Environmental Management Accounting - Case Study Example

Undertake a review and evaluation of the research that has been undertaken in relation to management accounting, and the contributions made to modernindustrial management / modern business, identifying examples of possible “good practice”. 1. Introduction In the context of modern market the effectiveness of businesses to control their financials is secured through the use of appropriate Management Accounting techniques. However, the continuous increase of competition has set for businesses the following challenge: the measurement of costs and performance has become quite difficult especially since the profits related to daily business operations cannot be guaranteed due to instability that characterizes global market. As a result, the continuous update of Management Accounting has been considered as unavoidable for securing its value in supporting business growth. This paper focuses on the developments of Management Accounting as reported in the last 30 years; emphasis is given to two of these developments: Environmental Management Accounting and the Non-Financial Performance Measurement Systems. It is made clear that the introduction of innovative practices and principles in Management Accounting can highly increase its effectiveness but only under the terms that business values and ethics are not threatened. 2. Developments in Management Accounting 2.1 Environmental Management Accounting The introduction of environmental accounting, in 1970s, has been related to the need for aligning governmental and business practices with the principles of sustainability so that threats for environment worldwide to be minimized, as possible (Khalid et al. 2012). Environmental accounting is categorized as follows (Khalid et al. 2012): a) accounting at state level; it focuses on the review of macroeconomic factors that can influence national income; b) financial accounting, related to the potential effects of business activities on the environment and c) management accounting which is based on the involvement of ‘environmental data on business strategic planning’ (Khalid et al. 2012, p.2). In this study emphasis is given especially to the third aspect of environmental accounting, i.e. the Environmental Management Accounting (EMA). The effectiveness of EMA in practice is explored in the study of Abiola and Ashamu (2012). In the above study reference is made to the use of EMA by the National Petroleum Corporation (NNPC) of Nigeria. The methods used by NNPC for checking and reporting its performance in regard to the implementation of EMA are analyzed. It is proved that EMA cannot lead to correct estimation of a firm’s costs unless it is based both on financial and non-financial measures, such as ‘personnel hours and materials used’ (Abiola and Ashamu 2012, p.79). On the other hand, Cullen and Whelan (2006) have noted that the effectiveness of EMA in leading to environmental outcomes can be evaluated using two approaches: a) the’ private cost approach’ (Cullen and Whelan 2006, p.1); this approach emphasizes on the need for incorporating environmental outcomes into a firm’s existing management accounting practices and b) the ‘external cost approach’ (Cullen and Whelan 2006, p.1); this approach relates environmental outcomes with ‘the non-market costs of business activities on the society ‘(Cullen and Whelan 2006, p.1). The approach that a firm will choose for achieving environmental outcomes will be based on business objectives, the firm’s CSR Code and the costs involved (Rikhardsson 2006). From a similar point of view Vivayagamoorthi et al. (2012) have noted that EMA has a unique mission: to promote the use of environmental costs for developing strategic decisions related mostly to a firm’s internal environment. At the same time, the internal decision making process can be quite complex; using appropriate tools of cost analysis could secure the effectiveness of the process; activity based costing (ABC) is one of the most popular tools of such use (Vivayagamoorthi et al. 2012). EMA can be also involved in the assessment of investments. A tool commonly used in the context of EMA for such assessment is the ‘Total Cost Assessment’ (Vivayagamoorthi et al. 2012, 149), a strategic tool based on the principles of capital budgeting (Vivayagamoorthi et al. 2012). The performance of a business in regard to EMA can be primarily checked by reviewing the firm’s annual report; there, information should be incorporated for indicating the performance the business in applying EMA (Qureshi et al. 2012). The information related to the above role is usually the following: product costs, costs for improving a firm’s waste management systems, statistics in regard to the limitation of ‘a firm’s waste and toxicity materials’ (Qureshi et al. 2012, p.87) and so on. It should be noted that costs related to EMA do not refer only to the present but also to the future, at the level that the estimation of a firm’s costs is based on credible cost analysis techniques (Esty and Simmons 2011). According to Firoz and Ansari (2010) the techniques used in the context of EMA need to be aligned with appropriate international standards, such as the International Financial Reporting Standards; only in this way, failures in estimating a firm’s environmental outcomes could be avoided. This issue is also highlighted in a report published by the International Federation of Accountants (2005). In the above report emphasis is given to the fact that businesses tend to use different rules when developing their EMA practices. The case of unethical practices when promoting EMA is explored in the study of Lior (2013). Through the research developed by Lior (2013) it has been proved that specific paths are available for checking the alignment of a firm’s EMA practices with ethics. International standards and Regulations are vital for controlling unethical practices related to sustainable business practices (Lior 2013). In the context of EMA a business can be considered as based on ‘good practice’ in specific cases, such as: when it provides analytical information for the waste involved in its activities (Bennett et al. 2001), when it invests on R&D for increasing the sustainability in its units (Ahmad 2014), when it publishes its policies that promote sustainability and so on (Fields 2011). 2.2 Non-financial performance measurement systems The introduction of non-financial performance measurement systems is considered as one of the most important contributions of Management Accounting. Of course, the value of performance measurement systems based on financial data cannot be ignored. In practice, it has been proved that performance measurement systems of organizations can be more effective when they are based on both financial and non-financial metrics (Zuriekat et al. 2011). Moreover, Franco-Santos et al. (2012) noted that traditional performance measurement systems have important disadvantages, such as their need for complex calculations which usually require excessive working hours, a fact that leads to the significant increase of employee costs. At the same time, the figures resulted using these systems may not be accurate, being influenced by temporary conditions or events that are not expected to occur again in the future (Sharma 2009). For example, the findings of performance measurement using traditional performance measurement systems may lead to the assumption that no balance exists between costs and profits in a particular organization; however, the above assumption can be non-valid if the costs of the firm in the previous year have been highly increased because of an unexpected event, such as a flood, that caused extensive damages on the firm’s key manufacturing unit (Davilla et al. 2012). On the other hand, Adler (2013) stated that non-financial performance measurement systems have become quite popular mostly because their demands, in regard to specialized knowledge, are limited. In the past, performance measurement has been a task developed only by managers with background in economics (Epstein and Lee 2010). Since the introduction of non-financial metrics, the popularity of performance measurement, as a strategic process, has been highly increased since the process has been made accessible also to managers with no previous experience or knowledge on economics (Abdel-Kader 2011). Moreover, the information used in non-financial performance measurement systems reflects the actual status of the organization, as of its various departments (Davila et al. 2010). In opposition, in traditional performance measurement systems the data used in performance measurement has been often irrelevant to the actual performance of the business in regard to the activity involved (Hoque 2006). 3. Conclusions and Recommendations The developments in Management Accounting, as related to the sectors presented above reveal the potentials of Management Accounting to secure business growth. More specifically, through EMA a firm is able to assess its performance in protecting the environment (Bennett et al. 2003). Also, using EMA a firm can improve its market image, a fact that could help to the improvement of the firm’s relationship with its stakeholders (Al-Mawali, H., 2013). On the other hand, it has been proved that EMA cannot guarantee the ethical behaviour of businesses. The use of International Standards and of laws regulating business activities is critical for ensuring the violation of ethics through EMA (Ahmad 2014). A similar assumption would be developed in regard to the non-financial performance measurement systems. These systems, as involved in Management Accounting, have helped managers to develop more effective decisions (Davilla et al. 2012). In addition, the specific systems have the following advantage: the information on which these systems are based is not affected by market changes (Adler 2013). This means that the decisions produced based on such information could remain effective even in the case of strong market pressures. However, these systems have the following disadvantage: the evaluation of the information on which these systems are based is not based on standard criteria. In this way, different assumptions could be developed by managers even if the information involved in the decision making process, as based on these systems, is the same (Bennett et al. 2002). The above risk could be effectively limited by setting specific criteria, such as average increase of hours of work or average increase on a product’s demand, on which the evaluation of non-financial data is based. References Abdel-Kader, M., 2011. Review of Management Accounting Research. Oxford: Palgrave Macmillan Abiola, J. and Ashamu, S., 2012. “ENVIRONMENTAL MANAGEMENT ACCOUNTING PRACTICE IN NIGERIA: NATIONAL PETROLEUM CORPORATION (NNPC).” European Scientific Journal, 8(9): 76-93 Adler, R., 2013. Management Accounting. London: Routledge. Ahmad, K., 2014. “The Adoption of Management Accounting Practices in Malaysian Small and Medium-Sized Enterprises.” Asian Social Science, 10(2): 236-249 Al-Mawali, H., 2013. “Performance consequences of management accounting system information usage in Jordan.” Business and Economic Horizons, 9(1): 22-31 Bennett, M., James, P. and Bartolemeo, M., 2001. Eco-management accounting: guidelines for accountants, business advisers and environmental managers. BSI British Standards Institution Bennett, M., Bouma, J. and Wolters, T., 2002. Environmental Management Accounting: Informational and Institutional Developments. New York: Springer. Bennett, M., Rikhardsson, P. and Schaltegger, S., 2003. Environmental Management Accounting — Purpose and Progress: Purpose and Progress. New York: Springer Cullen, D. and Whelan, C., 2006. “Environmental Management Accounting: The State of Play.” Journal of Business and Economic Research, 4(10): 1-6 Davilla, A., Epstein, M. and Manzoni, J., 2012. Performance Measurement and Management Control: Global Issues. Bingley: Emerald Group Publishing Davila, A., Manzoni, J. and Epstein, M., 2010. Performance Measurement and Management Control: Innovative Concepts and Practices: Innovative Concepts and Practices. Bingley: Emerald Group Publishing Epstein, M. and Lee, J., 2010. Advances in Management Accounting. Bingley: Emerald Group Publishing Esty, D. and Simmons, P., 2011. The Green to Gold Business Playbook: How to Implement Sustainability Practices for Bottom-Line Results in Every Business Function. Hoboken: John Wiley & Sons. Fields, E., 2011. The Essentials of Finance and Accounting for Nonfinancial Managers. New York: AMACOM Div American Mgmt Assn Firoz, M. and Ansari, A., 2010. “Environmental Accounting and International Financial Reporting Standards (IFRS).” International Journal of Business and Management, 5(10): 105-112 Franco-Santos, M., Lucianetti, L. and Bourne, M., 2012. “Contemporary performance measurement systems: A review of their consequences and a framework for research.” Management Accounting Research, 23(2): 1-85 Hoque, Z., 2006. Methodological Issues in Accounting Research: Theories, Methods and Issues. London: Spiramus Press Ltd. International Federation of Accountants, 2005. “Environmental Management Accounting: International Guidance Document.” Available at . [Accessed at 29 Jan 2014] Khalid, F., Lord, R. and Dixon, K., 2012. “ ENVIRONMENTAL MANAGEMENT ACCOUNTING IMPLEMENTATION IN ENVIRONMENTALLY SENSITIVE INDUSTRIES IN MALAYSIA.” Presented at 6th NZ Management Accounting Conference, Palmerston North, 22-23 Nov 2012. Available at . [Accessed at 29 Jan 2014] Lior, N., 2013. “Sustainability Ethics and Metrics: Strategies for Damage Control and Prevention.” Journal of Environmental Accounting and Management, 1(1): 15-24 Rikhardsson, P., 2006. Implementing Environmental Management Accounting: Status and Challenges: Status and Challenges. New York: Springer Sharma, B., 2009. Accounting Management: Information for Decisions. New Delhi: Global India Publications Vivayagamoorthi, V., Murugasen, S., Kasilingam, L., Venkatraman, K. and Halingam, G., 2012. “ENVIRONMENTAL MANAGEMENT ACCOUNTING – A DECISION MAKING TOOLS.” International Journal of Management, 3(3): 144-151 Zuriekat, M., Salameh, R. and Alrawashdeh, S., 2011. “Participation in Performance Measurement Systems and Level of Satisfaction.” International Journal of Business and Social Science, 2(8): 159-169 Read More