Evaluation of Usefulness of Environmental Management Accounting (Essay Sample)

Environmental Management Accounting
Part A: Evaluation of usefulness of Environmental management accounting to today’s organisation
From a business perspective, ‘Environment’ is not confined to the physical surroundings, but also describes all the influences on an organisation. This environment is so complex and dynamic that Ola (1993) believed that it is impossible to exactly define the business environment. Lawal (1993) classified the business environment into internal and external environment as follows - The internal environment includes the organisation’s situational factors, which mostly are the result of the management decisions and control. It includes the behaviour, completeness, distinctiveness, strengths, synergy and weakness of the organisation. The external environment includes the external factors like competitors, customers, financial firms, labour, suppliers and government agencies. These factors despite being outside the boundary of organisation are relevant because of their potential impact as they can pose threats or provide opportunities and thus needs to be monitored carefully. The business environment is known to have multiple influences on the organisation and tends to shape the goals and outlook of the organisation by imposing several constraints. The business environment consists of factors which are usually beyond the scope of business PEST (political, economic social and technological) and impacts the decision making, strategizing, performance and processes in the business (Eruemegbe, 2015).
The business environment and a business have a bi-directional relationship between as the business creates demand for environment and the environment also creates the demand for a business. These interrelationships between the business and environment necessitate a response from the management towards the environmental factors as the survival and success of any organisation is dependent on the appropriate adoption to its environment which is changing and complex. The management should focus on identifying the strengths, weakness, opportunities and threats (both existing and potential) of the business and respond swiftly to gain competitive advantage. Thus, it is really important for any business to monitor its business environment in a continuous manner (Oghojafor, 1998).
Usually, the managers do not consider the environmental costs to be significant as they do not consider the environmental component of the production cost. These components are much higher than the initial estimates and increase the production cost. If this component is hidden, then it is impossible to separate the two cost component- production and environmental. Thus, the product pricing will not reflect the true production cost as the polluting products will seem to be more profitable despite having hidden costs, which means they were undersold. On the other hand, the cleaner product will appear costly as the environmental overheads are allocated, thus they will be overpriced and profitability will be underestimated (UNIDO, n.d). This could be attributed to the narrow scope of performance and investment appraisal, dominant effect of the financial accounting, lack of motivation and no accounting for externalities. However, with the rise in the impact and incidents related to the environment due to the corporate activities (which are also leading to monetary consequences for the corporates), the need for a better environmental management is understood and can be fulfilled by the environmental management accounting (Schaltegger and Burritt, 2000).
Environmental management accounting is an accounting method for the environmental and material costs of operating a business. The environmental accounting refers to allocation of the environmental costs to the operation whereas the materials accounting refers to the tracking of the materials flow for evaluating the opportunities to improve environmental impact. The purpose of the environmental management accounting is to monitor the economic and environmental performance of a business. It basically includes auditing and reporting, but the full scope involves benefit assessment, full cost accounting, life-cycle costing and strategic planning. The analysis of the environmental impact and costs (both financial and non-financial) allows the business to integrate these costs in its operational decision making, which results in the business optimising its economic and environmental performance and build a sustainable business. However, the relevance of the environmental accounting depends on several factors like the management function, the management decision and role and responsibility of the management in the value chain (Burritt, 2004).
The core purpose of the environmental management accounting is to assess the total expenditure on treating emission, protecting and managing environment on an annual basis. This is added to the purchase value of the material purchase and the cost of production for non-product output. The total sum shows the total cost of inefficiencies on annual basis and based on which companies try to improve their efficiency and information system and achieve the goal of cleaner production (Jasch, 2003). The business managers are aided by the environmental management accounting to decide on capital investment, costing, process and product designing and evaluation of performance. The benefits of cost improvement by environmental management accounting include difference in product pricing as a result of recalculation of costs, profit margins being re-evaluated, non-profitable products being phased-out, products and services being redesigned and improvement in housekeeping. If the managers use the environmental management accounting, they can justify the cleaner production projects to save money and improve environmental performance (UNIDO, n.d).
Environmental management accounting is actually an integrated approach as the data is transitioned from cost accounting, financial accounting and mass balances towards reduced environmental impact and increased material efficiency. Despite the fact that the environment management accounting is not done by nations (it is done by firms), the role of government is significant as the governments can increase awareness about the environmental management accounting. In order to increase the governmental role in better management of environment, United Nations Division for Sustainable Development established an Expert Working Group in cooperation with several governmental and non-governmental agencies. The environmental management accounting was promoted through test projects, publications and international forums for discussion on environmental management accounting. The Expert Working Group, in its first book explained the technique for quantification of environmental expenditures, so that benchmarking and controlling can be done. The external costs (externalities like social and environmental effects on the general public) are excluded as per the methodology. This methodology instead focuses on comprehensively assessing the direct annual expenditure on treating emission, protecting and managing environment and material wastage and energy inefficiency. Thus, the annual total expenditure is first assessed, after which options for improvement and savings are considered and the prices are recalculated. This method suggested by the Expert Working Group is applied in many case studies (Jasch, 2003).
In one such case study on Ecoramic Tiles by Masanet-Llodra (2006), it was found that despite majority of the firms claiming environmental awareness, very few firms are actually concerned about setting-up environmental management system. Guidance specifications like ISO 14000 have introduced environmental perspective in addition to the economical perspective which has made it necessary for the global businesses to respond to the environmental issues and take a proactive approach by taking voluntarily initiatives for environment. There are several potential benefits- lower cost of environmental compliance, energy saving, waste reduction and higher efficiency. In order to get certifications for environmental management systems, the firms are known to show improvement in their environmental performance. This competitiveness is translated into positive results for the firms as not only the environmental performance is improved, but the economic performance is improved as well. It can be inferred that under increased monitoring, firms try to ensure higher compliance (both mandatory and voluntary) towards environment by setting up environmental management accounting system. In comparison to the financial and management accounting (which have generally accepted standards), environmental management accounting has no generally accepted standards and as a result it is restricted to internal use only. Firms are also known to consider the environmental disclosures as an important commitment towards the stakeholders, however the procedure of disclosure is restricted to individual demands rather than providing general information asked by all the stakeholders and also not much emphasis is seen in the annual reports. Another observation is that there is a large gap between the environmental position planned as part of the strategy and the environmental behaviour shown through the operations (Masanet-Llodra, 2006).
Masanet-Llodra (2006) also found that firms consider that competitive advantage can be generated by the environmental management system, which not only exceeds the improvement in the business image, but also improves the efficiency of the production management system by reducing the energy use and reducing wastage. Most of the firms expect their environmental management to improve their business image and also be profitab...