Environmental Accounting
Environmental Management Accounting (EMA) is a cover title used to describe different aspects of this burgeoning field of accounting. The focus of EMA is as a management accounting tool used to make internal business decisions, especially for proactive environmental management activities. EMA was developed to recognize some limitations of conventional management accounting approaches to environmental costs, consequences, and impacts.
For example, overhead accounts were the destination of many environmental costs in the past. Cost allocations were inaccurate and could not be traced back to processes, products, or process lines. Wasted raw materials were also inaccurately accounted for during production. Each aspect of EMA has a general accounting type that serves as its foundation, according to the EMA international website. The following examples indicate the general accounting type followed by the environmental accounting parallel:
- Management Accounting (MA) entails the identification, collection, estimation, analysis, and use of cost, or other information used for organizational decision-making. Environmental Management Accounting (EMA) is Management Accounting with a focus on materials and energy flow information, with environmental cost information.
- Financial Accounting (FA) comprises the development and organizational reporting of financial information to external parties, such as stockholders and bankers. Environmental Financial Accounting (EFA) builds on Financial Accounting, focusing on the reporting of environmental liability costs with other significant environmental costs.
- National Accounting (NA) is the development of economic and other information used to describe national income and economic health. Environmental National Accounting (ENA) is National Accounting focusing on the stocks of natural resources, their physical flows, environmental costs, and externality costs.
EMA is a broad set of approaches and principles that provide views into the physical flows and costs critical to the successful completion of environmental management activities and increasingly, routine management activities, such as product and process design, capital budgeting, cost control and allocation, and product pricing, according to the EMA international website.
EMA offers potential benefits to industry, such as the capability track and managing the flows and use of materials and energy with greater accuracy. The EMA international website reports that accurate identification, estimation, allocation, and management or reduction of costs is important, too. Environmental performance can be supported and improved by using more accurate and complete information. This information will also improve the measurement and reporting of environmental information to the public.
Government can benefit from the application of these principles according to the EMA international website. The cost of environmental protection can be lowered on the basis of industries’ financial self-interest. Industry data can be used to estimate and report environmental performance metrics and financial and environmental and benefits to government stakeholders. These metrics can also be used to effectively affect future environmental policies and regulations.
Societal benefits exist also. With the implementation of these principles, energy, water, and other natural resources can be used more efficiently. The EMA international website reports these principles can help reduce external societal costs stemming from industrial pollution such as environmental control, monitoring, remediation, and public health costs.
Forms of Environmental Accounting
- Environmental Management Accounting (EMA): Management accounting with a particular focus on material and energy flow information and environmental cost information. This type of accounting can be further classified in the following subsystems:
- Segment Environmental Accounting: This is an internal environmental accounting tool to select an investment activity, or a project, related to environmental conservation from among all processes of operations, and to evaluate environmental effects for a certain period.
- Eco Balance Environmental Accounting: This is an internal environmental accounting tool to support PDCA for sustainable environmental management activities.
- Corporate Environmental Accounting: This is a tool to inform the public of relevant information compiled in accordance with the Environmental Accounting. It should be called as Corporate Environmental Reporting. For this purpose, the cost and effect (in quantity and monetary value) of its environmental conservation activities are used.
- Environmental Financial Accounting (EFA): Financial accounting with a particular focus on reporting environmental liability costs and other significant environmental costs.
- Environmental National Accounting (ENA): National Level Accounting with a particular focus on natural resources stocks & flows, environmental costs & externality costs etc. Need of Environmental Accounting at Corporate Level: It helps to know whether corporation has been discharging its responsibilities towards environment or not. Basically, a company has to fulfil following environmental responsibilities.
- Meeting regulatory requirements or exceeding that expectation.
- Cleaning up pollution that already exists and properly disposing of the hazardous material.
- Disclosing to the investors both potential & current, the amount and nature of the preventative measures taken by the management (disclosure required if the estimated liability is greater than a certain percent say 10 per cent of the company’s net worth).
- Operating in a way that that environmental damage does not occur.
- Promoting a company having wide environmental attitude.
- Control over operational & material efficiency gains driven by the competitive global market.
- Control over increases in costs for raw materials, waste management and potential liability.
Scope of Environment Accounting
The scope of Environmental Accounting (hereinafter called as EA) is very wide. It includes corporate level, national & international level. As far as this article is concerned the emphasis is given on the corporate level accounting. The following aspects are included in EA:
- From Internal point of view investment made by the corporate sector for minimization of losses to environment. It includes investment made into the environment saving equipment/ devices. This type of accounting is easy as money Measurement is possible.
- From external point of view all types of loss r indirectly due to business operation/activities. It mainly includes:
- Degradation and destruction like soil erosion, loss of bio diversity, air pollution, water pollution, voice pollution, problem of solid waste, coastal & marine pollution.
- Depletion of non-renewable natural resources i.e. loss emerged due to over exploitation of non-renewable natural resources like minerals, water, gas, etc.
- Deforestation and Land uses.
This type of accounting is not easy, as losses to environment cannot be measured exactly in monetary value. Further, it is very hard to decide that how much loss was occurred to the environment due to a particular industry. For this purpose, approx. idea can be given or other measurement of loss like quantity of non-renewable natural re- sources used, how much Sq. meter area deforested and total area used for business purpose including residential quarters area for employees etc., how much solid waste produced by the factory, how much wasteful air pass through chimney in air and what types of elements are included in a standard quantity of wasteful air, type and degree of noise made by the factory, etc. can be used.
Limitations of Environmental Accounting
EA suffers from various serious limitations as follows:
- There is no standard accounting method.
- Comparison between two firms or countries is not possible if method of accounting is different which is quite obvious.
- Input for EA is not easily available because costs and benefits relevant to the environment are not easily measurable.
- Many businesses and the Government organizations even large and well managed ones don’t adequately track the use of energy and material or the cost of inefficient materials use, waste management and related issue. Many organizations, therefore, significantly underestimate the cost of poor environment performance to their organization.
- It mainly considers the cost internal to the company and excludes cost to society.
- EA is a long-term process. Therefore, to draw a conclusion with help of it is not easy.
- EA cannot work independently. It should be integrated with the financial accounting, which is not easy.
- EA must be analysed along with other aspects of accounting. Because costs and benefits related to the environment itself depend upon the results of the financial accounting, management accounting, cost accounting, tax accounting, national accounting, etc.
- The user of information contained in the EA needs adequate knowledge of the process of EA as well as rules and regulations prevailing in that country either directly or indirectly related to environmental aspects.
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