Evaluation of the Potential Effects of the Introduction of the Environmental Legislation - Essay Example

ENVIRONMENTAL LEGILATION] (Name) (Instructor/Tutor) (Course/Subject) (Institution/ University) (City, State) (Date) Introduction The recent past has seen an increase in the level of legislation especially on environmental and climate change. The Australian Government has introduced regulations in relation to climate change, for instance, the National Greenhouse Energy Reporting, the Carbon Tax and the National Pollutant Inventory. This move of using the free market and pro-regulatory approach to regulation has posed many effects on Societies, corporations and Governments. For instance, it is a requirement of the Australian Government’s National Greenhouse and Energy Reporting System that Corporations should calculate and report the production of energy, consumption of energy and emissions of greenhouse gas (HRL Technology, 2012). The Carbon Tax, on the other hand, obliges companies to have a firm understanding of their energy use and emissions. This requirement is not only from a compliance perspective, but it also ensures that suitable measures are taken to curtail costs to corporations. It provides an enormous opportunity to realize and capitalize on energy saving opportunities (Edwards, 2012). Environmental legislation controls and governs conduct of businesses to restrict accounting options. Accounting regulation was firstly introduced shortly after the Great Economic Depression of 1929. This was after numerous people argued that investors had made poor and uninformed investment decisions due to the problems with accounting information. Since then, there have existed two main competing views as to whether regulation is necessary or not. There are proponents of the pro-regulation perspective and those who are anti regulation, free market advocates. Although there are many theoretical arguments for regulating the practice of accounting practice, this practice have negative and positive on business entities in Australia. The publication of general purpose financial reports in accordance with regulation is one of the principal means by which business enterprises and their directors have to be made accountable. Sources of authority for reporting generally stem from a mixture of legislative and professional or self-regulatory requirements. As far as Australian companies are concerned, the major sources of authority arise from the companies’ legislation, the Corporations Act of 2001 and the accounting standards. Whether the need for financial reporting arises from legislation, that is pro-regulation or from self-regulatory requirements, regulation poses various impacts on business enterprises. This research paper defines and explains the free market perspective of financial reporting requirements. It also delves into the pro-regulation perspective. It analyses the various impacts of regulation on Australian business enterprises. The paper then provides a conclusion with recommendations explaining the whether the researcher supports or opposes environmental legislation on business entities. The Free Market Perspective A free market is a market whereby there is little or no intervention of institutions of authority such as the government or the central bank. The prevailing market conditions are the key and only determinants of the conduct of business entities in terms of pricing, environmental reporting and social responsibility. In a free market, market forces are the determinants of how companies provide information. Such forces ensure that companies provide the desired level of information to all stakeholders. This is because entities have to provide a level of accounting information that is sufficient to meet the economic demand, even in cases where there are no regulatory requirements. Demand and supply forces are drivers that ensure that sufficient information that reaches a socially optimal equilibrium, the cost of providing the information is equivalent to the benefits. Issues such being unable to raise funds in capital markets, either debt or equity finance, when companies have not provided sufficient levels of financial information forces such companies to ensure that they provide such relevant information somas to be able to acquire funds from the capital markets. On the other hand, when companies need to enter into contracts, they have to provide sufficient financial information. This is because such contracts determine the perpetual existence of companies. Additionally, all companies have an impact on society. Therefore, they should act appropriately in provision of financial information. Having the goal of ensuring that performance is on the apex leads to the provision of an optimal amount of financial information to the market. If a manager fails to provider an adequate level of information of the right quality, such a manager would harm his or her reputation, as well as, their current and future career projections. Environmental regulation decreases an entity’s cost of attracting capital by creating or increasing confidence of external stakeholders regarding its operations. Companies that do not perform well, and do not provide information as per the requirements of the market are prone to takeovers. This is because such companies have to be taken over to enhance their performance. Alternatively, most arguments have been posed based on the perspective that managers will have incentives to reveal information, either good or bad. This is because most stakeholders of in the market assume that absence of any information in the market is an indication of the worst. When a company does not communicate a required level of information to the market, then it is considered a lemon, meaning that it represents a defective product. The Pro-Regulation Perspective This perspective is based on the view that companies might not produce an appropriate level of information when there is no compulsory regulation. It is a market failure view. It is an exact opposite of the free market perspective. The market failure view proposes that the market as a whole, including the entities that make up the market cannot be relied on to provide a suitable level of financial information. Therefore, the market would fail to meet the needs of various stakeholders in the absence of regulation. Hence, regulation is required to protect the public interest. This is because most of the business enterprises, especially monopolies, if left uncontrolled, they might misuse that freedom to pollute the environment and exploit the public. Therefore, there is a need of regulating business activities and keep such activities under check because if they are left to carry out their activities on their discretion, they might pose damage into the environment. This perspective considers that accounting information cannot be seen in the same way as other products. This is because it is a public good. Proponents of this approach argue that regulation is required to ensure information is produced for all users and to ensure an efficient capital market. A regulatory approach results in standardized information, which allows great comparability between different entities. There is high information quality. Business entities are required by authority to provide information in their financial statements or reports on how their production activities affect the environment. This will force business enterprises to be innovative and reduce the amount of damage that their production activities cause on the environment. This is because business enterprises are mindful of how the public views them, and they would not like to provide reports that would harm their reputation. The Effects of Regulation on Business Entities Accounting regulation has either social or economic impacts or consequences for many organisations and individuals. This affects those who prepare financial reports and the users of these reports the most. Business enterprises incur economic enterprises as they incur the costs necessary to prepare and present the financial information required by accounting regulation authorities. There is also an economical impact on the preparation of financial reports in terms of portraying the state of the entity when, for instance, the enterprise it seeks debt and equity financing. Other areas that have economic impacts on business enterprises in financial information reporting include entering into wage negotiations or when seeking government assistance, for instance, in the form of compensation if a carbon tax is introduced. Social and Economic Impacts Stakeholders are not left unaffected by accounting regulation. There are economic and social impacts for stakeholders of a business enterprise as the users of financial reports. Shareholders and potential shareholders base their buy, sell and hold decisions on the entity’s financial reports. The same case applies to banks and other lending institutions in making lending decisions. Trade unions may use the financial reporting information to support their wage claims. An excellent example is that of mining companies that are making healthy profits. The mining employees through their trade union may feel they have a right to a wage rise. Governments and other institutions of authority enact legislation, on the basis of financial information of various businesses. This has an impact on society as a whole. Consider the Australian government’s deliberation of an added mining tax based on a view of mining companies as being in a very healthy financial position because of the booming export market. Therefore, with this proposal implemented, it can affect the balance of taxation from various sources within the county’s economy. Political Impacts The environmental regulatory process has also been described as being political. There are several parties that are involved and impacted by financial reporting financial reporting regulation. It should be noted that the term political has been used, and is still used in a wide context to refer to not only to government involvement, but also to the policy making. Therefore, it generally refers to all those who are affected by the regulations. Financial reporting regulation engages both the government, government bodies and accounting professional bodies. Therefore, bodies such as the FRC and AASB have been established by the government to represent various constituents. Financial reporting regulation affects many stakeholders. These include, but not limited to shareholders, lenders, suppliers, customers, interest groups, creditors, and the general public. All these stakeholders rely on the financial information that business enterprises in which such shareholders have an interest provide. Companies and other enterprises that are subject to regulation incur costs as they seek to comply with the regulatory provisions. This is normally because they are forced to disclose information that they may have not wished to or they may not be willing to disclose. The financial reports of reporting entities prepared in accordance with the various regulatory provisions are then deemed to reflect the performance and financial position of those business enterprises accurately. As a result, these financial reports become public documents, available to everyone. However, in representing a political process, the regulatory bodies must consider all the stakeholders and other pertinent parties. This includes those entities that are subject to the regulations. The accounting profession, the reporting enterprises and individuals from various regulatory bodies may always seek to maximise their interests. As a political process, accounting regulation, given the multitude of interests to be considered results into accounting standards and other rules that may not be technically the best. At times, there has to be a compromise between the many interests, upon assessment. Hence, accounting standard setting may not be as objective, neutral and apolitical as might be desirable. Compromises will often lead to financial reports that meet the needs of users. Reduction of Environmental Pollution Environmental regulation obliges business enterprises to provide full reports on how their production activities affect the environment. Therefore, most manufacturing entities whose production activities often affect the e environment either directly or indirectly are required to give detailed report in their financial statements. Since most of the firms want the public to have a superior perception about them, they often seek to reduce the amount of environmental pollution so that they can provide positive reports. Therefore, environmental regulation or legislation gives entities incentives to reduce pollution to the environment. This is because the business enterprises are forced to introduce new technologies and products to regulate discharge of pollutants (Schaltegger & Burritt, 2000). This is as a result of an obligation to use control measures hence promotion of the use of some new technologies that can help reduce environmental damage. Flexibility Environmental legislation instils flexibility among organizations. Due to the existence of the need to provide financial reports regarding environmental conduct, businesses are obliged to be flexible in their operations. This means that they easily adopt and change their operations to suit the environmental requirement. For instance, an organisation may want to provide a report to portray it as an environment preservist. Therefore, it has to adapt production technologies that cause little or no damage to the natural environment (Jenkins, 2002). It should follow this by seeking to make rectification and environmental reclamation where there is little damage to ensure that it produces a report that is favourable in accordance with its claims. On the other hand, sometimes managers are forced to few, selected, favourable disclosures because if they disclose issues regarding negative corporate impacts on the environment, this may not be their best interest. Therefore, external parties are forced to provide incentives for managers to be encouraged so as to be transparent. This may be costly to the users of financial information and reports. Environmental Reasonable Operations The aspect of environmental legislation obliges firms and other business enterprises to practice reasonable operations that are environmental friendly. The free market perspective does not directly oblige organisations to be responsible for their actions. Instead, it forces business entities to practice environmental friendly operation so that they can have a good reputation in the society’s view. The pro-regulatory perspective, on the other hand, provide mandatory rules that leads businesses put environmentally reasonable operations in place, and create economic conditions for productivity. This implies that organisations have to be preserve and conserve the environment so as to create favourable conditions for productivity (Brown & Snyder, 2012). When organisations operate in favourable environmental conditions, they perform better, and it is their responsibility to ensure that the environment is preserved to make it favourable for their productivity, which will increase profitability and continuity. However, coercive strategies have substantive administrative and enforcement costs while highly prescriptive strategies are associated with reduced flexibility, hence great compliance costs. There are arguments which state that there is a conflict between the efforts to protect the environment and economic performance. This means that environmental legislation adds to the cost of reducing pollution as an externality. This is because business enterprises always undertake additional expenditure so as to abate pollution and reduce environmental damage. Reduction of Profits As stated earlier, business enterprises often undertake extra overheads so as to reduce pollution and lessen environmental damage. Environmental regulation from both from the free market and the pro-regulatory perspective requires that firms report minimal environmental damage to please the public and to ascertain their compliance. This implies that out of the revenues that firms gain, they have to sacrifice a certain portion that should go into the reduction of pollution. Consequently, the profits of a firm are reduced significantly, as some of the funds are used in pollution reduction (Jenkins, 2002). Reporting low profits may at times portray a negative image about the organisation as the public will perceive that performance is low. Diversion of Capital Resources Most businesses set aside some amount of capital to cater for environmental conservation. This means that such firms invest in environmental conservation. Due to the requirements of environmental legislation where companies have to provide reports pertaining to environmental damages caused by their operations, such companies end up diverting capital resources away from other potential projects. In most cases such funds could have financed projects with high returns which could in turn lead to growth of the firms. Therefore, environmental legislation impacts firms negatively in that there is no growth and productivity (Jenkins, 2002). Internalisation of Externalities Costs related to environmental conservation as per environmental legislation requirements are perceived as externalities. These are costs that are considered externalities. Regulation on financial reports forces firms to internalize externalities. This increases the costs of operation on such companies. Externalities impact a business entity’s revenues because such costs reduce a firm’s profits and hence it’s overall growth and productivity. Consumption of Management’s Time Environmental regulation, especially pro-regulation requires strict compliance. On the other hand, free market environmental regulation that is does not oblige organisations directly, requires that business entities respond to maintain their competitiveness. Consequently, the issue of compliance with strict environmental regulation absorbs financial resources and takes up significant time of management. This reduces the management’s availability for other tasks which could have contributed positively to the growth of the firm as they concentrate on making decisions and managing issues related to environmental regulation. The overall production of the company might go down. Innovation Since there have to be ways of reducing environmental damage, firms are forced to be creative in how they carry out their operations. Therefore, innovation to reduce environmental damage often leads to reduced costs and increased competitiveness. Firms look for ways of increasing resources productivity to reduce wastes that arise due to pollution. This means that they find out efficient ways of production which increases the entities’ resources while they seek to comply with environmental conservation and legislation requirements. Additionally, business enterprises have to find ways of converting wastes into saleable products to add into their revenue. They often design and use cleaner technologies of production to reduce legal costs and fines, which are often added expenses. Competitive Advantage Environmental expenditures are a source of competitive advantage for a firm (Vogel, 1997). In case of a free market, firms need to have growth strategies so as to maintain their competitiveness in the market. For firms to win many customers and please many of the stakeholders they must prove their concern on environmental conservation. When many stakeholders perceive organisations to be environment conservers, they tend to act in favour of such organisations. For instance they can decide to invest in such companies by lending credit, buy more of such entities’ products just because they have evidence that the firms are mindful of the environment. Therefore, environmental regulation is a source of competitive advantages to business enterprises when they respond positively by provision of sufficient accounting information. Conclusion Despite the negative economic or social impacts that environmental legislation poses on Australian business entities, it instil positive impacts that outweigh its negative impacts. For instance, environmental legislation leads to reduced profits, consumes management’s significant time, leads to internalisation of externalities and diverts capital resources of companies. Environmental legislation is of imperative significance to the public because it obliges business enterprises to reduce environmental pollution, leads to innovation instils flexibility among firms and finally, creates competitive advantage for many business advantages. Therefore environmental legislation is an imperative requirement that governments should create to ensure that firms take public interest into account. Environmental regulation also instils appropriate manufacturing practices as much the public might need to provide incentives to firma so as to provide sufficient information at times. References Brown, K. B., & Snyder, D. V. 2012. General reports of the XVIIIth Congress of the International Academy of Comparative Law. Dordrecht: Springer Press. Edwards, D. 2012. The Australian Carbon Tax: How will emissions reporting be effected? Retrieved November 2, 2012, from http://www.sra.com.au/PageFiles/804/White%20Paper%20-%20Carbon%20Tax%20Impacts%20on%20Reporting.pdf HRL Technology. 2012. National Greenhouse and Energy Reporting System. Retrieved November 2, 2012, from http://www.hrlt.com.au/national-greenhouse-and-energy-reporting-system/w4/i1039695/ Jenkins, R. O. 2002. Environmental Regulation in the New Global Economy: The Impact on Industry and Competitiveness. Northampton: Edward Elgar Publishers. Schaltegger, S., & Burritt, R. 2000. Contemporary Environmental Accounting: Issues, Concepts and Practice. Greenleaf: Sheffield Press. Vogel, D. 1997. Trading up: Consumer and Environmental Regulation in a Global Ecoonomy. Cambridge: Harvard University Press. Read More