Growing Adoption of Green Accounting at Corporate and Macroeconomic Level - Research Proposal Example

Green Accounting Student Name Instructor Name Course Code and Name University Date of Submission Green Accounting Introduction Climate change has become a world issue that has generated attention to both in governments and private sectors globally. There has been a growing need for corporations and governments to implement policies that address environmental and social issues in their communities as a way of ensuring the sustainability of their operations. Nowadays, corporations are not only in the pursuit of profits, but also investing their physical resources in the conservation of the environment. Green accounting, which is also referred to as environment accounting is not a new concept, but rather has been used for a long time only that it is gaining dominance now. Therefore, green accounting refers to a management tool that is used for purposes such as controlling environment costs, improving environmental performance, developing greener processes, investing in cleaner technologies and forming decisions related to their business activities (Johnson 2009, p. 15). Green accounting has also been defined as the identification, analysis, collection, dissemination as well as flow of information physically, environmental cost, other financial information for conventional as well as decision making on environment in the organization (Johnson 2009, p. 15). These accounting procedures allow a company to identify the costs of environmental conservation during the normal course of business, identify benefits gained from such activities, provide a monetary and physical unit of measurement and support the communication of its results. Historical background of Green Accounting Green accounting traces its origin from the environment accounting practice in the U.S. in 1992 that was a response from outside stakeholders. The pressure from these stakeholders was the belief that pollution prevention would not be prioritized in terms of adoption by industries until environmental costs of non-prevention and economic benefits of pollution prevention could be seen by managers making business decisions (Boje 1999, p. 5). However, this was later to give rise to the functionalist and green accounting, where functionalist EA treated accounting as an isolated function that was only required to facilitate accountability to the investors and managers ignoring societal and natural costs. On the other hand, green accounting encompassed accounting in a wider transorganizational and the transpersonal understanding of stakeholders for both internal managerial accounting and external social and ecological accountability (Boje 1999, p. 6). Functional EA is what is currently taught in the U.S. in management accounting courses. It was the development of the ISO 14000 standards in 1995 that gave vigour to green accounting as it motivated corporations to adopt environment accounting practices, as there was uniform way of accounting for the environment (Boje 1999, p. 6). This contributed to the spread of green accounting from the U.S. to European countries and other nations. Problem Statement Green accounting has been associated with cost savings and competitive advantage for corporations that have adopted the accounting practice. This is majorly due to the regulatory environment that has seen the environment compliance requirements to raise the bar for corporations. Therefore, the implementation of green accounting is seen as a way through which firms can manage environment cost by minimizing compliance costs. Furthermore, green accounting has been identified as an element of strategic decision making as it may provide information on whether to abandon or continue producing a particular product. However, it is the ability of environmental accounting to create competitive advantage that has it gain relevance as it not only makes profits to the company’s shareholders, but addresses social and ecological challenges affecting their stakeholders, who are also their customers. Green accounting guarantees the sustainable development of business. Literature Review The green accounting topic has been heavily researched by many scholars, each taking part of the topic and critically analyzing it. Therefore, this chapter will describe various literature related to green accounting with a view of developing a theoretical framework for this paper. A study conducted by Paul Bailey identified environmental accounting as a useful modification of life cycle costs, which were developed in the 60s and 70s in order to reflect the increase in cost of systems including the cost of energy and labour force. However, this was further expounded by Baba (2012, p. 15-24) in his article named “Advantages of Implementing Environmental Accounting within an Economic Entity”, where he analyzed green accounting further to associate costs such as cosy of waste management and control of pollution. This was different from a study by Stoian (2003, p. 103-180) in an article named “Ecomarketing” whose results categorized potential environmental costs into 4 categories, namely: cost of diversion, damage, costs, cost avoidance and removal, and planning and supervision costs. These authors concentrated their studies on identifying the environmental costs for accounting purposes after a study by the Environmental Accounting Environment Agency of Japan. In 2000, it gave a classification of environmental costs to include the cost of the control of the impact that the business has on the environment, management activity’s costs, development costs, and the cost of social activities and costs representing damages. This study gave a general classification of all the costs associated with the environment. All these costs were meant to help managers account for the environment, which is the objective of green accounting. In a report titled “Japan Environment Accounting Guidelines 2005” by the Ministry of Environment of Japan in 2005, structural elements of environmental accounting were identified as environmental conservation costs, environmental conservation benefit and economic benefit associated with environment conservation activities (Ministry of Environment 2005, p. 5). In addition, the report established that the investment in environmental conservation should be treated as an asset, and it was to be allocated during a target period when the benefits from these investments is recorded as an expense during the depreciation period. Both environmental conservation costs and economic benefits were to be measured in monetary value while environmental conservation benefit was to be measured in terms of physical units. In order to execute environment accounting in an enterprise, the target period had to be the same as the company’s fiscal year, the scope of calculation had to cover all the businesses operated by the company and there had to be standards for measuring environmental conservation costs and benefits. According to Vasile, Cristina and Mihaela (2008, p. 51-84) in an article named “Green Accounting – A Challenge for the Accouting Specialists”, Green accounting also has a macroeconomic dimension where on a national level; it provides information about the quantity, quality and consumption of natural resources which can also be regenerated. National environment accounting provided a picture on the relationship between the economy and the environments. The authors identified that countries needed to address the sustainability of their economies by accounting for its natural resources and differentiating it from corporate environmental management. The author provided national accounting as one of the three contexts in which green accounting would be used. The other contexts include financial accounting and managerial accounting, where the former related green accounting to financial reporting and estimation of environmental costs while the later view green accounting as a decision making tool. This study also finds that green accounting follows the double effect principle of financial accounting, where an element replaces or counteracts the deficiencies and evils done. The World Bank also commissioned a study named “Green Accounting”, with the aim of developing a framework for green national accounts, where it focused on two indicators, namely wealth estimates and adjusted net saving linking macro-economies with the environment and sustainability (World Bank 2010, p. 2). The indicators were built on the idea that the generation of well-being depended on the country’s asset base that included natural resources and human capital. Therefore, the findings established that the country’s capacity to sustain growth in well-being was closely linked to how the asset base varied over time. Another study that emphasized green accounting on a macro-level was that by Bartelmus (2001) titled “Green Accounting”, who analyzed UNEP System for Integrated Environmental and Economic Accounting (SEEA) that introduced environmental and economic assets, and environmental costs associated with degradation and depletion of the environment into the system of national accounts (UNEP 2014, p. 12). In the process of aggregation and valuation, national environment accounting requires the summation of inputs, outputs and environmental impacts as well as combining them into environmentally adjusted indicators that were measured both in monetary terms and physical units. However, the author is quick to point out that environmentalists have criticized SEEA use of market values for pricing categories of nature as they are of the view that environmental assets in monetary term commodity nature, whose intrinsic value should not be subjected to market preferences. They prefer nature to be measured using physical indicators. In recent times, after the passage of carbon emission legislation, market mechanisms such as the cap-and-trade program have emerged, which has presented a variety of complex accounting issues. According to Fornaro, Winkelman and Glodstein (2009, p. 40-45) in an article titled “Accounting for emissions”, cap-and-trade program refers to a market based approach, where credits or allowances are used to offer incentives to firms in order to reduce emissions by assigning a monetary value to pollution. The cap refers to the maximum level of emission that is allowed for a company that is set by the EPA, while the trade aspect encompasses a situation when a company’s actual emissions are either less or greater than the amount covered by its credits, where they have to purchase additional credits in the carbon market. However, the authors analyze the disparities that exist between the standards used to account for carbon emission. In particular, the authors note that there is a difference between the accounting treatment under the IFRS and under the U.S. GAAP. Using the U.S. GAAP, emission allowances are classified as inventories and reported at historical cost using a weighted-average cost method (Fornaro, Winkelman & Glodstein 2009, p. 40). On the contrary, IFRS 3 classifies emission allowance as intangible assets, thus accounted under IAS 38 that gives both the historical cost and revaluation method to be used. The findings of this research identified that the diverse accounting practices for emissions provided conflicting financial results. These disparities are particularly in the U.S. and Europe, although the FASB and the IASB have partnered to develop on a framework for accounting for emissions. In conclusion, the importance of green accounting was emphasized in an article titled “Carbon Accounting and the ETS”, by Collier, Sinclair and Orme who identified that, it would be difficult to provide a true and fair view of the financial position of a business if accountants do not account for GHG emissions (Collier, Sinclair & Orme, 2011, p. 15). However, the authors noted that the lack of an accounting standard that deals with emission trading schemes is a major deterrent to the adoption of green accounting by corporations and nations. Research Methodology Since the topic has been heavily researched, it would be important that this research makes use of secondary research methods to collect data. In particular, this paper will use information from international professional journals, working papers and reports for international organizations. The benefit of using secondary data is synthesized unlike primary data that is raw data. Furthermore, this paper will be a library based research where data will also be retrieved from books and magazines that have been discussed and extensively explored the green accounting topic. In particular, the research will identify the focus and nature of these researches, as well as the rate of adoption of green accounting. Finally, the research will use quantitative techniques to analyze the data collected. Conclusion From the discussion, there is a growing adoption of green accounting not only at corporate level, but also at a macro-economic level. Companies that have adopted green accounting have not only been able to account for environmental degradation costs but also reduce the cost of production by investing in clean alternative energy sources. Of particular importance, is the fact that the SEEA has integrated actual environmental expenditures into the computation of gross domestic product of a nation. The importance of a green GDP is that it addresses the sustainability of the growth of the economy as it also takes into consideration the degradation of nature. Therefore, even though there lacks uniform way of measuring the value of natural resources, it is important that nations understand that nature also contributes to the GDP, and green GDP has been established as an indicator that may be used to enhance economic growth. On the other hand, the adoption of green accounting in corporate enterprises has not only enhanced their relationships with their stakeholders, but has also enabled them not only pursue profits but also address ecological and social challenges within their environment. In addition, corporate entities that have adopted green accounting have benefited in terms of stricter control of environmental costs, gaining more customers, gaining ease in meeting compliance regulations, gaining competitive advantage, as well as improving their reputation. Green accounting has been established to provide information that managers may use in decision making regarding product design, production process, waste management and investment in green technologies. Even though there lacks an authoritative accounting standard for green accounting, disclosure of environmental information by an entity is enough to establish a good relationship between them and the society. However, there is need to address the mismatch between U.S. GAAP and IFRS so as to increase the adoption of green accounting by companies. List of References Baba, MC 2012, “Advantages of Implementing Environmental Accounting within an Economic Entity,” Anale. Seria Stiinte Economice, vol. XVIII, no. 2, p. 15-24. Bartelmus, P & Seifert, EK 2003, Green Accounting (International Library of Environmental Economics and Policy, Ashgate Publishing, Farnham; UK. Bartelmus, P 2012, Green Accounting, Viewed from http://www.eoearth.org/view/article/153127 Boje, DM 1999, Green Accounting History, Viewed from http://web.nmsu.edu/~dboje/TDgreenhistory.html Collier, G, Sinclair, J & Orme, S 2011, “Carbon Accounting and the ETS,” Chartered Accountants Journal, vol. 90, no. 6, p. 44-46. Dellaportas, G 2008 “Accounting for Carbons,” Charter, Vol. 79. No. 5, p. 64-65. Ebrahim, A 2013, “Accounting for Green House Gas Emission Schemes: Accounting Theoretical Framework Perspective,” Business Studies Journal, Vol. 5, No. 1. Fornaro, JM, Winkelman, KA & Glodstein, D 2009, “Accounting for emissions,” Journal of Accountancy, vol. 208, no. 1, p. 40-45, Viewed from http://adezproxy.adu.ac.ae/docview/206797095?accountid=26149 Johnson, E 2009, Green Accounting: Environmental Accounting? Viewed from http://www.articlesbase.com/education-articles/green-accounting-environmental-accounting-755857.html Ministry of Environment 2005, Japan Environment Accounting Guidelines 2005, Viewed from http://www.env.go.jp/en/policy/ssee/eag05.pdf Srinivas, H 2012, Sustainability Concepts: Environmental Accounting, Viewed from http://www.gdrc.org/sustdev/concepts/07-ema.html Stoian, M, 2003, Ecomarketing. SASE Publishing House, Bucharest. UNEP 2014, Environmental and Economic Accounting, Viewed from http://www.unep.ch/etb/areas/valuationEnvAcc.php Vasile, P, Cristina, CA & Mihaela, L 2008, Green Accounting – A Challenge for the Accouting Specialists. Annals of the University of Oradea, Economic Science Series, 17 (3), 1387. Wambasganss, JR & Sanford, B 1996, “The Problem with Reporting Pollution Allowances”, Critical Perspectives on Accounting, vol. 7, no. 6, no. 643-652. World Bank 2010, Green Accounting, Viewed from http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTEEI/0,,contentMDK:20487830~menuPK:1187769~pagePK:148956~piPK:216618~theSitePK:408050,00.html Read More