Fostering the Adoption of Environmental Management with the Help of Accounting: An Integrated Framework

Abstract

Social accountability of organizations has been intensely discussed in the recent past. As a means of being accountable organizations pursue many environmental management strategies in addition to other strategies. In order to analyze these strategies various models that trace the development of corporate environmental management have been suggested. However, without supportive greener accounting tools and techniques environmental strategies will not succeed. But there is limited guidance and analysis of how the vital accounting aspects can be integrated with environmental development to sustain corporate environmental strategies. This chapter aims to provide an integrated framework to facilitate the adoption of environmental management with the help of accounting in pursuit of corporate social accountability.

The framework suggests that the development of environmental management in an organization is evolutionary from compliance to leading edge stages. Initially driven by compliance, these strategies will later generate competitive advantage for an organization while ensuring social accountability. To reach the leading edge stage, environmental strategies should encompass all the significant environmental domains while engaging stakeholders on a regular basis. In this process accounting for environmental management (Environmental Management Accounting) with the provision of requisite information will act as the common thread that connects and sustains these practices. By providing useful practical and theoretical contributions the integrated framework adds a new accounting dimension to the existing discussions on how corporate environmental management strategies can be developed over time.

Appendix: EMA Techniques

1.1 Accounting for Energy, Materials, Water and Waste

According to Bennett and James (1998) accounting for energy and materials is the tracking and analysis of all flows of energy and substances into, through and out of an organization. When organizations realize the importance of energy costs, they can follow a piecemeal approach (in-house initiatives) or a comprehensive approach (top-down approach) or even a combination of them (Gray et al., 1993). Due to the wide range of approaches possible, there is no single hard and fast rule for accounting for energy, but any accounting system should attempt to separately identify different types of energies used, relate these costs to the causes of costs, highlight the energy costs in cost reports, etc. The same is applicable when accounting for materials, water and waste.

1.2 Material Flow Cost Accounting

MFCA is a tool for quantifying the flows and stocks of materials in processes or production lines in both physical and monetary units (Kokubu & Kitada, 2012; Strobel & Redmann, 2002). MFCA has been developed based on the principles of mass balance. Accordingly, mass balance implies that the amount of inputs should be consistent with the sum of desirable and no-desirable output (refer Fig. 2). MFCA incorporates both PEMA and MEMA by quantifying material flows and stocks in a process or processes in terms of both physical and monetary units.

Fig. 2

Mass balance of an organization

In MFCA waste is valued at the same rate as the good output, it thereby brings the cost of waste to the attention of the management immediately for requisite action. The benefits of MFCA are evident from both economic and environmental perspectives. From an economic perspective, MFCA identifies the material in both physical units and in monetary units along with their progress through an organization. From an environmental perspective, the reduction of the consumption of materials and energy reduces the undesirable waste outflows from an organization.

1.3 Environmental Capital Budgeting

Capital budgeting is the process of making long-term decisions that involve cash flows beyond the current year (Hilton, Ramesh, & Jaydev, 2008). When environmental considerations are taken into account explicitly in the long-term decision making process, environmental oriented capital budgeting takes place. It is therefore necessary to fully consider environmental costs, cost savings, and revenues in evaluating a potential capital investment (Environmental Protection Agency (EPA), 1995). As Gray et al. (1993) suggest, as the world is becoming more environmentally sensitive, non-environmentally sensitive income streams will be difficult to obtain, leading to early abandonment of projects. Environmental capital budgeting offers financing as well as investment benefits to an organization. Financing benefits such as easy approval and soft financing terms for capital investment projects and investment benefits such as informed decision making are the results of such environmental capital budgeting techniques.

1.4 Life Cycle Accounting

Life-cycle costing estimates and accumulates costs over a product’s entire life cycle (Drury, 2004). According to EPA (1995), life-cycle accounting assigns and analyzes the product or project-specific costs within a life-cycle framework including usual, hidden, liability, and less tangible costs. However, it will be difficult to conduct a comprehensive life cycle assessment of products or projects (Gray et al., 1993). Yet, accountants and other professionals can contribute to life cycle assessment by bringing in financial implications of existing activities and potential future options.

1.5 Environmental Activity Based Costing

Activity-based costing is a two-stage procedure used to assign overhead costs to various cost objects accurately (Hilton et al., 2008; Kaplan & Atkinson, 1998). Despite the fast diffusion of ABC, many companies around the world still use traditional volume-based overhead allocations systems (Fonseka et al., 2005). In a traditional overhead absorption costing system, environmental related costs can be hidden (Burritt, 2004; Gibson & Martin, 2004; IFAC, 2005). It is necessary to bring environmental costs to the attention of corporate stakeholders (EPA, 1995). This necessitates the allocation of environmental costs to the appropriate accounts by allocating them to those who generate them (Soonawalla, 2006).

1.6 Sustainability Balanced Scorecard (SBSC)

Balanced Score Card (BSC) has been promoted as a balanced performance measurement system that overcomes the limitations in conventional performance management. BSC has also been suggested as a strategic management tool as well (Kaplan & Norton, 1992, 1993, Niven, 2002). BSC encompasses four perspectives, namely, financial, customer, internal business and learning and growth. As these perspectives act as only a template, BSC has been suggested as an effective tool to incorporate economic and environmental (and social) dimensions (Dias-Sardinha, Reijnders, & Antunes, 2002, Epstein & Wisner, 2001, Figge, Hahn, Schaltegger, & Wagner, 2002, Moller & Schaltegger, 2005). The environmental (and social) integration into a conventional BSC to make it a sustainable BSC can be achieved in different ways (refer Figge et al., 2002 for more information).