The Industrial Green Game Implications for Environmental Design and Management (1997) / Chapter Skim
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Accounting for Environmental Cost
Accounting for Environmental Cost
Pages 185-199
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From page 185... ...
Accounting for Environmental Cost RICHARD MACVE Today's challenges to business to improve environmental performance come from many quarters. They arise from new legislation and government regulations, market pressures from the "green" consumer, interests of stakeholders such as investors and employees, and general public awareness focused by the activities of environmental groups and media reporting.
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From page 186... ...
company should publish details of • the company's environmental policy; • the identity of the director with overall responsibility for environmental issues; • the company's environmental objectives, which should be expressed so that performance against them can be measured (environmental targets and performance as far as possible should be reported in quantifiable tech nical or financial terms) ; • information on actions taken, including details of the nature and amount of expenditure incurred, in pursuit of the identified environmental objec tives; • the key impacts of the business on the environment and, if practicable, related measures of environmental performance; • the extent of compliance with regulations and any industry guidelines in cluding, if applicable, whether the company's sites are registered under the European Community's ecology-audit scheme and the details relating to applications and approvals for registration under British Standard 7750 (Environmental Management Systems)
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From page 187... ...
There is increasing debate worldwide as to what extent more explicit guidance should be given by regulators and accounting bodies to companies on their reporting of and accounting for environmental costs. Most of the concern regarding financial accounting has focused on issues such as the reporting of contingent liabilities for environmental restitution costs and penalties and of impairment to land and other asset values.
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From page 188... ...
The evidence that companies are achieving necessary internal changes is less than that for external reporting. It is not yet clear whether this is because the changes have not yet taken place or because researchers have not yet investigated them adequately.3 Technical Costing Changes Conventional accounting systems may inhibit environmentally oriented actions and expenditures because the costs that are reported -- and included in investment appraisal budgets -- focus on the immediate direct costs of actions, processes, and products and ignore the levels of costs at which savings are most likely to occur (i.e., indirect and longer-term costs)
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From page 189... ...
; Tier 2, Tiers 0 and 1 plus legal liability costs; and Tier 3, Tiers 0 through 2 plus intangible costs and benefits. Conventional accounting systems and evaluation procedures measure the indirect costs at Tier 1 but suffer either from not tracing these costs to processes and products or from allocating them arbitrarily, distorting their relevance (Todd, 1994)
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From page 190... ...
Organizational Changes Attempts have been made to identify the organizational difficulties that inhibit such developments.6 Apart from the additional complexity of TCA calculations (Tellus Institute, 1992) , tracing relevant environmental costs may cut across traditional organizational divisions.
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From page 191... ...
The researchers speculate that there may be aspects of the nature of professional accountancy training (which emphasizes financial measures, precision, prudence, and resistance to change -- caricatured as the bean-counters who say "no") that inhibit accountants from initiating or even responding readily to change.
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From page 192... ...
For example, savings in labor costs may not be apparent if a firm's labor costs are a function of what the company can bear rather than the real workload (Tellus Institute, 1992) , and there may be other diseconomics of scale.
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From page 193... ...
This approach avoids conflicts between these often contradictory outcomes because the externalities that it imposes do not presently have to be internalized -- through regulatory or fiscal mechanisms -- as its own costs. Thus, reporting of expenditures on environmental cleanup may not signify an environmentally "friendly" company but an "unfriendly" company that is doing something to mitigate the environmental damage it is causing.
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From page 194... ...
. However, the power of the financial bottom line has always made it accountancy's strongest weapon, both in its apparent capability to summarize organizational performance across a diverse range of divisions, activities, and products and in its behavioral linkages to incentives and rewards (Ezzamel et al., 1990)
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From page 195... ...
Therefore, the concern is whether the extra costs are justified by the extra revenue or other benefits that result. Such effects of decisions are unlikely to be captured by routine reports of past costs allocated in some inherently arbitrary fashion, however arithmetically precise.9 The nineteenth-century engineers' concerns with identifying true total cost were therefore misplaced.
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From page 196... ...
The significance of such external reporting depends on the extent of changes in management culture and systems and on how new measures influence management decisions. The greening of accountancy involves a reappraisal of how to identify and measure the relevant costs of processes and products (such as TCA)
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From page 197... ...
6. Similar failures of present cost and management accounting systems have also been identified in relation to nonenvironmental investment decisions that involve long-term benefits intangible benefits, or both -- including improvements in cost and management accounting systems them selves.
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From page 198... ...
1994. Financial dimensions of environmental performance: Develop ments in environment related management accounting.
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From page 199... ...
1992. Total Cost Assessment: Accelerating Industrial Pollution Prevention Through Innovative Project Financial Analysis.
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