Stakeholder Management Environmental Accounting And The Global Compact Accounting Essay

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Introduction

The recent transformation of the business community is attributed to the increasing awareness amongst the modern consumer and the development of the stakeholder management theory. The concern for reporting the environmental impact of business activity is the core strategy of the modern organisation due to the growing importance of environment in the perception of the consumer. Accounting and financial reporting can be used to measure and quantify the impact of business on the internal and external environment. It is essential to understand the impact in quantifiable terms as it facilitates a cost and benefit analysis from the social viewpoint.

The available research presents different suggestions regarding the manner in which the environmental impact of business should be addressed; some recommend that the business should pay for the complete costs associated with repairing the environmental damage, while others argue in favour of the business community. The public policy regarding the environmental impact of business is yet to emerge in its complete form but it is clear that the growing pressure from the consumer necessitates voluntary action from the side of the business community for it to remain competitive. Most corporations have realised the importance of adopting sustainable processes because any activity that does not address the environmental concerns is not considered sustainable over the long-run due to increasing consumer pressure. The green accounting offers a solution to the dilemma presented to environmental management by quantifying certain elements of the environmental impact of business and responding to the problem by producing more efficient and environmental friendly technology to satisfy the immense pressure from the stakeholders of the business.

Stakeholder management, environmental accounting and the global compact

More recently companies have started to acknowledge the importance of multiple stakeholders in the light of the stakeholder management theory. The business community has realised that its success in the contemporary times is not only dependent on the consumers and the investors but all the stakeholders of a business contribute to its success in the long-run. The important stakeholders that can be identified for most businesses include the consumers, investors, employees, suppliers, government, environment and the society. Historically, businesses failed to recognise the society or the surrounding community as a relevant stakeholder and the strategic decision making process did not take into account the interests of the society in its operations. The society derives its power from the environmental pressure groups that have the ability to influence the consumer decisions and steer the future policy regarding the environmental regulation.

Mosley (2003) found that government policies and accounting standards are successful through the direct involvement and acceptance of the standards by the private participants. The research argues that international standards regarding improvement in environmental accounting can only succeed through the direct participation of the business community. The outcome of this understanding is the establishment of the global compact by the United Nations. The global compact is a voluntary arrangement between transnational organisations to improve their impact on the environment and aims at adoption of certain common standards that can facilitate in the development of international standards regarding accounting practices. The global compact initiative is further strengthened through the creation of the local network that develops national partnerships between organisations striving to improve businesses impact on the environment. These partnerships are meant to convey a message to the consumers regarding the stance of the participant and member corporations regarding good governance and corporate social responsibility practices. The incentive for the members is the competitive advantage they will gain relative to the competitors that to not participate in the global compact or the local network.

Changes in practices in environmental management accounting

Conventional accounting ignored the impact of business on the society and only accounted for the internal costs to an organisation. The traditional environmental cost assessment considered the costs associated with waste treatment and disposal but failed to account for the material flows and their impact on the environment. The material flows associated with the business operations are the result of the infrastructure available to the company and the result in the quantification of the flow of materials including the amount water used and waste water created during a process. The modern environmental accounting involves a need to systematically integrate the internal costs, external costs and the material flows associated with a business activity through an effective information system.

The environmental costs can be reported using the most suitable methodology from the array of techniques developed through recent efforts in environmental management accounting. The residual waste accounting is the next step in measuring the impact of business on the environment by measuring not only the disposal costs but also taking into account the material purchase values and the proportionate production related costs. The measurement processes are similar to that used in the case of corporate financial reporting and the goal is to make available an all-inclusive statement of yearly environmental outlays.

The traditional management accounting attributes environmental costs to the overheads in the financial reporting process and does not identify these costs in their entirety. The modern accounting techniques are geared towards improving the environmental reporting process using the activity-based costing approach. This approach improves upon the original internal cost estimation of a company by allocating costs to the products and activities that are actually causing the pollution instead of reporting them as an all-inclusive overhead cost. This facilitates in tracking the original source of pollution and identifies production gaps that need to be filled for improving the environmental efficiency of a business.

Another approach used to account for the environmental costs attached to the production process is the flow costing approach. This technique is different from the activity-based costing methodology as it does not merely disintegrates the environmental costs but instead determines the costs attached with each process flow and carries out a complete evaluation of the associated costs including the environmental costs. The process is exceptional as it does not segregate the environmental costs as a unique aspect of the production process but it incorporates them into the analysis as regular process flow costs that need to be controlled by improving the efficiency of their relevant cost centres.

The input and output analysis of the material flows is also a modern technique used for environmental accounting; it is aimed at subdividing the various production processes according to the products manufactured by the company. The product cost assessment is further analysed at the internal company level and after the product leaves the company. The external costing evaluates both the upstream and downstream life-cycle phases and estimates the relevant environmental costs associated at various stages of the life-cycle to determine the contributions towards environmental damage at any particular stage that needs to be altered. However, the life-cycle costing approach has not gained significant importance as the estimation of the externalities can be cumbersome and in many cases too costly. The development of integrated information systems may simplify the process over the passage of time and create a possibility of a complete analysis through the life-cycle approach. The current practices in environmental accounting have favoured the use of activity-based costing technique due to its practical applicability and the relative ease in the estimation of the environmental costs that needs to be addressed.

United Nations (2009) developed an environmental cost scheme suggesting that the environmental accounting in a company should be based on two separate examinations. The environment manager should identify the costs associated with each environmental medium such as water and air, while the controller should estimate the environmental expenditures linked to each accounting category. This system ensures double checking of the estimation of environmental costs and facilitates the senior management in identifying the gaps in the measurement process and present systemic opportunities for improvement in environmental practices. The large scale corporations often consist of two groups of specialists including the accountants and the technology experts; these groups can often work together to identify and capitalise on the available opportunities to improve environmental accounting.

The augmented accountability for material flows and the transformation in the buying and stock supervision procedures are not in the interest of unit managers. A regular audit of financial statements progressively judges the broad risks connected with poor environmental practices. Environmental risk can be considered as the likelihood that a business will not accomplish its targeted environmental objectives during a given period. Financial statement auditors enquire regarding all noteworthy characteristics of commercial risk facing a business and determine the quality of the risks management processes to build up the most efficient technique to achieve reassurance about the dependability of reported information for use in the decision making process.

The accounting profession highlights the costs and benefits associate with environmental processes in an attempt to outline the optimal solutions available for businesses to approach an environmental problem. The costs associated with environmental problems are often assessed by estimating the cost of repairing the environmental damage produced or created by a business. The environmental accounting suggests that it is not always essential to repair the environment to its original condition even if a business has allocated sufficient funds to complete the process; it is more important to generate positive externalities for the environment or the society and a complete capital budgeting process must be conducted to select the most suitable project for the creation of such positive externalities. The regulatory policies in the future are geared towards reversing the negative impact of the business on the environment and such policies can be modified to incorporate positive externalities into their framework.

The importance of accounting and financial reporting for environmental management

McDaniel et al., (2002) examine the role of audit committees in determining the environmental quality of the financial statements and argue that such committees often lack the presence of an expert on environmental management accounting to provide a complete audit evaluation of the procedures developed by the organisation. The suggestion is to include experts in the field of environmental accounting to improve the quality of the financial reporting with regard to the environmental impact of the business. It has been observed that many businesses tend to manipulate the financial statements in relation to environmental reporting as the measurement of such costs and benefits is highly subjective the benefits associated with an environmental endeavour can be magnified, while the actual costs faced by the society can be understated.

Environmental accounting is considered very important by businesses in the form of an internal information management system and it is accepted that an improvement in the material and financial indicators that produce constructive and unbiased information would facilitate the advancement of the environmental management systems. It is notable that other business indicators were formerly present in the traditional accounting practices but the improvement in measuring the environmental indicators has resulted in the creation of a balanced approach that groups financial and environmental ratios and proves that the preamble of an incorporated environmental management system progresses environmental management. It is seen that companies do not demonstrate any sizeable concern regarding the disclosure of environmental information in the annual financial statements as confirmation of the murkiness that continues to subsist in the segments exemplified by enduring technical validation (Llodra, 2006).

The key responsibility for the insufficiency and failure of financial accounting and reporting in relation to the environment falls on the company management and the accounting workforce but the company auditors, professional accounting bodies and the standard setting authorities must accept a contribution to the failure. All of these participants have a fiduciary duty towards the client and the shareholders of the company so a failure to fulfil the duty conscientiously is an ethical issue. There is need for a significant reform in environmental financial reporting and the reporting procedures can be strengthened by removing the conflict of interest between the auditors and the management to commence a closer alliance with the shareholders of the company (Staubus, 2005).

Joshi et al., (2001) reveals that the costs associated with implementing environmental regulation are composed of the obvious and the hidden costs. The obvious costs of environmental regulation are easily quantifiable and the earlier literature bases its support for environmental regulation on the evaluation of the obvious costs. The hidden costs associated with environmental regulation are found to be about ten times that of the obvious costs presenting an argument against the use of excessive regulation for forwarding environmental concerns. The reason for the high costs associated with environmental regulation includes the difficulty in measuring the extent of implementation of the environmental measures. It is suggested that further research is required before environmental regulation can be enhanced and there is a need to take particular sectors and industries into account through a complete analysis of the regulatory costs involved with environmental regulation.

As sustainability is becoming imperative to the strategic goals and the risk management processes of modern organisations, the senior managers and auditors a more concerned regarding the impact of the business activities on the environment. The sustainability practices of an organisation can be verified by following an underlying methodology provided by the financial statement audits. The company management and accountants are now focusing on creating integrated sustainability reports instead of reporting the business and environmental aspects separately. There is modest worth in the long-run in the advancement towards procedures and financial statement audit policies on a segregated framework as objectively they are best understood in the context of the complete business environment. Similarly, there is no point in developing disconnected information systems in a business: one for cost accounting and the other for environmental accounting as in both cases the goal is to identify and follow the process flows and the business activities. Environmental management and sustainability concerns have turned out to be essential considerations for rating agencies and asset management companies are often concerned about the procedures adopted by businesses to address the future demands of their stakeholders the to review the techniques utilised by businesses to administer prospective risks and expected legal commitments.

Recent laws are beginning to demand disclosures regarding the dealings of investment funds in relation to sustainability concerns in the assortment of stocks held in their portfolios. The future regulations and standards in this context are considering disclosure requirements regarding the ethical and environmental features in relation to pension funds and a strong move forwards for encouraging the listing of companies producing green products on the stock market. Investors mostly select to invest in corporations that are listed on the stock markets and the annual reports to shareholders enclose combined results for the business. Consistency and reliability in environmental reporting are important concerns for businesses in the recent years and there is a growing trend to verify environmental reports using external sources. Therefore, the disclosure of dependable environmental performance for the business supported by a concrete information system that constantly gathers and combines financial information is imperative for maintaining competitive advantage in the modern world.

Klassen & McLaughlin (1996) estimate the impact of the quality of environmental management procedures used by an organisation on the market value of its stock. It is suggested that companies providing extensive disclosures regarding the environmental impact of their business are considered more transparent by investors and are likely to be valued higher than their competitors that fail to provide similar disclosures. Moreover, the consumer perception regarding the environmental responsiveness of an organisation has been determined to be important in the purchase decision and companies that are highly responsive to the environmental concerns should experience an increase in their revenues, income and market values. This interesting correlation between the level of environmental disclosures and the market value of a corporation leads some companies to adopt an unethical strategy; they increase the level of environmental disclosures but the quality of the disclosures is such that it is geared to overstate the benefits of environmental projects and understate the estimated costs to the society. This latest concern has encouraged the introduction of observable standards for environmental reporting as businesses that are actually helping the environment are hurt by this unethical practice.

Qin & Burritt (2005) show that a diverse intensity of environmental information can be obtained and used for decision making in local government organisations in the context of waste management accounting. The administration in the local government organisations is found to be for the most part oblivious of the notion behind environmental accounting; similar to the standing in private sector where a number of businesses have documented the costs associated with examining, auditing, toxic waste control, waste management and site cleaning; however, these expenses will not be revealed exclusively as ecological costs. Analysis signifies that material information linked with the flow of waste management processes is composed in a more complete manner than financial information related to the flow of waste. This environmental volatility and ambiguity has resulted in businesses to opt for an assortment of procedures and the use of innovation in green tactics followed by organisations. This is expected to inspire testing with a wider possibility for the implementation of environmental decision support systems to enable proper collection and interpretation of the financial flows in the near future.

Cho et al., (2006) considers the level of environmental disclosure in relation to different sectors of the economy. The study reveals that corporations operating in the sectors that result in the greatest damage to the environment are spending sufficient cash to support the activities of the ruling political parties in order to maintain their business as usual. These sectors are producing ample disclosures regarding the environmental impact of their business in their sustainability reports but are actually doing little to bring about a change in their environmental practices. Therefore, the disclosures are viewed as a marketing tool by such corporations and are aimed at appeasing the discontentment of the general masses. The regulation should focus on removing the conflict of interest between the politics and these organisations to foster change in this unethical behaviour by businesses. This change can only be brought forward by increasing pressure from the masses to alter government actions in the long-run.

Adams et al., (2001) studies the impact of the adoption of a code of conduct by certain corporations and the impact of the code on the ethical and environmental behaviour of the firm. It is suggested that the voluntary adoption of a code of practice in relation to the environment or society leads to an improvement in the behaviour of the firm as this is considered as an empowering tool for the stakeholders of the company and provides a sense of direction to the employees. However, the adoption of a code should be seen as the beginning to an on-going process of improvement in the environmental performance of a firm instead of as a means to an end.

Conclusion

Businesses in the recent past have faced a growing tide of public insistence for adopting green technologies and environmentally responsive products. The contention is that corporations have been sluggish in shifting from customary strategies in the direction of supplementary deterrence based strategies. The organisational framework and activities of corporations hold back contamination avoidance projects from entering the decision making phases excluding these options from deliberation by the corporations. The traditional accounting procedures imply that even if a prevention plan effectively goes through the capital budgeting course of action, its rivalry with other ventures for scarce financial resources and inadequate acquaintance of the management with the facts regarding the true costs and benefits of non-product yield restricts the project. However, the role of environmental accounting and financial reporting is to facilitate a complete cost and benefit analysis of the associated environmental initiatives of a business and permits an effective decision making process that considers both the internal and external costs associate with a project. The goal of environmental accounting is to highlight the opportunities that are available to improve the current processes used by the business and to create value for the shareholders over the long-term. Moreover, it is evident that businesses that opt to adopt environmentally friendly processes and technologies are bound to develop a major competitive edge over its competitors. The modern business is not considered viable and sustainable over the long-term if it lacks the processes and the technologies that are required to improve the environmental efficiency of the business.

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