Environmental Management Accounting - Assignment Example

Environmental management accounting Name Institution Date Environmental Management Accounting Q1: Social and political theories Sustainability is one of the greatest concerns of the management. Researchers have identified several approaches used by organizations to achieve sustainability and several other key factors that would need to be addressed in order for the operations of the organizations to be sustainable. The theories for sustainability attempt to address prioritization and integration of social responses to the problems faced by the organization in its environmental and cultural surroundings (Jenkins, 2009). Sustainability has been approached from economics background an approach that through a fiscal controls and incentives framework attempts to price the environment (The Scottish government, 2006). This approach therefore proposes that the best way to ensure that the environment is protected is to assign it an economic value depending on how much people are willing to pay. In this way, sustainability is viewed as an investment problem where the use of the natural resources gives returns that present new opportunities with greater value. If it becomes difficult to relate natural capital with financial capital, then sustainability will require conservation measures to ensure that economies operate in respect of natural limits (Jenkins, 2009). The environmental utilization space approach however aims at observing limits to the maximum pressures that can be accommodated by the ecosystem without causing irreversible damages. These limits therefore work out to determine the boundaries within which the organization may operate in the environmental space (The Scottish government, 2006). In this way therefore the utilization of resources is regulated and will not be done in a manner that will not respect its sustainability. Political models achieve sustainability through realization and respect for human dignity. Of greatest concern is the manner in which environmental issues will jeopardize this dignity so that efforts are focused on supporting human life through fighting for environmentally favourable conditions. The environmental justice and civic environmentalism is one theory that focuses schemes that will prevent or minimize threats to the human life by addressing those that arise from the environment. Another dimension of this model holds the view that conditions must be maintained for encouraging the debate on sustainability. In this approach, establishment of a political system with democracy will require sustaining other factors, economic and ecological, along with those that are directly political. With considerations of the resources and energy efficiency, organizations have promoted sustainability by encouraging saving. Amory, in the 1970s explained his view to the solution to the energy crisis by explaining the potential for saving energy as opposed to exploitation of the nuclear fuel (The Scottish government, 2006). Adoptions of the new technologies that are energy efficient have greatly contributed to the energy and resource efficiency. Of great consideration by organizations is the business point of view of sustainability. This point of view triggers several factors that have been known to encourage or slows down reorganization and innovation. Policies developed to influence the business mechanism will be effective if they will follow an adaptive logic. If policies are developed without considering the business point of view on sustainability, then the result would be failure to understand the firm’s role in sustainable development and bias in comprehension of policies’ relationship (Stocchetti A., 2012). Q2: evidence on growing importance of EMA While organizations and companies continue to engage in their activities, the impact of these activities on the environment will always felt. At the same time most of these impacts have associated business costs that include consumption of the raw materials, the use of utilities like energy and water as well as the generated wastes. Environmental management accounting involves the management concerned with environmental and economic performance achieved by developing and implementing necessary environment related accounting systems and practices. In several companies, this management includes reporting and auditing but in general terms, environmental management accounting will also involve life-cycle costing, strategic planning, full-cost accounting and benefits assessment (International federation of accountants, 2005). It also encompasses activities like identification and collection of physical information on the use of energy, water and materials as well as monetary information related with environmental costs, savings and earnings. The increasing importance of EMA is its contribution to the decision making in several organizations. The decision makers use the available physical flow information and the monetary information to support their decisions that have financial and environmental impact of the organization’s performance. While EMA provides this kind of assistance to decision making, it is important to note that it does not guarantee improvements in financial or environmental performance. EMA will however provide critical information to those organizations that aim at minimizing costs, particularly those related to the environment or environmental impacts (Savage et al, 2001). It is the desire of most if not all organizations to identify and minimize environmental costs and this has been a major driving force for organizations to adapt these practices. These firms have understood that reducing environment-related investments or total environmental operation costs can greatly increase their profit margins. They have also understood the role of EMA in reduction of product/service prices that helps them retain or increase market share. A study on environmental management accounting and reasons behind its increasing use in local governments in New South Wales found that there was an increase in the amount of environmental management accounting information that was being made available (Qian et al, 2011). During the study, it was found that social cultural influence rising from the pressures from environmental regulatory bodies was a major push for organizations to adopt EMA. More pressures were from interested local communities and peer councils. Further motivation were the organizational contextual influences arising from the organizations’ complex waste operations, service designs and uncertainties in their waste and recycling operations (Qian et al, 2011). EMA is therefore an essential tool for creating an internal need in business organizations for a cleaner and economical production process. It has changed the reasons for companies to involve in prevention of pollution activities from the original environmental concern to engagement in these activities purely for the fact that it makes better business sense and results to faster financial benefits (Savage et al, 2001). EMA therefore becomes more significant not just for environmental management but for other managerial activities like process and product planning, capital budgeting, price policies, cost control and allocation and supply process (Vasile & Man, 2012). Q3: Changing role of management accountants Environmental cost is a wide subject and depends on the company’s utilization of information. The costs may include the conventional costs like energy costs and raw materials, hidden costs like those included in accounting systems but lose identity in the overheads, contingency costs as well as costs associated with company image and relationship. Management accountants have therefore experienced more pressure in terms of their responsibilities as the demands of environmental costing continue to increase and diversify. The pressure has been magnified by the constantly changing business environment, competition, regulations, technology and growing uncertainty in the market. Management accountants have had to be able to not just reduce costs, but they have had to ensure minimal impact to the environment by the operations of their companies. The pressure has been a result of concern from stakeholders and other financial providers as well as government, consumers and even employees. To be able to achieve the companies’ obligations in enhancing their environmental performance, the managers have been expected to avail information related to environmental costs and associated with the operations of the company. It is generally accepted that environmental change is a great contributor to organizational change. From this line of argument, it can be argued that most management accountants changing roles are indirectly related to changing environmental conditions. Since these conditions will always keep changing, managers experience constant pressure to regulate the companies’ activities to ensure a harmonious coexistence between the company and its sorroundings. Q4: challenges an organization would face in assessing environmental cost Organizations will usually experience several challenges when it comes to assessing their environmental impacts and the associated costs. The data collected by the managers could in one way or the other understate or overstate the actual environmental costs. Over reporting may be contributed to by several potential causes although it has been found that these causes have minor effects. An example would be a case where respondents may include costs incurred in addressing the health and safety for workers as costs for pollution control (United States, Office of Technology Assessment, Congress, 1994). Jasch (2003) argues that are not usually fully recorded and this results to distorted calculations aimed at improvement options or achieved savings. At the same time, those projects carried out to minimize emissions or wastes at their source are not usually recognized and are never implemented. Further challenges are presented by the fact that usually the environmental manager will rarely have access to the cost accounting material and documents. But while the controller has most of these information, he cannot make proper use of it. The result is serious communication problem between the two and more obstacles on the road to a successful environmental costing assessment (Jasch, 2003). A greater challenge for the management accountants would be to bring out the complete picture which definitely would mean inclusion of the important benefits enjoyed by the organization as a result of the environmental regulations. This cost is associated with that which the organization, society and workers would be forced to bear in the event that these environmental regulations were not enforced. It is very difficult to approximate and quantify this benefit. It arises in different ways. An environment that is kept clean and hygienic will to great extent lower health care costs and in one way or the other improve the people’s health, enhance resource productivity and at the same time provide valuable amenities (United States, Office of Technology Assessment, Congress, 1994). Murphy (2010) points out that from a business point of view, it is usually difficult to define and approximate environmental costs. She says that considering the last few years, these costs have been considered to be part of those costs used to run the business. This has made it very difficult to successfully assess these costs independently as part of the environmental management accounting. Initially, wastes or other substances released into water bodies, the air or land and the resultant environmental pollution was regarded as a social cost, or as commonly referred, an externality. The emergence of new regulatory laws has however changed things. It has resulted to what is commonly referred to as internationalization of most of the environmental externalities. An example is the case of rising need of additional capital investments in training and equipment or the fees and fines that are a result of noncompliance. The trend is that environmental externalities continue to be internalized while investors are beginning to get interested in the environmental risks that their investments may be exposed to. In this way, therefore new costs emerge and contribute to the complexities in environmental cost assessment (Murphy, 2010). Environmental costing managers are therefore faced with a difficult task as they try to ensure that product costs remain accurate in order to enhance effective decision making by trying as much as possible to capture all these new costs into the cost accounting system. The other most obvious reason for the challenging environmental cost assessment is the numerous factors that contribute to this cost. All factors that have an environmental impact will definitely contribute to this cost. On the global scene, the global economy has to part with approximately $ 4.7 trillion yearly according to the report on environmental costing assessment in April. This is an indication of the scale of the costs associated with the environment. This included costs associated with air pollution and related health costs, effects of gas from greenhouses, and the loss of benefits of nature like carbon storage in forests as well as the loss of the natural resources. Other externalities include water use, air pollution, waste, air pollution and land and water pollution. Other business establishments with great environmental impact like mining meet further costs while they try to account for things like natural resource use as well as pollution costs, according to a report by The Economics for Ecosystems and Biodiversity (TEEB). It becomes very difficult for organizations to fully and effectively account for all the costs and come up with an accurate environment cost assessment (Bloomberg, 2013). Q5: Environmental cost frightening picture of total annual cost of inefficiency The research by TEEB reports that about $4.7 trillion is the cost of the impact of businesses on the environment every year. This is a large sum of money by all means! Environmental costs have now been taken with greater seriousness with organizations indentifying and including more details and components into this cost. Originally, organizations understood environmental costs to describe what is commonly referred to as private environmental costs-that which had direct impact to the firm’s bottom line. Current trends have shown organizations’ reconsideration of environmental costs and have included public, also known as social environmental costs-that which affects the community as a whole. Current environmental cost assessments have included several forms like upfront environmental costs, backend environmental costs and voluntary environmental costs. Gale & Stokoe (2001) point out that environmental costs have been known to form a substantial part of an organization’s costs, and may be between 5% to 20% of total cost of doing business. They also argue that environmental costs are still likely to raise due to the increasing pressure from environmental protection agencies. While reporting on their environmental performance in the 2011 and 2010 financial years, Toshiba gave an insight onto the scale of their environmental costs as well as the resulting environmental benefits after implementation of environmental investments. Although the company noted a decrease of 1% on its environmental cost, the figure for 2011 was 54.7 billion yen (Toshiba, 2013)! The firm also noted a decrease in their total investments by 6.4% from a previous 9.5 billion yen but the environmental investments accounted for about 2.8% of their total investments! These figures are frightening indeed. Environmental accounting is flexible and could be applied at quite different scales. It may be designed to cover different scopes and will usually be limited by the funds available or the specific use that the information is intended to address. The scale will depend upon the corporate needs, goals, resources and interests and may be applied to an individual process, a system, production line, facility or department, regional groups or it may be applied to corporate division or even the entire firm. Managers will also be concerned with the scope of the environmental investments since this will directly reflect on the financial inputs that will be applied. The scope will determine whether or not the program will go beyond the conventional costs and also include the potentially hidden, contingent, future as well as the image or relationship costs. The scope will also specify whether it is the company’s intention to only consider those cost directly affecting the bottom line performance or whether the company will recognize environmental costs resulting from activities which the company is not solely accountable for. All these considerations go a long way to determine the total environmental costs that will usually be high. Jasch (2003) says that environmental costs comprises internal and external costs and includes all those costs incurred as a result of damage and protection to the environment. It includes costs for planning, disposal, prevention, control, damage repair and shifting actions that may be done in companies, governments or to people. Corporate costs incurred due to contamination of sites, waste disposal and effluent control as well as corporate environmental protection costs that include those costs for measures for environmental protection is part of the environmental costs. Another dimension of the cost is the wastes associated with the production process. When waste is regarded as that material purchased for use but which was not put into any meaningful process to be turned into products then this cost may be considered to be part of the corporate environmental costs. Therefore the costs of wasted materials, labour and capital are also added to the environmental costs. Waste therefore signifies a great level of inefficiency (Jasch, 2003) and if the cost of waste is high then the environmental cost contribution to the cost of inefficiency will certainly be high! Calculations of environmental costs therefore do not only include the disposal costs, but the purchase value of the wasted material as well as the cost of production of the waste and associated emissions are also included. Environmental costs would even be higher if purchase value of other non-material outputs were again added to it. It can therefore be concluded that environmental cost will always represent a significant part of the total costs of an organization but this cost can be minimized by employment of the right culture with proper environmental protection regulations. References Jasch C. (2003). The use of Environmental Management Accounting (EMA) for identifying environmental costs. Journal of Cleaner Production. Volume 11, Issue 6, Pages 667-676, ISSN 0959-6526. Bloomberg. (2013). Environmental Cost of Business Estimated at $4.7T Annually. Retrieved on 6th September 2013 from < http://www.bloomberg.com/news/2013-04-17/environmental- cost-of-business-estimated-at-4-7t-annually.html> Murphy A. (2010). What are Environmental Cost? – Part 1. Retrieved on 6th September 2013 from < http://www.microempowering.org/external-blog/what-are-environmental-costs- part-1> United States, Office of Technology Assessment, Congress (1994). Industry, technology, and the environment competitive challenges and business opportunities : report. Derby: DIANE publishing. Gale, R.J.P & Stokoe P.K. (2001). Environmental Cost Accounting and Bussiness strategy, in Chris Madu (Ed.) Handbook of Environmentally Conscious Manufacturing. Dordrecht: Kluwer Academic Publisher. Savage D. E., Ligon P, J. & Lomsek J. (2001). Environmental Management Accounting: Policies and Linkages. Retrieved on 6th September 2013 from Vasile E & Man M. (2012). Current Dimension of Environmental Management Accounting. Procedia-Social and Behavioural Science, Volume 62, Pages 566-570, ISSN 1877-0428 Jenkins W. (2009). Sustainability theory. Retrieved on 3rd September 2013 from < http://www.berkshirepublishing.com/assets_news/sustainability/Spirit_SustainabilityThe ory.pdf > The Scottish government (2006). Chapter 3: theories and principles for sustainable development. Retrieved on 3rd September 2013 from Toshiba, (2013). Environmental accounting: As a tool for environmental management. Retrieved on 6th September 2013 from Stocchetti A. (2012). The sustainable firm: from principles to practice. International Journal of Business and Management; Vol. 7, No. 21. International federation of accountants (2005). International Guidance Document: Environmental Management Accounting. Retrieved on 6th September 2013 from < http://www.ioew.at/ioew/download/IFAC_Guidance_Env_Man_Acc_0508.pdf> Qian W., Burritt R., & Monroe G., (2011). Environmental management accounting in local government: A case of waste management, Bingley: Emerald Group Publishing Limited. Read More