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The primary goal of starting a business or of an organization is to produce products or to deliver services to customers so as to earn profit. However, not until the twenty-first century, with the increasing awareness and pressure from the customers around the world, organizations have to take consideration of the environmental strategies when developing their business strategies. In this assignment, I will look into the relationship between environmental strategy and the sustainable development of an organization; the changes of financial accounting and management accounting when the organization implementing environmental strategy. Also, I will discuss the contrast and the roles played by financial accounting and management accounting in the development of environmental strategy.
Relationship between environmental strategy and sustainable development of an organization
The environmental issues has risen significantly and drawn global attention during the past two decades, especially when people awareness of the effect of global warming and event like the Gulf of Mexico oil spill which happened recently to the environment. Just like the example of the Gulf of Mexico oil spill, it costs the oil company a lot of money only to rectify their damage to the environment. With the possibility of losing money and additional environment-related cost so as to affect profitability of the company, this triggers the organizations facing different pressures from different stakeholders, such as, customers, the community, environmental activist groups and business partners, of implementing the environmental strategy to minimize the impacts to the environment and to the company.
When mentioning the additional environment-related cost, it may refer to items required by environmental regulations which have been strictly imposed in some countries. These regulations have led to variety of additional environment-related costs imposed to organizations. This includes costs for items like, pollution control equipment, pollution monitoring and emission fees and regulatory paperwork and reporting. Pollution clean-up regulations have resulted in increasing liability costs for site remediation and liability-related insurance costs.
While, on the other hand, organizations have also increasingly realized that there is potential monetary rewards of improved environmental performance. Organizations realize that with the improving efficiency in the use of energy, water and other raw materials brings not only environmental improvements, such as reducing resources use and reducing waste and emissions, it could lead to significant cost savings on purchasing materials and waste treatment, etc. Also, when organizations have imposed better environment policy which has improved environmental performance, it enhances the image of the company, and it improves the relationship between organizations and customer, the community, as a result attracting income.
According to the report from World Commission of Environmental Development (WCED, 1987, p43) "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs". Sustainable development is to achieve compromise between two goals, first of all, the word "sustainable" suggests preserving the natural ecosystem and its resources, secondly, the word "development" suggests increasing economic growth and prosperity. They are contradicting because it seems to assume that economic growth would cause damage to the environment. Therefore, in other words, sustainable development is a vision of reducing the conflict between these two goals.
People begin to recognize that they must make use of the environment, and with their interests of improving the standard of living, they have to preserve the environment. For example, in countries level, existing rich countries would not want their present level of prosperity or future level of prosperity to be reduced, as for poor countries, they would like to improve and achieve the benefits of development.
For businesses, a sustainable organization is an organization that generates profit for its shareholders and at the same time, it protects the environment and improving standard of living for those it interacts with. The organization operates in a way that it meets both the interests of business and the interests of the environment and the society. A sustainable business helps the organization become possible to be more successful in the future than it is today, and it remains to be successful for a really long time. Therefore, it is vital for organizations to develop and implement environmental strategy in order to sustain long term success.
Changes of financial and management accounting on the environment management of an organization
In order to manage the environmental pressures, the environmental-related costs and benefits effectively, organization would need different expertise which includes accounting and finance, marketing and public relations, and general management, etc. Accountants play an important role in the management as well to environment management, it is because they are able to access financial information of an organization. Their role is to make use of such financial information and their professionalism to assist the organization to make appropriate business decision, budgeting and strategic planning.
Financial Accounting and Management Accounting are the two general categories of accounting adopted by organizations. Financial Accounting refers to accounting activities and the preparation of financial statements directed to external stakeholders, as for Management Accounting focuses on providing information to organization management for internal decision making.
The aim of Financial Accounting is to provide and satisfy the financial information needs of external stakeholders, such as shareholders, tax authorities and creditors. They require receiving an accurate and standardized information about an organization's financial performance. Financial reporting is regulated by national laws and international accounting standards. Financial Accounting focuses on various types of financial information. An organization's financial statements provide information on annual revenues and expenditures in an Income Statement. The Balance Sheet reports assets, liabilities and equity at a specified date.
As for Management Accounting, its main focus is on providing information for internal management. Management Accounting focuses on both monetary and non-monetary information, for example, labor hours and quantities of raw materials purchased, etc. They make use of these information to do planning and budgeting, so that to ensure making efficient use of resources, performance measurement and formulation of business policy and strategy, therefore, to assist management to make appropriate business decision, and also to create, protect and increase value for an organization.
With organizations implementing environmental strategy, external stakeholders would expect the environmental related cost be reflected in the financial reports. Also, it has been found that environmental related issues have to be dealt with or managed before they could be reported, so this leading to the change of both financial accounting and management accounting for managing the environmental strategy.
For traditional Financial accounting, the financial reports would try to reflect the environmental issues by identify different environmental-related costs which occurred during the products/services production processes. However, it has been found that many traditional accounting systems are unable to handle adequately with the environmental-related costs and just simply attribute those costs to general overheads.
In addition, the environmental issues have usually been excluded from the financial information systems, unless those costs have been directly affect the entity's profitability or future, such as, fines or accidents. For those environmental issues which are not required by regulatory or by the government, are often being ignored, because those costs are always be considered as unimportant, as people would tend to think resources are unlimited and they exist everywhere around the world; those items are not directly related to core business function; and those items are difficult to estimate and to assign a financial value. As a result, management do not have enough information, and do not aware of these costs so as to manage the environmental items.
Because of the above, organizations realize that in order to effectively manage environmental issues and to avoid the additional related costs, it is required to recognize the existence of these costs, and it have to make sure all the responsible parties related to the organization realize these cost.
Financial accounting then has evolved with the implementing environmental strategy, to start with, the financial report has to disclose all the environment-related financial information which would include the analysis and reporting of the internal costs, assessment and reporting of environmental risks and liabilities, capitalization for environmentally related expenditures and the treatment of environmental debt.
Management accounting techniques sometimes could have distorted and misrepresent environmental issues, leading management to make inappropriate decisions both for the businesses and to the environment. If the management accounting system does not have incorporated environmental concerns into their analysis, organizations would not be aware of the impact of the environmental issues in profit and loss accounts and in the balance sheet. This would fail to enhance customer value, but on the other hand, increasing the risk of investments and other inappropriate decisions which would lead to long-term consequences.
In order to assist in effectively measure and manage the environmental related cost or issues, management accounting should generate and analyze both financial and non-financial information so as to support internal environmental management processes. To complement with the traditional management accounting approach, this could assist in identifying and allocating environment-related costs. This would include the assessment of annual environmental costs/expenditures, product pricing, budgeting, investment appraisal, calculating the costs and savings of environmental projects, or setting quantified performance targets.
Environmental management accounting provides information or analysis beyond the traditional core activities. One is costing, this is important to be recognized that the environmental related costs of products and services are being allocated properly so that they can be managed and the prices being set at an appropriate level. Second of all is investment appraisal of projects, accountants have to ensure that all relevant environmental-related costs are being considered in project proposals.
Environmental management accounting therefore represents a combined approach which gathers the transition of data from financial accounting and cost accounting to increase efficiency of material, reduce impact and risk from the environmental, and reduce costs for environmental protection.
Benefits of adopting Environmental Management Accounting and how it supports organization to achieve sustainable development
Environmental management accounting data are valuable to the management, as it provides not only the cost data for assessing the financial impact of the environmental strategy, but also the physical flow of information, for example, the usage rate of raw materials and the rate of waste generation, it helps to assess the environmental impacts. With the support of environmental management accounting, it also helps in the followed actions: pollution prevention, design for environment, environmental life cycle assessment/costing/design, environmental supply chain management, environmentally preferable purchasing, extended producer/product responsibility, environmental management systems, environmental performance evaluation & benchmarking, environmental performance reporting.
In other words, by adopting Environmental Management Accounting, it supports environmental protection by complying with environmental regulation and self-imposed environmental policies. For example, it helps to plan and implement investment in pollution control, to generate report on environmental waste and emissions to regulatory authorities, etc. Environmental Management Accounting also supports the simultaneous reduction of costs and environmental impacts through more efficient use of energy, water and materials in internal operations and final products. For instance, to accurately track the flow of energy, water, materials and wastes, to assess the total annual return of investment in cost efficiency environmental strategy, etc. Besides, it supports the evaluation, implementation of cost effective and environmentally related programs to ensure the long-term strategic position of the organization. It could be achieved by working with suppliers or partners to develop products or services target for environmental conscious markets, to estimate the costs for anticipated future regulations so that to report to related stakeholders, like customers, suppliers, partners and the community, etc.
To achieve sustainable development, it refers not only to the environmental aspect, but it also includes economic sustainability and social sustainability. So, "People, Planet and Profit" are always been describe as the triple bottom line and which leading to the goal of sustainability. "People" refers to fair and beneficial business practices toward their labor and the community in which the organization running their business. "Planet" refers to sustainable environmental practices. Finally, "Profit" refers to economic growth of the organization. In order to achieve a sustainable development, organizations would require a management tool to collect and analyze these information so that to make business decision. In this case, management accounting would have to go beyond environment, a sustainable management accounting requires to generate, analyze and make use of the financial and non-financial information to enhance corporate environmental, social, and economic performance and therefore to achieve sustainable business. Because of that, Environmental Management Accounting becomes more extensive and integrated, and requires turning its focus to other aspects of sustainability. It has to cover the environmental, economic and social sustainability aspects. Among the three aspects, it would relatively easy to manage the environmental and economic aspects, while it would be quite difficult to manage the social aspect.
The traditional accounting standards are not designed for the measuring of the three aspects, there is not a standard parameter for measuring those values. Also, there is no benchmarking for the comparison of those values with its last year performance. Especially when evaluating the social aspects, it does not have a common language or "currency" which is the measurable value to use in financial statements. In addition, every size, culture, the place where it operates or situations of each organization is different, it is difficult to judge if the figures coming out from the intangible aspects like, people or social aspect, is good or not. The problem is that it is difficult to make quantitative assessments attributing to the actions or events within the social aspect, when we are in fact dealing with something which is qualitative during the organization evaluating the social impact of corporate activities. It seems that there is still a long way to have any kind of systematic way to measure the pros and cons of the social aspects, or having any common standard, to arriving at a global figure for the social performance of an organization. Clearly, there is still some inadequacy for the triple bottom line approach.
This transformation from one-dimensional financial reporting to three-dimensional because of the introduction of triple bottom line reporting has created new challenges for the organization, while it also has created new opportunities for the accounting professionals. Especially for the Management accountants, who already possess their accounting knowledge and skills, are able to taking advantage of these opportunities. However, of course, the inadequacy of the approach would require the management accountants and other financial professionals to adapt and learn new skills to make the approach practical.
In the future, accountants would require to capable of verifying environmental and social criteria, and they to work with other experts such as environmental auditors and community-based organizations in order to help them to verify non-financial performance. Ultimately, accountants might be required to report and verify non-financial information in same common standards that financial information needed to meet.
As for management accountants, going forward, they have to identify and decide what set of indicators are appropriate for measuring the triple bottom line performance. Therefore the related stakeholders could easily understand how the environmental impacts on the organization, as well as the social and economic performance of the organization.
Therefore, ultimately, measurement and reporting skills of non-financial items are quickly becoming skills that accountants are expected to possess.
Environmental issues have brought significant awareness from the customers, government and around the world, giving organizations pressure to develop and implement environment strategy along with their core business. However, it has increasingly been realized that with the implementation of the environmental strategy, there would be environmental related cost involved, and the traditional accounting systems are not aware and do not track those items or cost, so that external stakeholders and management of organization become unaware of the cost impact as well as the organization impact related to the environment. This makes the traditional financial accounting and management account have to evolve so that to go along with this changing trend or strategy of organizations around the world. In addition, organizations realize to have a sustainable development or success, they do not only focus on the environment performance, but also have to make balance of the social and economic performance, which has broadly been named as the triple bottom line. Nevertheless, triple bottom line approach has its inadequacy, which is it is difficult to evaluate qualitative item, like to social aspects in quantitative terms. Therefore, it comes to a conclusion that as accounting professionals who already possess certain accounting skill and knowledge, complementing with new knowledge and skill, they are able to derive solutions for compensating the inadequacy of the triple bottom line approach which could lead organizations to achieve sustainable development.
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