. It is of great importance for any organization to use natural resources in an effective manner. In addition, companies have to acquire relevant, up-to-date, and comprehensive understanding and information regarding the ecosystem and natural condition they are in, as well as the way of interaction.
Government in Australia started several initiatives to collect environmental information recent years and environmental accounting helps with the process of information collecting. Kyoto protocol, Australia’s biodiversity Conservation Strategy, the National Plan for Environmental Information, and other government initiatives all put a great emphasis on information collecting regarding environmental condition and natural resources condition. Correspondingly, organizations and companies, as small components consisting of the company, also bear the responsibility and liability to produce credible information that would guide the sustainability of the organization as well as the firm.According to my personal experience and knowledge, accountants act as initiator, participants, practitioner, and analyzer in the course of environmental accounting, and details are illustrated in the following sections.
Initiator in complying with regulation
As far as I am concerned, the most direct role of accountants in promoting environmental accounting originates from their duty to produce the financial reports in accordance to requirements by government and regulation entities. As a result, accountants are acting as the initiator for environmental accounting within an organization. According to a report by KPMG in 2016, there are almost 400 instruments for sustainability reporting in place in more than 60 countries, including U.S., France, Spain, and Australia. Following the recent Paris Agreement at the UN climate conference, environmental disclosures requirements are likely to increase within the foreseeable future.
For Australia, Standard DR03422 provides guidelines on the verification, validation, and assurance of environmental and sustainability for reporting purpose. In addition, the jointed standards by Australia with New Zealand proposed an Environmental Management System. Australia Auditing Standards also provides guidelines regarding sustainability reports. There are many components within the requirement list of a sustainability report, and one of the most important one is the disclosure regarding the environmental impact of a company, which accordingly, might include the energy consumption, CO2 waste emission, environmental programs expenditures, and other impacts and efforts by the company. Considering the recent trend in increasing emphasis on sustainability report, accountants within an organization will automatically put more efforts to environmental accounting in order to meet the requirement set by the government and comply with the regulations.
Besides basic compliance with regulators, with the increase emphases of environmental impact and corporate social responsibility, the outside debtholders and shareholders also see the environmental disclosure performance as an indicator of an organizations’ ability to sustain in the long run and an influential factor of tis image and credibility. The sustainability report or other environment impact disclosures now gain increasing power in signaling investors about the performance of the company. While the report mainly comprises non-financial disclosures or information that is irrelevant to its profit-generating business operations, it still reveals the company’s competency to grow organically and with great potential. The reduced ongoing concern adds value to the market share of these company, which can be evidenced by the share price of the clean energy company such as Tesla. Facing the requirement and the pressure from managers, accountants act as initiators for environmental reporting and are dedicated to produce the most reliable and precise report.
Participants in Establishment of environmental management systems
In the process of environmental accounting, accountants are as part of the creators of the environmental management systems within an organization. Similar to traditional information management system, such as financial information system, management cost management system, and human resources management system, environmental management system records information relevant to all aspects revolving around the mutual impact between the organization and the environment (Feldman et al., 1997).
The environmental management system lays the foundation of the environmental accounting within an organization. It provides the basic system support and information support in order to conduct future accounting record and analyses. In addition, it also serves as channels to communication and exchange information with outside environmental information system. For example, Carbon Disclosure Project (CDP) is a reporting system that help gather information from organizations with regards to their climate change risks and their way of natural resources consumption and effects. Thousands of companies are incentivized to measure and disclose the greenhouse gas emission and redemptions for water and climate change strategies by leveraged market forces such as customers, governments, and shareholders (KPMG, 2016).
Since the system has to be in compliance with legal requirements and environmental regulations, accountants are involved to practice due diligence examinations. In addition, the system consists budgeting, cost evaluation, and other estimation related to financial information, accountants, who are equipped with solid foundation in financial accounting and information, provide the best consulting service in the course of creating the new system. Meanwhile, accountants also proficient in developing information system and conducting related control and auditing work. As a result, they are the perfect participants in the primary stage of environmental management system development.
Practitioner of Environmental accounting
Accountants can use their professional knowledge and experience in traditional financial accounting to conduct environmental accounting. Companies introduce this type of accounting approach to collect data with respect to the investment and cost for its environmental programs. In addition, companies aim to analyze the data in order to further evaluate the investment results and the cost-benefit pertaining to managerial decision making.
For example, Toshiba released its environmental accounting online (Toshiba, 2014). The total environmental costs are broken down into several by business segments, including healthcare, energy and infrastructure, lifestyle products, community solutions, and electronic devices. After collecting data, yearly data are compared and the trend is analyzed. Environmental costs include the cost for reduction in environmental impact, green procurement and recycling, Environmental education, EMS maintenance, restoration of polluted water or soil, etc. All information relies on the work of accountants who practice accounting policies in accordance with regulations and rules by exercising their professional judgment and by referring to other relevant practices.
Besides accounting for costs, accountants have also measure and record environmental benefits. In the example of Toshiba, it records benefits including actual benefits, assumed benefits, customer benefits, and risk prevention benefits. Benefits from reduction in electricity charge and water costs are measured by comparing to the previous year in the monetary value. Benefits for reduction in chemical discharged are measured by specific and explicitly-stated accounting policies. Customer benefits are measured by estimating the reduced CO2 emission during the life cycle of the products.
Environmental accountings are similar to traditional accounting, which also requires practitioners to exercise professional judgment but also comply with the accounting policies set by the company. In addition, the estimation methods, measurement approach, and basic accounting ideas are similar to the traditional ones, which makes accountants are the most suitable personnel for conducting environmental accounting.
Analyzer of Environmental accounting program
Cost-Benefit analysis of environmental programs
Once costs and benefits are measured and recorded, companies have to measure and evaluate the environmental programs based and cost and benefit analysis (ACCA, 2016). Cost and benefits of implementing an Environmental Accounting and Reporting (EAR) should be analyzed and disclosed. Green initiatives may increase the profitability, but these programs might also incur extra costs to reduce the profitability. Since the ultimate goal of a company is to maximize the shareholder value, accountants have to carefully evaluate the effect the cost and benefits of green programs in order to maintain investors satisfaction.
Costs might incur due to increased costs of raw materials, natural resource restoration, or recycling centers, and a good understanding of the costs and benefits introduced by each environmental programs helps the company carry out the most effective and efficiency green programs. As part of managerial accounting, environmental accounting provides company with better understanding of the environmental and social costs (Stephenson and Rodriquez, 2014). By using sustainability reporting, companies are expecting to receive all the benefits against the cost. In addition to managing the cost-benefit relationship, accountants are also practicing prediction and evaluation skills during the process. Instead of just evaluating programs that have been already implemented, accountants also working on evaluation and assessment of programs to be developed. Similar to profit and performance prediction in traditional financial accounting, accountants help with predict the financial and non-financial impact of certain green program by synthesizing the information that they have collected from various channels.
Canon, for example, has build a Canon Group Environmental Charter to help with optimizing resource utilization. In 2009, the company launched Green Action and categorized its environmental costs into R&D cost, production and sale cost, and marketing cost. In a three-year analysis, the company has analyzed its environmental costs and benefits, and the results showed that the program was successful since the gain was increasing. IBM also conducted similar analysis, showing that the company has savings and benefits from its green programs exceeding the initial costs and expenditures. Intel also showed that the savings outweighed the costs and the bottom-line number turned green due to the environmental protection programs (Stephenson and Rodriquez, 2014). As a result, accountants are diligent analyzer in the course of environmental accounting.
Environmental accounting gains increasing attention recent years as the society as a whole becomes more aware of environmental issues. People care about carbon footprint and demand companies to care about their emissions caused directly or indirectly by business operation activities. Accountants are motivated to promote environmental accounting due to requirements by government and regulations. One on hand, it serves as an approach to increase customers and investors by portraying the company in the positive lights. On the other hand, environmental accounting helps the company to comply with the rules and avoid penalties. In addition, to build up the environmental accounting, infrastructure information system has to established, which falls into the responsibility of accountants. Meanwhile, as professionals in accounting, accountants can utilize their professional experience and knowledge to conduct cost and benefit measurement and analysis and evaluation of environmental programs. As a result, accountants are playing a major role in promoting a company’s environmental accounting.
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Feldman, S. J., Soyka, P. A. & Ameer, P. G. 1997. Does improving a firm's environmental management system and environmental performance result in a higher stock price? The Journal of Investing,6,87-97.
KPMG. 2016. Global trends in sustainability reporting regulation and policy. Available: http://www.sseinitiative.org/wp-content/uploads/2016/05/Carrots-Sticks-2016.pdf [Accessed 2016 12 4].
Stephenson, S. S. & Rodriquez, N. 2014. Eco-friendly or Eco-frenzy? A cost-benefit analysis of companies' environmental decisions. Journal of Sustainability and Green Business,2,1.
Toshiba. 2014. Environmental Accounting [Online]. Available: https://www.toshiba.co.jp/env/en/management/account.htm [Accessed 12 4 2016].
van Dijk, A., Mount, R., Gibbons, P., Vardon, M. & Canadell, P. 2014. Environmental reporting and accounting in Australia: progress, prospects and research priorities. Science of the Total Environment,473,338-349.