Management and Financial Accounting in the Development of Environmental Policies - Essay Example

Management and Financial Accounting – The Impact on Environmental Policies Introduction. Due to the global awareness on the preservation of ecological balance and the protection of the environment, it is sometimes queried whether an accounting of the environment can be made. One writer was bold enough to offer an affirmative answer. The contributed article claims that the environmental services of all of Canada’s forests can be quantified monetarily and this amounts to a total of ninety three billion dollars. The said services are in the form of climate being regulated which in turn captures and keeps carbon, filters the water and treats the wastes, maintains biodiversity and provides pest control which is undertaken by the birds, among others. (Timmer, John. Accounting for the environment. September 27, 2006. Nobel Intent. Ars technical. [internet]). In a large measure, the environment has become so important a subject that even the art of accounting is now being made part in the quest for attaining worldwide ecological balance. As a matter of fact, disclosure of environmental issues and the duty to report the same is now a corporate task. (Hutchison, Paul D. Environmental Accounting: Issues, Reporting and Disclosure. page 37). This essay will thus be critically evaluating the statement that management accounting and financial accounting both play a role in the development of a robust environmental policy that will contribute to longer term organizational success. In order to complete this task, relevant academic literature will be used to validate the appraisal of the subject theory. Evidence to back up the arguments made in the essay will be obtained from journal articles and other relevant literary items or sources. Overall, the paper will conclude that managerial accounting, as well as financial accounting, is inherently significant in formulating and implementing environmental policies which contribute to long-range corporate success. Financial accounting also has an important function in the development of robust environmental decisions and practices which, in turn, help business entities and organizations in achieving long term success. One of the reasons why this is being asserted is that financial accounting can be used as a monitoring tool or an instrument in gauging or measuring environmental performance. It can therefore be safely said that management accounting is indeed a vital factor in devising plans and programs that will extensively advance corporate concerns over environmental and ecological issues. With those problems properly addressed, the prospect of long-term corporate success is further enhanced. In particular, there is a branch of management accounting which specially covers the field of environment in businesses. This area of knowledge is called environmental management accounting. Management and financial reports. Circumstances, factors and variables surrounding, or related to, the environment come in many forms. A lot of data and information originating from these sources find destination in the accounting records which are finally reflected in several accounting reports either for management or financial accounting purposes. Expenses for water consumption, electricity and power, waste disposal, repairs or maintenance, fuel and oil, office supplies and other costs of a current nature or with a consumable character have direct bearing on the environment. These items are presented in both management and financial accounting statements. Management accounting. It is readily admitted that managerial accounting is actually a segment of a business entity’s information system. In essence, it is responsible for the delivery of periodic statements for purposes of reviewing past performances and of decision making which includes projections. The frequency of preparing these reports varies depending on necessity and propriety. For instance, cash position reports are usually made on a daily or weekly basis while analyses on the status of property and equipment are made available annually or, at the most, at the end of each quarter. Budgets are drafted within reasonable time before the start of the period covered by the appropriations for money. All these preparations generally and normally involve or take into account environmental concerns and issues. To illustrate, if the total petroleum cost paid for by the company for the current week materially varies from that incurred during the previous week as reflected in the periodic cash position report, a review is necessary to look into the variance. It may be checked if the existing vehicles have already reached such depreciated stage which makes the cars less efficient than before, thus consuming more gas. A decisive action may then be taken by management. Any transport equipment unit found unfit may be repaired in order to restore its fuel economy operations. Another option might be to retire some or all of these assets for replacement of new ones that are more economical in fuel consumption and which are friendlier to the environment. Whatever decision to be made to resolve that matter will necessarily have an aspect of cost savings. Incidentally, it also bears on the ecology. Any good environmental practice always goes hand in hand with cost reduction. This kind of remedial action becomes more particularly important if the concerned company has policies that apparently support the preservation and protection of the environment. The implication in this particular assumed incident is that a sound management information system, which necessarily includes managerial accounting, helps the environmental goals of any entity to be achieved leading to robust policies in that direction. As a matter of consequential benefits in a broader and universal sense, those desirable practices will greatly contribute to the success of the enterprise in the longer term. (Adams, Duncan. Concrete recognition. THE ROANOKE TIMES. Roanoke.com. [internet]) This is so because sound environment equates to lesser expenses which to equate to more profits. As a matter of course, profits realized signify good management and a successful organization. (Counting the Savings. GreentheCapitol. [internet]) A more specific illustration – a functional management accounting. The foregoing demonstration is a representation of only a drop in an ocean. What if the company is covered by the Waste from Electrical and Electronic Equipment (WEEE) Directive issued by the European Union which now plays environment protection watchdog? (About the WEEE Directive. BSI. [internet]). That will be something else and that will be something big. Let it be supposed that a cellular phone manufacturing company produces and sells one million units of mobile phones in one year which have a life of three years and the third expiry year comes. Under the presumption that the company does not care for mother earth at all, there is no more need to further discuss how management accounting can be a part of the given situation. However, if that manufacturing outfit has a team of conscientious managers in good behaviour who oversee the operations of the company under sound corporate governance, there will not possibly be an undesirable phenomenon. The most likely incidents and structures will be that there are guiding principles and mandated practices which are put in place generally for the care of the environment, and especially for the retrieval and proper disposal of the units to be retired pursuant to WEEE requirements one of which is aimed at preventing non-operating used electronic products from going to landfills.(The WEEE Directive. [internet]) Along that line, reports on stocks inventory will likely include figures for expired units which have been surrendered and disposed of on one hand, and for expired units which remain un-retrieved or un-condemned. Well designed processes have to be installed to monitor the whereabouts or locations of each unit. Data pertinent in this regard may be obtained from sales statistics and merchandise receipt summaries. It may be suggested that these details are presented in the statement of assets under the inventory caption. Subsidiary records are likewise possible recommendations to keep track of the locations and movements of these wares which can be environmentally harmful if not properly handled. On the other side of it, good practices in collecting these retired phones for the good of the environment will go a long way for the organization and for the industry where it belongs. Taken collectively, these desirable acts will altogether help in achieving sustainable development and business prosperity. At this juncture, it may be mentioned that one company parades this environment friendly process in its publication as part of corporate responsibility. (Corporate Responsibility. About Motorola. [internet]). Financial accounting. In the same manner, financial accounting has a very important role in the development of robust policies which influence environmental causes within business organizations or entities. Financial statements are fundamentally prepared and submitted in compliance with regulatory requirements. Among those agencies that oblige the filing of these reports are state instrumentalities that supervise and regulate tax, stock exchange, trade or commerce and corporate affairs and activities. There are three basic financial statements which are periodically prepared, that is, quarterly, semi-annually and annually. All facts and information presented in these summaries are quantified in terms of money. The annual statements pertain to the final reports which summarize (a) the financial condition of the entity as of the end of a given year of twelve months, (b) the results of its operations for that year, and (c) the flow of its cash funds for the same given year. The first of the three financial statements is called the balance sheet. It is also known as the statement of financial condition. It sets forth the balances of the assets, liabilities and capital accounts in terms of money. Balance sheet details are significant in environmental issues because, for instance, property and equipment being part of assets are presented in the balance sheet. Hence, lands and other real properties owned by the organization are presented in the balance sheet. If well prepared complete with notes, a view of the company assets will lead the manager to think further. Does this or that land ownership comply with environmental rules and regulations covering such facets like sewage, water and the maintenance of trees and other plants inside? Does this or that building religiously keep the laws regarding the prescribed types of furnaces, chimneys, dark smoke and other pollution problems? (SMOKE, GRIT, DUST AND FUMES (Part II). Clean Air Act. Legislation. UK Public Acts. [internet]). The second kind of financial statement is the income statement or the statement of income and expenses. The income statement shows several expense items which have direct bearings on the environment and ecology among which are water, light and power, fuel and oil, pollution control expenses if not included in repairs and maintenance, depreciation of machines and equipment and environmental taxes like the carbon taxes. (Government urged to raise carbon taxes. Feb 5, 2008. REUTERS UK. [internet]). It is likewise worth to note that the European Union is now zealous in its drives pertaining to environment taxes. (Environmental taxes on aggregate materials in the EU: towards sustainable construction. 27 Jun 2008. European Environment Agency. [internet]). Since annual income statements are prepared comparatively with the figures for the previous year, one can readily see any increase or decrease in costs and expenses and can thereby check if these changes have something to do with environmental concerns. Furthermore, any remarkable observation in the financial statements as against physical evidence has to be assessed. A machine, for example, is acquired at the price of ten million dollars and has an expected life of ten years which means that its yearly depreciation is one million dollars. However, an ocular inspection of the equipment seems to indicate that after a two-year operation, it can only have a total of five serviceable years and that its present net book value of eight million dollars cannot be substantiated by the literal appearance of the asset. Stated otherwise, the machine looks very much lesser in real worth compared to its net book value of eight million dollars. A good management will normally and timely evaluate not only the profit and loss factor. It will also investigate the possible effect of the deficiency in the machine or the presumed mechanical defect to the environment and to ecology. There can be an indication that the machine which has deteriorated in an accelerated manner might not be functioning well and is becoming, in fact, a pollution contributor. The last financial statement is the statement of sources and uses of cash funds. It is also called the cash flow statement. Its connection with environmental concerns will no longer be taken up because all transactions in a clash flow statement are distributed or spread to the balance sheet and the income statement which have already been discussed earlier. Common grounds between financial accounting and managerial accounting. Most of the information and data in the financial statements are also stated in reports within the sphere of management accounting albeit in a different manner. For instance, the actual costs of fuel and oil are presented in managerial accounting reports like the cost variance analysis in order to show the difference between fuel and oil costs as budgeted and fuel and oil costs as actually incurred. The variance or discrepancy will guide the management of the enterprise to analyze where the difference originated and what caused it. On the other hand, the said actual costs of fuel and oil are presented in the ordinary financial statements, specifically the income statement, to show how much really was spent for fuel and oil. In a way therefore, either managerial accounting or financial accounting is helpful in quantifying and evaluating environmental circumstances. In this particular illustration, managerial inquiry may include looking into what caused the difference or variance. Hypothetical question may be asked. Are there wastages? Aside from being cost economy drawbacks, are these wastages damaging or harmful to the environment? Can these wastages be prevented in the future such that the remedies will not only stop cost escalation but will also be helping the environment? (Domingo, Rene. How to cut costs in a recession. 03/23/2009. Money/Top Stories. [internet]) If the issues are favourably resolved, robust environmental policies will naturally developed. Furthermore, the feasibility of corporate success will become more attainable. If this pattern is made widespread in significant proportions, that business prosperity can be well achieved in the long range. A new approach in accounting. Environmental management accounting can be defined as the management of economic and environmental results through the use of management accounting methodologies which are concerned with literal issues such as energy, water and also financial issues such as costs and savings. It is concerned with the accounting of several expenses such as disposal, investment and external costs, among others. Spill over expenditures incurred by the public at large are also included within that realm. (Manjunatha 2008). Use of environmental accounting. Aside from the characteristics and features mentioned in the preceding paragraph, environmental accounting may also be referred to as a set of methodologies that allows for the transfer of data from financial and cost accounting records in order to have all available information and results analyzed with the end in view of maximizing material utility, of decreasing the environmental impact of production activities, and of reducing the costs incurred in the process of environmental protection. It should be highlighted that this form of accounting combines both monetary and physical data. The facts and information obtained from environmental accounting can be used to establish and review policies which relate to and connect with environmental matters. These include cleaner manufacturing methods, pollution reduction, sustainability reporting, the formulation and implementation of environmental management projects and so on. It should be highlighted that both public and private companies use environmental management accounting (Xiaomei 2004, p 47). Since the discipline of accounting in general seems to be undergoing evolution in terminologies, environmental accounting may continue to be premised on the basic procedures of the old reliable financial accounting concepts in the attempt to enable a company to re-focus its annual reports to elaborate more on environmental costs, history and objectives. By providing sufficient environmental information in the financial reports, companies can generally be transparent regarding environmental costs and can provide more comprehensive facts and data to show sustainability development and sound environmental policies. Environmental financial information which can be incorporated in the financial reports may include environmental costs, liabilities, impairments, risks and potential benefits and assets. It is also worth highlighting that data and information used by environmental management accounting in its approaches, including the measurement of performance, are basically obtained from the financial accounting databank. (Yakhou, Mehenna and Vernon P. Dorweiler. ENVIRONMENTAL ACCOUNTING: AN ESSENTIAL COMPONENT OF BUSINESS STRATEGY. Business Strategy and the Environment. 2004). In sum, financial accounting has a highly pertinent albeit indirect role in attaining the objectives of environmental management accounting (Manjunatha 2008, p 175). Overall, accounting approaches such as inventory procedures and sustainable cost approaches can help companies to implement their plans and programs for robust environmental policies. It should also be pointed out that when it comes to the role which financial reporting plays in the development of environmental policy, there are some limitations in its ability to play that role. The reason for the constraints is that, for instance, financial accountants usually do not have the expertise that is required for the identification and assessment of environmental risk exposures (Baker 1996, p 46). Summarily, management accounting and financial accounting will enable firms and entities to draw in investments which are geared towards sustainability development in particular and environmental issues in general. It should be stressed that the bulk of these investments could come from institutional investors which have the propensity of investing substantial amounts of capital within and among companies. Furthermore, via financial reporting which is focused on providing investors with information about environmental data, it would be possible for a company to attract investors known as ‘ethical investors’. Fundamentally, these interest groups tend to invest and to have stakes only in companies which can show that they have strong and healthy policies toward the protection and healthy preservation of the environment. By providing them with extensive disclosure about environmental policies through financial reports, this group of investors will have ample information to make an informed investment decision and will thus be more likely to invest. In addition to this, by using environmental management accounting and environment-oriented financial accounting, companies can make disclosures about their environmental and sustainability development initiatives which will in turn contribute towards raising the public profile of the company under consideration and this could in turn have positive effects on the trading value of the firm’s share prices in the stock exchange or in the open market. (Baker 1996, p 46). Conclusion. In making a final evaluation of the matters at hand, there is no doubt that management and financial accounting can play a significant role when it comes to the development of robust environmental policies. In the case of management accounting, the use of environmental management methodologies can aid in accomplishing environmental goals such as reducing costs related to environmental protection. By incorporating environmental data into financial accounting, companies can make disclosures about environmental financial data like environmental costs, environmental assets and allied variables. All these can aid in the efforts of drawing in investors who are environmentally oriented, especially referring to institutional investors with interests in wholesome and desirable ecological balance. It may also enable a company to attract ethical investors as well as raise the overall profile of the company. Along these directions, long term financial benefits such as increased capital investments and increments in share prices have the potentiality to be achieved. It may be noted though that the role which financial accounting plays within this ambit may be limited owing to the lack of expertise on the part of financial accountants in terms of identifying and assessing environmental financial information. (Borghini, Stefania. 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