AGSM 2009 - The Environmental Accountant

Only in recent times has a broad cross section of social participants across the global community begun to acknowledge the need for a more sustainable environment. The growing recognition of this complex problem has caused communities to seek solutions from individual occupational groups within each social location.

The multidisciplinary nature of the environmental puzzle has meant a variety of occupations, including scientists, engineers and accountants have all, to a degree, claimed some intellectual jurisdiction.

The appropriateness of the contribution of each of these occupational groups will determine how successful a society may or may not be in resolving the issue of environmental sustainability.

Professional accountants are increasingly involved in environmental sustainability.

Illustration: Gregory Baldwin

From a sociological perspective, we are witnessing the conflict from which a uniquely ‘environmental profession’ will eventually emerge.

The process of establishing such professional status is therefore an important social phenomenon that will significantly impact on all eventual environmental outcomes.

Professional accountants, with their historic background in audit, taxation, financial reporting, measurement and costing have become increasingly involved in environmental sustainability.

Accountants must determine specifically which components of their theoretical frameworks, methodologies and techniques are applicable to the problems and issues associated with environmental sustainability. If they fail in this task, both the environment and their professional status will suffer.

Accounting knowledge: A diverse tool

The application of accounting knowledge has expanded to include virtually all areas of business and thus substantially diversified away from its origins in bookkeeping. Initially, the expansion was into the areas of financial accounting, then to auditing and taxation.

More recently accounting expertise has come to include management consultancy, particular forms of marketing, finance, economic forecasting, even recruitment consultancy and the implementation of information systems.

The accounting profession must be careful as to how its knowledge is now applied to environmental issues.

In the later years of the twentieth-century the accountant’s knowledge set has now also become increasingly applied to the analysis and resolution of environmental issues in the pursuit of corporate environmental sustainability.

For example, accountants increasingly provide financial measures of environmental performance, analysis of both financial and non-financial performance information and the communication of this performance both internally through management accounting reports and externally through annual reports, triple-bottom-line reports and other forms of corporate disclosure.

What has driven the application of accounting knowledge to so many social issues?

As problems have emerged for various social groups, accountants have consistently responded by continually readjusting and realigning their knowledge set to expand its application and the social recognition of its value.

This highlights how the value of a profession’s knowledge is not absolute, but subjective and dependent on the circumstances and situations in which it is applied.

In the post-Enron era, accounting now faces a significantly different environment. Perhaps as a result of its continued expansion, accounting has recently been subject to substantial criticism, resulting in ‘Sarbanes-Oxley’ type responses.

The community (by way of regulators and governments) are now calling for the profession to focus on its traditional areas of expertise.

For over a century the applications of accounting knowledge have grown, but now accounting faces difficulties that could diminish both its social value and importantly its effectiveness in terms of the achievement of environmental outcomes.

As a result the accounting profession must be careful as to how its knowledge is now applied to environmental issues.

Accounting and corporate environmental sustainability

Changing social values and increasing scrutiny of the environmental impact of industry now means that corporations are no longer able to claim ignorance about the importance, causes, effects, and life cycle costs of pollution, or act as if there were endless natural resources and disposal options.

Nor can they remain in denial about their impact on the environment and treat pollutants as though they, and the related social and economic costs, ceased to exist once the pollutants “vanished” into the air, soil and water.

The concept of sustainable development, or the need exist on the earth’s income without eroding its natural capital, has become central to the way in which environmental issues are examined by both business and government.

An increasing public awareness of the environmental impact of organisations and the need for sustainable development has changed the environmental performance expectations of influential stakeholder groups within society.

The value of a profession’s knowledge is subjective, and dependent on the circumstances and situations in which it is applied.

To meet these sustainability expectations, organisations are increasingly expected to produce more goods and services whilst creating less pollution and using fewer resources.

Environmental performance issues are essentially business issues. They have the ability to significantly impact an organisation’s financial performance and therefore must be managed effectively.

Together, the business opportunities that are suggested to result from ‘good’ environmental performance and financial consequences resulting from ‘poor’ environmental performance have presented a strong argument for organisations to, at the very least, examine their position.

To effectively manage environmental performance, an organisation must go beyond the mere identification of environmental issues and actively pursue the measurement and control of environmental performance as guided by corporate environmental policy and strategic objectives. True risk assessment can only be achieved by undertaking a comprehensive identification and measurement of environmental impacts and their related environmental costs and benefits.

The adoption of systematic performance measurement approaches for sustainability is claimed to have both environmental and economic benefits, particularly in terms of adding value through creating competitive advantage, reducing costs, enhancing the bottom line and improving environmental outcomes.

Clearly, it is in the measurement and analysis, and the reporting and auditing of financial and non-financial performance information that the technical and professional knowledge set of accountants is particularly relevant to the sustainability agenda.

The application of accounting knowledge has expanded to include virtually all areas of business and thus substantially diversified away from its origins in bookkeeping.

Illustration: Gregory Baldwin

This is evidenced by the increasing reference to “environmental accounting” in both academic and professional literatures since the 1970’s and the escalating volume of financial and non-financial environmental performance information now being disclosed in organisational annual and triple-bottom-line reports.

Environmental accounting

Various approaches to conceptualising “environmental accounting” have evolved over time in the accounting literature.

Historically, corporate accounting systems were argued to be unsuitable for this purpose as they had tended to provide incomplete data and unrealistic targets, systematically under-report environmental costs, and fail to correctly identify the contributions of various products or processes to environmental costs and revenues.

Improving environmental performance information capture and disclosure does not necessarily require a major overhaul of traditional accounting systems.

At a minimum, companies can merely extend current practice to include common environmental costs in budgets and general ledgers, thereby integrating economic and environmental criteria to provide management with the necessary information to manage and communicate their environmental performance efforts.

Nevertheless, despite the steadily increasing presence of environmental accounting in both the literature and in practice, evidence suggests that relatively few corporate ‘leaders’ have embraced the potential of environmental accounting by successfully integrating environmental performance measures into their accounting information systems.

The amount of environmental information reported by companies remains limited and differs widely in terms of quality, generally lacking perceived credibility since the selection of reported environmental information is often perceived by stakeholders to be very much at the discretion of management and neither independently verified or in a regulated format.

While some organisations in industries of “environmental concern” such as mining, petro-chemical and government appear to have higher rates of adoption of these performance measurement and reporting practices, the widely anticipated move to institutionalised environmental accounting has not yet occurred.

Instead accountants generally stand accused of a reluctance to move away from traditional attitudes and paradigms and of taking a very ‘light green’ view of environmental accounting as they seek to modify information systems without significantly altering their substance.

Potential contributions of the accounting profession to sustainability

Research undertaken by both academics and the professional accounting associations has highlighted fundamental differences in the ability of the various disciplines of accounting to engage in supporting environmental sustainability.

This is most evident in comparisons of management accounting practice, which is generally focused on the internal provision of accounting information, and financial accounting, which is generally focused to the provision of financial information to external stakeholders such as shareholders.

"Professional accountants have become increasingly involved in environmental sustainability," said Mr Clarke.

Photo: Senior Lecturer Kevin Clarke

Focused toward the provision of organisational-specific performance information for internal decision making, management accounting systems are essentially unregulated and individually tailored to meet the needs of an organisation.

Management accountants are therefore well positioned to make environmental performance ‘visible’ within an organisation by incorporating financial and non-financial environmental information and key performance indicators into traditional management accounting control systems.

More comprehensive approaches may include innovative balanced scorecards which present a broad range of financial and non-financial measures.

Indeed the presentation of non-financial indicators is suggested since a continued focus on financial consequences alone may encourage an emphasis on cutting costs solely to increase profit, rather than focusing on sound ethical principles as the foundation for ethically benign and sustainable decisions.

Overall, the extent to which an organisation chooses to modify its internal accounting information systems will ultimately depend on the need for environmental performance information as dictated by the nature of the organisation’s operations and the complexity of its environmental management strategy.

In this context, management accountants are well positioned to assist in the identification and management of environmental performance, and to assume responsibility for the analysis and systematic management of the critical performance information necessary to support informed decision making by environmental specialists and senior managers.

This responsibility will of course also include the collection or measurement of financial environmental performance information such as costs. However, this does not suggest that the training and professional knowledge set of accountants provides the necessary scientific or environmental management expertise to collect or measure non-financial environmental performance information of a technical nature that is required by management.

Nevertheless, accounting may assist the environmental or operational professional with non-financial indicators by maintaining information systems and providing quantitative analysis.

The contribution of accounting has great potential value as a support function.

Unlike management accounting information, external financial reporting is highly regulated and the profession’s conceptual framework provides particular challenges to accountants seeking to holistically account for the performance, or impact, of an organisation.

Implicit in the pursuit of sustainability is a focus on decision making that is not simply driven by short-term self-interest but one that recognises the requirement to address longer-term, external stakeholder and indeed intergenerational issues.

Anecdotal evidence indicates that while managers may recognise a social and ethical responsibility to improve their environmental performance, efforts are often hampered by the constant focus on bottom line profitability.

Companies who publicly professed to be environmentally responsible have been shown unwilling to raise costs by more than a ‘trivial amount’ to prevent pollution.

This highlights the potential political consequences of assigning numbers, and in particular costs, to the environment.

Nevertheless, financial accountants can improve the information content of environmental performance disclosures through increasing the visibility of individual categories of environmental performance, such as the costs of wastes and non-renewable resource use, rather than the current tendency to aggregate environmental costs in general expense and overhead accounts.

Conclusion

Although the accounting profession may attempt to capture community sanction within an environmental context their knowledge set does not have the depth of technical or scientific environmental knowledge to justify their recognition as the ‘environmental professional’.

Accountants, given the current political scenario, need to remain focused in the application of their discipline and cognoscente of the dangers to their social status of the continued expansion of their intellectual jurisdiction.

This is not to suggest that accountants do not have a contribution to make in the pursuit of environmental sustainability. Rather, the contribution of accounting has great potential value as a support function, through not only its traditional activities such as budgeting and costing, but also the broader practices of financial and non-financial performance measurement, evaluation, reporting and analysis.

A deeper understanding of not only the limitations of accounting but also the potential contributions of accounting methods and techniques will propagate the creation of beneficial intellectual synergies within organisations that can maximise social outcomes both for social participants and for a sustainable environment.