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This semester, I was assigned a term project and I have selected the second question to be answered which is "Should management accountants be involved in the pursuit of green accounting". It is of my interest since nowadays, organizations specifically manufacturing industries have initiative to care and take into consideration on the environmental conditions. Nevertheless, some of them included that consideration as their corporate social responsibility. Human being is the one who should have been accountable to take care of the environment and to treat them as best as possible. Therefore, I managed to prepare this term project by dividing it into two parts which are first, the overview of green accounting and the second part is more towards answering the question which is focusing on the roles of management accountant in the pursuit of green accounting.
1.0 Part 1: An overview of green accounting
Most people particularly academicians in the field of accounting have talked about the green accounting. It is because, as far as the environment is concern we could see that there are many issues to be taken into consideration by the accountants such as air, water and noise pollutions, green house gases, global warming and etc. The major contributor of these environmental defects is generally human being. In fact, undeniably we can see and hear from the mass media about the negative effects on the environment as a result of organization and ultimately organizational misbehaviour. Now, I would like to discuss the interconnections between accounting, accountant and environment.
1.2 What is green accounting?
Nowadays we are moving towards green environment by which we preserve the environment from being the victims of human greediness. As a result, accounting has come out with the term green accounting which means that accountant being the medium to cure and prevent the negative impact on the environment. The issue of environmental degradation has triggered organization to be more eco-friendly particularly in increasing the attention and awareness to be more environmentally responsible. It is agreed with Jeffers, A.E. (2008) who defined green accounting as a way to reduce environmental pollution as companies will be forced to identify the costs related to environmental responsibility. There are some catchphrases that commonly being used apart from green accounting which are "going green", "eco-friendly" and "environmentally friendly". The works of an accountant in managing the cost related to environment is nowadays known as environment management accounting (EMA).
1.3 Literature Review
Related to this topic, there are several past studies on the issues in green accounting as well as EMA. Recently there has been a discussion made by Lansiluto and Jarvenpaa (2010) stated by Farouk S. et al. (2012) related to green accounting by which the authors have investigated the importance of greening the balanced scorecards (p.39). It means that the green measurement should be included in the balance scorecard as to ensure that the organization is not performed financially but also environmentally good. It is to be considered or assessed by the organization before they can embark on certain project that may pollute the environment. In fact, this is a good idea to incorporate green accounting in the normal balanced scorecard.
The green accounting as well as EMA has become more important for an organization to find a way to measure the cost of compliance and non-compliance to environment regulations as opined by Jeffers A.E. (2008) thus come out with two possibilities in measuring environmental accounting which are from macroeconomic and microeconomic perspectives. According to the author, at macroeconomic level, there is a need to take into account the calculation of green accounting in national income (NI) as well as gross domestic product (GDP). While at the microeconomic level, there were two ways that can be used as tools to measure environmental accounting which are primarily focusing on external and internal management accounting tools (p.74). It is beneficial to be continuously implemented as such measurement and consideration would uphold the reputation of the industries as well as the national image.
In relation to measurement of GDP above, there is a study conducted by Li V. & Lang G. (2010) on GDP measurement in China. The study is focusing on the green GDP implementation from 2004 to 2007 and it reveals that there is a need of environmental accounting as a tool to measure the estimated sustainability. In fact, China's government has initiative to bring environmental impacts into the policy discussion on economic growth. Here, we can clearly see that stakeholders like government and regulators including investors are concern about the need to be green so long there is a tool to measure the costs that contribute to the environmental degradation.
1.3 Issues contributing to the need for Green Accounting
Many enterprises are concerning on maximization of profit or shareholders' wealth while abandoning the natural wealth.
According to Rout H.S. (2010), from the economist point of view, they are much concern in the sustainable national income since it signifies the amount a nation can consume without damaging the natural resources (p.47). In addition to that, environment is also a source of economic wealth therefore, if there is any service that covers the environmental management can be traded in the open market it may signal a higher demand indicating that society are willing to pay for it.
Moreover, Rout H.S. (2010) has also stated the issues that brought the environmental accounting into the discussion particularly regarding the loopholes in the traditional Systems in National Accounting (SNA) by which we can see the need for green accounting (p.48).
Firstly, traditional SNA is just focusing on the wealth that natural environment like timber, forest and so on could contribute without taking into consideration the environmental degradation that resulted from the greediness.
Also, the author compares the depreciation of physical machine and natural resource - wood which signifies no different at all (p.49). The depreciation of the timber is in terms of its harvesting process. Traditional SNA is therefore overlooked the stock of natural resources as well as environment.
Thirdly, traditional SNA unable to include the cost of environmental degradation in the national income. It is not well classified from other forms of investment or consumption in national accounts (p.49).
2.0 Part 2: Answer to the Question
Based on the above discussion, we can see the idea of environmental sustainability as well as the need for green accounting. Yes, obviously management accountant should be involved in the pursuit of green accounting. Purposely in this section, we will look into the roles of management accountant and its impact to the profession as well as to the industries
2.1 Role of Management Accountant
The issues of environmental degradation have triggered the internal management to come out with solution particularly for decision making. Therefore, it is the management accountant who plays an important role to assist in the decision making process knowing that they possess the skills and knowledge in accounting. As far as the green accounting is concern, there are numbers of management accountant responsibilities in exercising the cost accounting tools:
Invention of cost accounting knowledge to reduce the waste
According to Prof. Maliah's lecture on the EMA, we could see that recently there is no more terms of recycle and reuse of things as far as the Material Flow Cost Accounting (MFCA) is concern. MFCA is a tool that was formalised in ISO 14 051 in 2011 and has been successfully implemented in Japan for the stamping activities. It is interesting to know the impact on the stamping activity whereby the waste resulted from the stamping activities has been calculated in terms of monetary as well as the physical unit. Knowing that the wastes can be reduced, the manufacturer was able to redesign the stamping metal scrap to fix the shape into more accurate size which further reduces the waste in billion yen. That is where management accountant can assist in waste minimization.
Plan, organize and implement
Under normal circumstance, the planning, organizing and implementing activities were done by all functions in the company which oversight by the top management. Here, as far as the green accounting is concern, management accountant should come out with idea to preserve the environment from being polluted by considering this matter at early stage of planning with the hope that it will reduce the cost of polluting the natural resources. For instance, normally in wood manufacturing they will cut down the trees and it will lead to the global warming. Not only that, the wild animal will lose their habitat and the oxygen produced by the trees will become lesser and lesser. Knowing the impacts of human greediness in maximizing the wealth, this should trigger management accountant to come out with possible action in planning as well as organizing and implementing activities with the consideration of these natural costs.
Integration of management and accounting
Management accounting should work together with the management to come out with the idea of incorporating the green accounting in the balanced scorecard as suggested by prior researchers as quoted by Farouk S. et al. (2012) above. Perhaps, as far as my understanding to what the authors idea is concern, I perceived the balanced scorecard could be as presented in Appendix A. In the normal circumstances, the balanced scorecard is inclusive of four elements which are financial, customer, internal and learning and growth but anyway the management should include the additional element which is environmental responsibility so that they can measure their success not only in terms of financial but also their responsibility towards the nature.
Wastage accounting and reporting
Apart from wastage accounting, management accountant also plays a role in the environmental reporting. In this case, accountant can work together with the economist to combine the environmental accounting and GDP finally come out with Eco Domestic Product (EDP) as implemented in China stated by Li V. & Lang G. (2010). Their study explains that the calculation of EDP is starting from the accounting of physical quantification of environmental pollution ranging from accounting for water, air and solid waste pollution by which calculated by sectors and by regions (p.51). As a result they are able to capture the extent of natural depletion and environmental degradation in the economic activity.
2.2 What would be the impacts on management accountant as well as the industries?
With regards to the impacts on management accountant and its profession, firstly, the impact would be the introduction of improvised work field of accountant by which management accountant could extent their job scope into environmental accounting which is also highly demanded by the public.
Secondly, it will increase the reputation of accounting profession mainly accountant as well as academician since their invention on the knowledge of environmental accounting could assist company to be eco-friendly.
Meanwhile, the impact towards industries is in terms of their long term sustainability. It will as well bring their image up for being environmental friendly.
Also, the industry may also be able to attract potential investors to invest in the company and boost up their capital as a result of the environmental disclosure in the annual report.
Although it may require higher costs in the process of being environmental responsible such as in altering the machines, raw materials and so on but obviously with the assist of management accountant in a precised production planning, the costs incurred could be translated into long term benefit. It is proven in the success of Japan manufacturing company discussed by Prof. Maliah in her lecture.
Based on the above discussions, we can see that, there is a need for organizations to improvise their business strategy since nowadays many stakeholders' concern are moving towards environmental accounting. Therefore, it can be concluded that management accountant is really needed in the pursuit of green accounting and there is a positive relationship between the execution of green accounting and market reaction in which implementation of green accounting will attract public attention to buy more share in the organization.