The Introduction of Environmental Regulation in the Business Community - Literature review Example

?Accounting and Finance Literature Review Introduction The issue of introduction of environmental regulation in the business community has spawned a lot of controversy and debate. Various parties, who are either for the introduction of regulation or, for the government to free the market, have sprung up to give an assortment of reasons why their stance is better suited for the Australian situation. When no regulations exist, it translates to mean that the government has given reign of the market to the business community. In this situation, the market tends to operate without any government oversight. However, in the pro-regulation scenario, a set of policies are enacted by the government that seek to influence, or rather control, the behaviour of persons, firms or organisations in relation to the economy. Regulations create and establish rules that should be observed and respected by individuals, organisations or firms that operate within a particular industry or business. Anyone or any entity that does not act in accordance to the preset rules is in direct contravention of the law and is thus subject to punishment by law. The punishment to be handed down can either be in terms of fines, imprisonment or repossession of the respective business. However, in the free market, the allocation of market resources is solely on the foundation of supply and demand forces, this happens in the absolute absence of any form of government intervention. The question now becomes whether free market approach or pro-regulation approach is the best avenue to take in the Australian economy. When it is all said and done, regulation is the appropriate approach to take. This paper will endeavour to illustrate, with logical backing, why this approach is the most suitable one in the Australian perspective. This paper will evaluate twelve articles, which are either for or against, the introduction of legislation to the Australian environment. Literature review The Australian environmental law has received a significant number of revolutions over the last decade. This is with the intent, to make the Australia a more conducive location for persons, businesses and organisations. In contrast to numerous other professions, the accounting community has a direct link with what happens with the change or transformation of the environmental legislation. The work by MJR Gaffikin (2005) strongly illuminates on this situation. Gaffikin notes that change in legislation might result in either an increase or decrease in the total expenses, to be incurred by the affected firms. He additionally cites the example of waste management. He explores this issue and ends up asserting that if firms are made to account for their waste management systems, many firms will have to invest more in their waste disposal mechanisms. This leads to a substantial increase in their overall operations cost. Thus, judging on this fact, then the free market approach is favoured. However, Michael gives a biased assertion that regulation aids in the creation of wealth, this is the view adopted by economists. This literal work is prejudiced in a manner that it does not back its assertions with hard facts. Nonetheless, the author has targeted the whole subject of regulation. In a situation whereby this article is the only information available on the projected impact of legislation, then the measure to be adopted would be to campaign for free market approach. However, this article does not take into factor in the general environmental effect of careless disposing of waste. When objectively analysing how the market would behave in the absence of government regulation, it is akin to analysing how children in the kindergarten would behave in the absence of their teacher. When there is no body of authority, individuals tend to act erratically as no accountability is necessitated. The thought of economy behaving this way is alarming if not depressing. This situation will favour the greedy at the expense of the good and ethical people. This is the view adopted by Juliette (2010) in her article,” Accounting rules could force business to disclose environmental impact”. She categorically states that regulation would ensure ethical behaviour in the affected industry. When companies and organisations are made liable to how they relate with their environment, then it would force them to check on their waste disposal mechanisms. Thus, according to Juliette, the introduction of environmental legislation would lead to an increase in the accountability of the firms. This means that the accounting profession will experience a surge in the number of accounting orders. With this in mind, then the environmental legislation should be enacted. In a research article by Rachael (2009), the author talks of the impact of legislation on accountants. It expounds on how accountants are unprepared to meet with the expectations of the legislation. The study conducted proved that accountants of four in each ten companies that were sampled were, that is before the study, either unaware or unprepared to handle the introduction of the Carbon Reduction Commitment. It goes ahead to show the increase in expenditure that will accrue to firms. However, the article does not elaborate on how the level of unpreparedness of the accountants. This is rather a biased action on the part of the author; this will be in addition to compliance related expenditure. The revelations of this study can be linked with the current situation. A prediction can then be made concerning the level of preparedness of accountants in general. If there exists any form of correlation, most likely direct, then a significant number of accountants are still not prepared for introduction of, any new environmental legislation. As such, when analysing the situation under this perspective, then appropriate measure to take will be to oppose the introduction of environmental legislation. However, the level of unpreparedness of accountants only signals their complacency, not the benefits of these regulations. When a firm decides to comply with environmental regulations, it has to change its whole operational structure. According to Satish Joshi et al, this cost is experienced by the firm in two ways, either variable or fixed costs. An example is when a firm decides to install a new carbon management system. The installation of this system will be followed by an increase in running cost. Aside from the considerable sum that the firm incurred when purchasing the system, there comes some running costs. Satich (2002) gives a list of the costs to be incurred by the firm. He further states that the costs incurred to the firms, due to government regulations, are hidden within costs of raw materials. However, the author fails to mention any cost saving benefits that may come to the firm as a result of these regulations. This can best be exemplified in a situation whereby firms are instructed by law, to, ethically, dispose of their wastes. Subsequently the firm engages in waste recycling projects and in turn reuses these products as raw materials. This form of cost saving is not mentioned by the author. This may be because the author thought these to be insignificant. However, since this paper aims to be objective, it must analyse these small issues. Aside from fixed and variable costs, the author gives a new class of costs; these are visible and hidden costs. Environmental legislation has been known to affect the entry of multinational corporations in a country. These multinational corporations are adversely affected by any form of environmental legislation. As such, before the enactment of any legislation concerning the environment, the impact of these Legislations on multinational corporations should be extensively be analysed. According to the research conducted by Madina Kukenova and JosE-Antonio Monteiro (2008), the introduction of environmental legislation, directly affects the amount of foreign direct investment in a country. The authors engage in the use of mathematical calculations in an endeavour, to prove their theorem. One key theorem the authors applied and relied on is the third country effect. It analysed how other factors in other countries had a hand in the amount of foreign direct investment to be allocated. However, since this paper has set its focus on the effect of environmental legislation, then the theorem of third country effect is of little concern. Some legislation will result in the reduction of foreign direct investment and has negatively impact the economy. As expected with an increase in legislation, the amounts of paper work to be completed increases in the number. This is because companies and corporations must file document proving that they comply and are acting in line with the constraints of the environmental legislation under consideration. In an article written by Rachael (2010), it shows that there is a significant work load that the firm has to handle with accountants in general. This arises from the new allowances that firms should pay and preparing the appropriate documents that should be processed before the deadline. The author shows that acting in accordance to expectations set by environmental Legislations is not an easy feat. The question now becomes whether the introduction of environmental legislation is worthy of the troubles it brings to industrial firms and the accounting industry. According to the article, an additional factor in the environmental legislation is the presence of a clause that requires firms and corporations to forecast their future emissions earlier and then pay for this up front; this act of forecasting results in unbudgeted operational costs. However, the writer notes that the excess amount paid will be repaid. Each new legislation to be enacted has its own pros and cons. Similarly, each has its way of being accounted. For some legislation, a certain percentage of the total cost of waste produced is to be paid. While, in some, there is a fixed figure to be paid depending on the size of the firm. This translates to mean that firms must be well knowledgeable on the environmental legislation that directly or indirectly affects them. Aside from these respective firms, accounting firms must also be knowledgeable on the particular legislation that affects their clients. This means a considerable quantity of reading for these two parties. According to Charles J. Coate, Karen J. Frey and Nikkie S. Sakuvich (2012), their article states that accountants must be well averse with environmental complexities of accounting and the possible treatment for any liabilities and costs. Thus, with an increase in environmental legislation there arises the need to be well informed on the complexities characterising the legislation that may affect the client. As such, in this perspective, it is not of the best interest to take the regulatory measure for controlling the economy. However, this increase in reading material should not impede on the benefits of regulations. The accounting profession is among the most scrutinized professions of the entire world. This may arise from the fact that they deal directly with money. Very few professions undergo the amount of supervision that is accorded to accountants. Argument may be made that, without this close monitoring, they would behave erratically and the result will be people losing their hard earned money. Thus, these regulations help to stream line this profession. Similarly, just as in the case of accountants, the environment should be kept under the watchful eye of the government or a concerned third party. According to Sumit K. Lodhia (2002), the environmental legislation should be put in place and left to operate akin to the accounting profession. He further states that additional education on the Legislations should be facilitated by the government. This will place the accountants in a better position to deal with the cases falling under environmental legislation. This study conducted by Sumit shows the perception of accountants on the matter of environmental legislation. However, it only focuses on accountants in Fiji. This limits the scope within which the results can remain valid. Since the inception of the first environmental legislation, firms and corporation shave been required either by law or ethical practise to disclose their environmental matters. This can either be their waste disposal mechanisms, carbon management or their community development mechanisms. According to Haslinda Yusoff and Glen Lehman (2006), environmental disclosure has fashioned an essential feature in the voluntary practises of firms and corporations. Their research sought to investigate the differences in environmental disclosure between the Malaysian business communities with that of Australia. The main factors that were going to be analysed were the state of art characterising environmental disclosure and the factors influencing environmental disclosure as a whole. The study concluded that both the level of state of art and number of factors influencing environmental disclosure were better and less respectively as compared to the situation in Malaysia. Additionally, the study concluded that a majority of the accountants sampled in both nations were of the perception that environmental legislation should be enacted. The main discussion point was that when analysing the cost of fighting the enactment, or the cost of not acting in accordance to what the environmental legislation demands, is significantly higher than adhering to the demands of the legislation. The study cites the accountants as adopting the idea that these additional funds could be used to sponsor the development of the accounting profession in the various countries. Thus, the study was of the opinion that regulation should be adopted since it is more expensive not to act in line with the environmental laws. Once legislation has been passed, the parties affected must institute modifications in order to be in, a situation to comply with the new law. In most cases, this entails the whole or partial restructuring of business operations, which is sometimes an expensive feat. Thus, it is expected that a number of parties will not comply with the new legislation. According to Jason Mitchell and Majella Percy, and Bridget McKinlay (2006), it is the duty of accountants to ensure that firms and corporations are acting in accordance to the law. Simply put, accountants must assume the role of a watchdog over the operations of businesses that are directly or indirectly affected by the legislation. The research notes that accountants have, however, been slow to take up this new responsibility. It seems that accountants are not enthusiastic on being given this demanding task. A key argument for firms and corporations that are in a situation to be directly distressed by the creation of environmental Legislations is that the extra costs would impede on the industrial development of the nation. Above cited articles that explore the issue on costs have either claimed that extra costs would be derived from increases auditing costs or the creating of better waste disposal mechanisms. However, according to Stephen Meyer (1999) extra costs would be sourced from reengineering costs of business accounting systems. This is done, in an endeavour to be able to keep track of environment related costs. The study found out that when such systems are implemented in a business, cost saving avenues can be found. However, the researcher notes that few business has put into use such systems. The resultant effect is that businesses are still experiencing massive financial costs associated with the adaptation of environmental regulations. The last article this paper will evaluate Nicholas Epstein (2012), which assumes a different approach on this matter. It is evident, judging by the information sourced from the multiple sources this paper has analysed that businesses have no issue on environmental legislation except for the costs associated with their enactment. Nicholas Epstein believes that there should be a system that makes it possible for these expenditures to be transferred on to the final consumer. He cites that the consumer is paying a significantly lower amount than what they ought to pay. If this avenue is pursued, then maybe environmental Legislations would be subject to reduced rejection campaigns. The practicability of this avenue is, however, subject to more debate. Consumers are also feeling the financial burden of increased production costs incurred by businesses. To think that this rise in prices is still not substantial will be attempting to increase the already high inflation rate. Conclusion The potential of the accounting profession in controlling the economy and ethical business practise are unlimited. Environmental legislation is set up, to make certain that the existing daily operations of human beings and businesses do not to the detriment of future generations. Polluting the environment without any due regard for future generations is an act of gross negligence. This means there has to be a control mechanism that checks on the behaviour of businesses. However, the introduction of any form of regulation has an adverse impact on the economic developments of a nation. As such, the enactment of these regulations must be preceded by adequate and thorough research as to how they impact the business community, either positively or negatively. Through the evaluation of the above sampled literature, the decision arrived at is that the introduction of regulations is what Australia needs and the world in general. References Charles, J., Karen, J. and Nikkie, S. 2012. Environmental Accounting and Reporting 101. [online]. Available at http://www.newaccountantusa.com/newsfeat/ip/ip_environmental.html Epstein, N. 2012. When Costs Outweigh Benefits: Accounting for Environmental Externalities. [online]. Available at http://chicagopolicyreview.org/2012/02/15/when-costs-outweigh-benefits-accounting-for-environmental-externalities/ GAFFIKIN, M. J. R. 2008. Accounting theory: research, regulation and accounting practice. Frenchs Forest, N.S.W., Pearson Education. Haslinda, Y. and Glen, L. 2006. INTERNATIONAL DIFFERENCES ON CORPORATE ENVIRONMENTAL DISCLOSURE PRACTICES: A COMPARISON BETWEEN MALAYSIA AND AUSTRALIA. [online]. Available at http://w3.unisa.edu.au/commerce/docs/international%20differences%20on%20corporate%20environmental%20disclosure%20practices.pdf> Juliette, J. 2010. Accounting rules could force businesses to disclose environmental impact.[online]. Available at Madina, K & JosE-Antonio, M. 2008. Does Lax Environmental Regulation Attract FDI when accounting for "third-country" e§ects?[online]. Available at < http://mpra.ub.uni-muenchen.de/11321/1/Monteiro.pdf > Mitchell, J., Percy, M. and McKinlay, B. 2006. Voluntary Environmental Reporting Practices: A Further Study of ‘Poor’ Environmental Performers. Australian Journal of Corporate Law19(2):pp. 182-215. Available at Meyer, S. 1999. The Economic Impact of Environmental Regulation. [online]. Available at Sumit, K. 2002. ACCOUNTANTS’ RESPONSES TO THE ENVIRONMENTAL AGENDA IN A DEVELOPING NATION. [online]. Available at Satish, J.,Ranjani, K. and Lester, L.,2002. Estimating the Hidden Costs Of Environmental Regulation. [online]. Available at Singh, R. 2010. Environmental legislation pushed back a year. [online]. Available at < http://www.accountancyage.com/aa/news/1863369/environmental-legislation-pushed> Singh, R. 2009. Accountants unprepared for environmental legislation.[online]. Available at Read More