Management accounting for Sustainable Development - Essay Example

Management accounting for Sustainable Development This paper is an effort to critically investigate whether management accounting process can be of any help regarding sustainable development. In this attempt the paper reconciles the economic and environmental concepts to check their mutually beneficial interaction. It has shown that management accounting can be in true sense, a helping factor towards sustainable development. This may be considered as a new dimension of management accounting in the coming years. Introduction: In the fifties, the concept of growth came as an unexplored horizon in Economics. However when this theory failed to reconstruct the world under the Marshall plan, then economists like Arrow brought a new concept popularly identified as development. Development differs from growth in the way that growth only considers the economic variables of human life while development is more interested in socio economic factors. The concept of development seems to be more justified than growth particularly improving the third world countries. However, whether development can be sustained or not, considering the limited amount of resources in the world, remained unanswered till 1987. Again, development suffers not only from the resource constraint but human life is constantly leaving some permanent marks through some irreversible changes, which also constraints development. The concept of sustainable development put its first step in the human mindset through Brundtland report named as “Our Common Future” (1987). Under sustainable development the needs of the present generation gets satisfied without compromising the future generation’s ability to satisfy their requirements. Sustainable development can be called as a culmination of the decision making process towards sustainability with the internalization of environmental costs. With this cost concept comes the most important and touchy factor known as ‘pricing of environmental goods’. If we fail to judge the proper social cost of environmental loss, then we will fail to put the right price tag on environmental products namely air, water, soil and the waste material that gets mingled with the five elements after merging from the factories. These drawbacks regarding identification of the cost in value terms and putting a price quote will lead to a continuous loss of environmental resources and they will be taken as a ‘free good’. This in course of time will raise the degree of environmental pollution to a higher level (Schmidheiny, 1992). As one of the most valuable contributions in the field of environment related management accounting, Bennet and James (1997) remarked “there is an increasing potential for environmental related management accounting to make a substantial contribution to both business success and sustainable development”. The paper testifies that management accounting can be used as a supportive tool to decision-making processes related to sustainable development. As we know that a proper framework for a sustainable development process must incorporate a cost and benefit analysis to reach a price tag (for environment there is no actual market and so price cannot be determined by a demand supply interaction), management accounting process can provide valuable information in order to measure the cost and price of an environmental commodity properly. It would not be an exaggeration that an integration of environmental economic institutional and social components through the management accounting system is the only option left for human civilization to undergo the process of sustainable development. This may be termed as sustainable management information system. Before we proceed further we better have a glimpse of different concepts involved in the process. Sustainable development: The word sustainable stands for “to carry on”. Let us now imagine a fire that is burning with the help of petrol. Now, this fire will go on as long as it has adequate supply of petrol. Once the petrol is finished, the fire gets extinguished. The essence of this sentence is that a process needs a continuous supply of inputs to provide output over a period. Now, if we compare development with the fire and the inputs it needs to carry on with the petrol requirement, then development will continue as long as there is adequate supply of inputs. The amount of total non-renewable raw material on the earth is constant. So once they get exhausted the process of development (output) will come to a halt. Therefore, we have to opt for renewable inputs such as sunlight, wind power, hydro energy instead of petroleum, coal and others. Again, even though the problem of input will be solved through the renewable inputs, human beings in their effort to live and to develop consciously or unconsciously have inflicted severe changes to that actual form in which nature was before they came. These changes may be termed as irreversible changes. It leads the nature to that extent from where it can never come back to its original posture even if the actions responsible for the above phenomenon are stopped. So, to sustain a development, we have to shift to the renewable energies on one hand and on the other, have to curb our actions responsible for irreversible changes. The process in which development can be sustained over the generations is termed as sustainable development and this is perhaps the most interesting contribution of environmental economics to human process of living. Management accounting: Management accounting can be termed as the process of identifying, measuring, reporting and analyzing information about economic events and organizations. Coming from the informational needs of the individuals embedded into a system, management accounting guides the operating and investment decisions. The following box diagram illustrates the multiple functions that lead to multiple demands for management accounting information: Operational control Provide feedback information about the efficiency and quality of tasks performed Product and customer costing Measure the costs of resources used to produce a product or service and market and deliver the product or service to customers Management control Provide information about the performance of managers and operating units Strategic control Provide information about the enterprise’s financial and long run competitive performance, market conditions, customer preferences, and technological innovations. Source: Atkinson et al, 1997: 12 It is clear from the above diagram, management accounting provides operational information at first that is very useful in improving the performance of the organization. This information gets used in two different management levels serving different purpose. The higher level of management uses this information to support strategic decision making while the middle management uses this to plan and decide. The traditional approach of management accounting is found to be more and more inclined towards quantitative and financial information but with the publication of Relevance Lost (Johnson and Kaplan, 1989), new forms of management tools and techniques have started to find use more frequently and considered as a very important supporting ammunition in internal decision making. Some new and improved management accounting techniques are Activity Based Costing (ABC) and Balance Business Score Card (BBSC). ABC is mainly used to measure accurately the cost of activities, products, services and customers. BBSC is a brilliant tool to link current decisions with future financial benefits. They also found their applications in evaluation of business performance. In these new financial techniques along with the financial indicators non-financial and qualitative information also found their way in analyzing the management problems. In the changing corporate environment these new management techniques have a greater acceptance due to their increased accuracy and better understanding of the business environment. These new techniques have made the management accounting process so flexible that now marginal changes in decision-making gets reflected in these accounting processes. Environment related management accounting: Environmental cost and pricing problems can now be measured with the help of management accounting techniques. The process involves harmonization with information needs, environmental legislation, changing consumer behavior and organizational responsibility - in words of Bennet and James ‘the generation, analysis and use of financial and non-financial information in order to improve corporate, environmental and economic performance (Bennet and James, 1997)’. The environment and management accounting interaction at firm level can be illustrated through the following box diagram: Organization Supply Chain Society Financial focus Environment-related Financial Management Lifecycle Cost Assessment Environmental Externalities Costing Non-financial focus Energy and Materials Accounting Lifecycle Assessment Environmental Impact Assessment Source: Bennett & James, 1997 Bennett and James have explained the above box diagram in the following manner – Energy and Materials Accounting: the tracking and analysis of all flows of energy and substances into through and out an organization Environment-related Financial Management: the generation, analysis and use of monetised information in order to improve corporate environmental and economic performance Lifecycle Assessment: a holistic approach to identifying the environmental consequences of a product or service through its entire lifecycle and identifying opportunities for achieving environmental improvements Lifecycle Cost Assessment: a systematic process for evaluating the lifecycle costs of a product or service by identifying environmental consequences and assigning measures of monetary value to those consequences. Environmental Impact Assessment: a systematic process for identifying all the environmental consequences of an organization, site or project’s activities. Environmental Externalities Costing: the generation, analysis and use of environmental damage (and benefits) created by an organization, site or project’s activity. (Bennet and James 1997) Under the above structure, environmental related management accounting in reality is concerned mainly with the information required to move forward the internal organization. Questions may arise regarding which techniques may be used for environmental accounting. The scale of the entity for which the information will be used will determine the answer to this question. The type of cost concept that will be used in a particular environmental accounting is of great importance. In environmental accounting we follow “different cost for different purposes” principle introduced by J.M. Clark in 1947. The inherent idea of this cost theory is that definitions change with their use. The EPA (Environmental Protection Agency) in 1995 distinguishes between three types of environmental cost illustrated in the following diagram: Source: based on EPA, 1995 Previously, under the old techniques, management accounting systems only managed to consider the conventional cost component of a decision. This cost component gets reflected in the book keeping process of a particular organization. However, under the new technique of management accounting along with the conventional costs to other forms of cost component comes into discussion. Private cost can be referred as the type of cost for which an organization can be held responsible. An example of such cost can be a business process involving discharge of ammonia within the working environment of its own domain for which the people feel uneasy and their productivity falls. This definitely is a cost to the organization but will never get reflected in older accounting practices. Societal cost is a type of cost incurred by an organization such that, for this cost, the organization cannot be held legally responsible. An example of such cost can be a business process exhausting a local water pool using water as a raw material for production. It deprives the others from adequate water supply but cannot be held responsible legally with ease. This phenomenon is profound in third world economies. Under the new management accounting practices these three sets of costs can be taken into account. New indicators for a new practice: The commission on sustainable development, in April 1995, proposed a list of, approximately, 130 new indicators corresponding to four sets of categories. The categories are as follows: Indicators for social aspects of sustainable development Indicators for economic aspects of sustainable development Indicators for environmental aspects of sustainable development Indicators for institutional aspects of sustainable development This set of indicators getting incorporated in management accounting evaluation sheets in various forms are providing a new dimension in measuring cost and price for environmental products in recent times. Conclusion: One problem with the above interaction between the management accounting practices and sustainable development is that till date there is no absolute consensus on the definitions and their interpretation of sustainable development. Our common future twenty years ago has given a path breaking idea but it was without any real direction and bereft of mass acceptance. The probabilistic nature that jumps into management accounting practices whenever it tries to measure an environmental phenomenon raised ample questions on its viability in environmental economics. It has been observed that in the city of London valuation of a particular environmental good through contingent valuation method managed to raise forty percent of the promised amount from the participants in a survey. It can be forty percent for a developed nation, then it is expected that it would have been lower for the developing and less developing countries that are bereft of any financial security like their developed counterparts. However, the above argument gets easily rebutted as, previously environment has always been considered as a free input or free good. With the advent of management accounting practice into the environmental economics in order to reach the long cherished goal of sustainable development, at least raising some fund in favor of it or generating ample public awareness in favor of protecting our mother earth has been possible. References: 1) Atkinson A., R. Banker, R. Kaplan, S. Young (1997), Management Accounting, New Jersey 2) Bennet M. and P. James (1997), ‘Environmental-related management accounting: current practice and future trends’, Greener Management International 3) Callens I. and L. Wolters (1998), ‘Factors of unsustainability: identification, links and hierarchy’ Business Strategy and the Environment 4) Gouzee N. (1996), Implementation of the Rio Agreements: Indicators of Sustainable Development, Brussels, Working Paper 1-96 5) Environmental Protection Agency (1995), An introduction to environmental accounting as a business management tool: key concepts and terms, Washington D.C. 6) Brealey R.A. and S.C. Myers (1998), Principles of Corporate Finance, Tata McGraw-Hill Publishing Company Limited, New Delhi 7) Bhattacharya A.K. (2005), Financial Accounting for Business Managers, Prentice Hall of India Private Limited, New Delhi. 8) Schmidheiny S. with the Business Council for Sustainable Development (1992), Changing course, a global business perspective on development and environment, London. 9) Unctad/GATT (1992), United Nations Department for Policy Co-ordination and Sustainable Development DPCSD (1998), ‘The Indicators of sustainable development: framework and methodologies’, 1998,gopher://gopher.un.org:70/00/esc/cn17/199697/indicators/INTRODUC.ID 10) Kumar H.D. (1999) Biodiversity and Sustainable Conservation, Science Publisher, USA Read More