Explain what accountants mean by environmental accounting and illustrate the importance of the role of environmental performance indicators.

Gray, (2001) States that, ‘to what extent can the privileged minority of the worlds population continue to enjoy life of rising luxury whilst the planets eco-systems collapse.’

This comment is perfectly introduces the concept of environmental accounting which takes into account the effect on the environment of the organisations actions, and therefore adjust there financial figures to reflect this, as Emery (2002) states, most organisations have an environmental impact of some kind, therefore environmental accounting has become evidently essential in contemporary society.

The roots of environmental accounting come from the concept of corporate social responsibility, which emerged in the 1960s, Glautier (2001). Firms are encouraged to take account and address the impacts, which they have on their external environment. Ecological and social externalities are the most common aspect of these, these are not included in the companies’ financial statements, but have both positive and negative impacts on the company’s external environment. Environmental accounting tries to put a monetary value on them in order to include them in the company’s financial records.

The Environmental Protection Agency (EPA) defines environmental accounting as "the addition of environmental cost information into existing cost accounting procedures and/or recognizing embedded environmental costs and allocating them to appropriate products or processes” <http://www.epa.gov/opptintr/acctg/pubs/indepth.pdf>(12/05/03).

Similarly the Australian governments environmental website states ‘Environmental Accounting aims to provide organizations with the information required to understand the full spectrum of their environmental costs and to integrate these costs into decision making’ <http://www.environment.gov.au/epg/environet/eecp/> (12/05/03).

By doing this, the company is able to see a more accurate figure as to the costs of production of their goods or services.

There are two main types of environmental accounting, financial and management, they are concerned with external users of information and internal users of information respectively. Although there is a difference in the type of information presented the underlying objective is the same, to satisfy the information needs of the user <http://www.tutor2u.net/business/accounts/financial_management_accounting_comparison.htm> (12/05/03).

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Financial environmental accounting places a monetary value on company’s actions, which effect the environment, aiming to improve the accuracy of financial statements, identify impacts on the firms profits (compliance costs) and provide information about the firm’s environmental and economic performance to external users of the information. They are trying to capture the social costs, including them in statements as financial environmental accounting is trying to provide a record of these costs on its profit, Emery (2002).

Management environmental accounting prepares information for internal use, in order to develop business objectives and strategies and translate them into operating plans, formulate a budget, assign accurate costs to products and services so that the correct price can be set, Emery (2002). A third type of environmental accounting is linked to national income accounting, called national resource accounting, this is a macro economic measure of production in the economy, environmental accounting can look at the use of the nations natural resources in the production instead of just the output figures.

In conclusion, accountants understand environmental accounting as the process by which they try to place a monetary figure on environmental impacts the firm incurs externally, and takes into account legal pressures that affect the profits of the firm, including these costs in financial statements, which can be used both internally and externally for the benefit of the company. The accuracy of the information gathered is variable in both quality and type and varies between firms. In order to try and gather steady reliable information companies will use environmental performance indicators, as well as production performance indicators. I will now explain what these are and explain their importance in environmental accounting.

Performance indicators measure the output resulting from an activity; environmental performance indicators measure the impact of the organization on the environment, Emery (2002).

Environmental indicators can be divided into three main groups. The first is Operational Performance Indicators, which provide information on environmental performance of an organization’s operations (sometimes known as lagging indicators). The second is Management Performance Indicators, which provide information on an organization’s capabilities and efforts in managing issues that have an influence in environmental performance (sometimes known as leading indicators). Thirdly Environmental Condition Indicators describe the quality of the surrounding environment, these indicators are usually only considered if it is deemed that the organization significantly interacts with, and/or contributes to, the state of the surrounding environment. <http://www.environment.gov.au/epg/environet/eecp/> (12/05/03).

The importance of these indicators can also be seen to be threefold. The first is external pressures on firms from the government, and legislation passed on environmental discharge limits, and resources usage. To conform and meet the pressure of these external targets business would need to measure their environmental performance and adjust their operations accordingly in order to comply and therefore avoiding financial penalties and bad publicity from external pressure groups and the government

The second key importance of environmental performance indicators is that by using these indicators and standard performance indicators the company is able to see short comings in its production methods, for example where resources are not being used to there full potential or too much waste is being produced, <http://www.gemi.org/MET_101.pdf> (13/05/03). This could lead to more efficient production techniques being implemented, and recycling programmes but in place to reuse what was before deemed as waste to produce other outputs, costs of inefficiency are often not accounted for (Bennett 1998). In doing this, the company is able to increase its efficiency, cut its costs, and therefore increase its operating profit. This may not be the case in the short run but in the long run it should benefit the company, once new procedures are well established. By implementing increased efficiency and recycling techniques it will help to boost the companies image in the public, and governments eyes, so increasing its reputation and again leading to a stronger profitability in the future. An example of this can be seen with Boots PLC, which reduced carbon dioxide emissions by cutting out unwarranted transport distances, which in turn cut costs and maintained the steady increase in the companies turnover <http://www.boots-plc.com/environment/information/info.asp?Level1ID=19&Level2ID=90&Level3ID=86&Level4ID=93> (14/05/03)

The third, and key importance of environmental performance indicators is to provide core data for environmental reports and statements that can then be used in the company’s reports and financial statements, released to the public. By using the indicators it is easier and more reliable to get accurate results for which environmental related actions can have a monetary amount placed on them in order for environmental accounting to take place in an accurate manor. Such as in the metal plating industry where reports are required by law on the companies operations, especially its outputs < http://www.epa.gov/opptintr/acctg/pubs/indepth.pdf> (14/05/03).

Indicators can also be used in a system of benchmarking, where the firm is able to view their results against other companies, different sections within its own organisation or average industry performance. The drawing up of environmental performance indices also help the company to compare its performance yearly to see if its steps re working.

Not all companies have well established environmental auditing systems (Emery 2002), Bennett and James identified three frameworks of environmental performance indicators which are evident within companies, with the third generation one being where companies had a developed environmental accounting system and committed to sustainable development. The third generation is where companies need to be if they wish to benefit fully from environmental accounting (Bennett 1998).

The importance of environmental performance indicators can be seen to be both financial and social benefits to the firms, there uses are able be felt both internally and externally of the company. Scepticism is evident in concerns about the lack of comparability and reliability in the data (Bennett 1998). This is reduced by developing a structured set of indicators, so that the company is able to progress in its cost cutting initiatives, improve sales and supply accurate financial details with the true costs of production displayed through accurate environmental accounting.

References

Gray, R, Owen, D & Adams, C 1996. Accounting and accountability, London: Prentice Hall

Emery, A, R, T 2002. The challenge of environmental accounting The journal of the economics and business education association.

Glautier, M & Underdown B 2001. Accounting: Theory and practice, London: Prentice Hall

Bennett, M & James, P 1998. Environment under the spotlight, Journal of the ACCA, London.

Gray, R & J Bebbington 2001. Accounting for the environment, London: Sage

Bennett, M & James, P 1998. The Green Bottom Line: Environmental Accounting for Management: Current Practice and Future Trends, Sheffield: Greenleaf Publishing

Global Environmental Initiative. (2003). Measuring Environmental Performance [online]. Washington, GMI. Available from: - http://www.gemi.org [accessed 13/05/03]

Environmental Protection Agency (2003). An introduction to environmental accounting as a business management tool [online]. Washington, EPA. Available from: - http://www.epa.gov [accessed 14/05/03]

Tutor 2 U (2003). Comparison of financial and management accounting [Online]. Newcastle, Tutor2u. Available from: - www.tutot2u.net [accessed 12/05/03]