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This paper will analyze the relationship between the accountant and the environment by first looking into the concept and history of green accounting. We then look into the role of the accountant in green accounting and discuss the ethical issues related to this topic. We further discuss the technical details of green accounting and some current examples of its application today. We close out our discussion by looking at the future of green accounting.
Tables of Contents
An emerging topic within the accounting profession is the role of the accountant on the environment. While accounting has numerous important functions in today's society, many question if the accounting profession has the obligation to account for the environment. While thinkers like Milton Friedman believe that the only social responsibility of business is to make profit, many believe that the role of the accounting practice extends further (McPhail and Walters, 2009). That is to say, many believe that the accountant's professional responsibilities have increased in scope due to the momentum of concepts such as environmental accounting. Environmental accounting, otherwise known as green accounting, can be defined as an accounting practice in which the firm factors environmental costs (such as depletion of natural resources) in addition to financial results through business operations. For example, a firm may cause air pollution or water pollution which causes significant harm to natural life (Flower, 2010). This concept will be analyzed in detail throughout our discussion. Â In the following paragraphs, we will discuss the concept of green accounting, the ethical issues, the technical aspects associated with accounting and the environment, and the future outlook of environmental accounting.
Concept of Green Accounting
Human interaction with the environment has been a growing topic in today's society, as global awareness has shifted to implementing measures to protect the environment and preserve natural resources. With this emerging awareness, it follows that accounting and other systems have started to take accountability for the protection of the environment. As a result, measures have been taken to prevent negative externalities at both the individual and firm levels. The underlying goal of environmental accounting is for managers to be forced to account for all stakeholders, which includes animals and plants. While green accounting has various functions to be discussed, an important goal is to "provide data which highlights both the contribution of natural resources to economic well-being and the cost imposed by pollution and resource degradation" (Hecht, 2000). A secondary, and equally important, goal of green accounting is to incorporate environmental benefits and costs into the firm's decision making process. Another underlying goal is to help make the economy more sustainable and to gather information to understand the relationship between the economy and the environment (Hecht, 2000).
While green accounting is more recognized in European countries, most of our analysis will focus on the U.S. implementation and progress. Although green accounting ideals have been used since the 1970s as a management tool, the U.S. lagged behind many countries in its implementation. While countries such as Norway and Sweden adopted many Environmental Accounting practices in the 1970s, the Environmental Accounting Project in the U.S. began in 1992 by the Bureau of Economic AnalysisÂ (Hecht, 2000). This arose from outside stakeholders' concerns that managers were not accounting for environmental costs in the decision-making process (Hecht, 2000). Since the early 1990s, the use of green accounting has become more widespread and has been adopted on the firm level with greater consistency. Over the years, a key issue has been the significant disagreements in developing practical methods for environmental accounts. This topic will be explored later in our discussion. In the case of the United States, the adoption of the environmental accounting program was swiftly terminated by Congress. This was in response to the objections of various resource-based industries that would be negatively affected by green accounting measures (Hecht, 2000). While the United States still undertakes a number of measures which could be considered green accounting, the Bureau of Economic Analysis (BEA) was prohibited from using its funds for environmental accounting. According to the GAO, "although this restriction has now been lifted, to date no funding has been appropriated for BEA to resume its work" (GAO, 2007).
While the United States continues to struggle in its implementation, countries across the world continue to adopt and develop the practice. Many parties consider this a huge concern, as the United States consumes huge amounts of natural resources and generates pollution in "proportionately large quantities" compared to other countries (GAO, 2007). Many believe that the United States' absence in the environmental accounting process significantly delays more consistent and universal concepts and practices worldwide. This includes raising awareness, obtaining support for the environmental accounts, and making the accounts as useful as possible (GAO, 2007). By all accounts, creating a base for environmental accounting and obtaining support for environmental accounts will take a long term commitment. However, the BEA has shown its commitment to the long-term benefits that the environmental accounting concepts can provide nationwide.
In conclusion, green accounting arose partially because stakeholders were concerned that firm managers would not adopt pollution prevention measures by their own choice, as it generally would not improve the company's 'bottom line'. Therefore, the purpose of environmental accounting is to force firm managers to recognize the environmental costs of non-prevention and the economic benefits of pollution prevention (Boje, 1999). Â The underlying goal of this concept is to "bring about organizational changes towards sustainability by creating visibility to environmental aspects of the firm" (Boje, 1999). This is meant to give disclosure to all stakeholders on the harmful environmental effects of the firm's actions. Therefore, the accountant plays a significant role in calculating benefits and costs of implementing pollution-cutting measures, which we will discuss in the following section.
Role of the Accountant in Environmental Accounting
In recent years, environmental accounting has gained significant popularity on the firm level, resulting in firms making environmental costs a part of their decision-making process. This may raise the question, what is the motivation for the firm to make environmental costs a variable in their decision-making process? Many companies hire environmental accountants to calculate the costs of adopting measures to cut pollution, and comparing these costs to potential benefits. Specifically, the accountant can assist the firm in the areas of risk assessment, capital budgeting and investment appraisal, and within the internal reporting mechanism (Wilmshurst, 2000). Benefits come in the form of tax credits for using government approved methods and for following government regulations (Jobin, 2011). Therefore, government can play a significant role in protecting the environment by providing incentives for firms to make decisions in the best interest of the environment. The accountant can assist in this role by calculating additional costs to the firm to cut pollution, while comparing these values to the tax relief and other benefits the firm could receive (Jobin, 2011). Also, the accountant can contribute in identifying environmental costs and can help decrease these costs wherever possible. There are many environmental costs which can be overlooked, which green accountants can help identify. For example, many organizations do not realize their carbon dioxide emissions, which the environmental accountant can assist with (Hinter, 2009). The accountant can help firms limit their environmental impact, make efficient use of natural resources, reduce costs, and exhibit social responsibility. Overall, a large benefit of environmental accounting is having firm's invest in more environmentally friendly equipment and methods, all while providing the firm with a profit motive to implement these measures. Now that we've discussed the role of the accountant in regards to the environment, we will now look at the ethical issues surrounding the accountant.
Ethics of Green Accounting
A major topic in environmental accounting is the concept of sustainability. Sustainability can be defined by the "safeguarding of our natural resources and environmental resources for future generations, while also promoting economic growth and maintaining our quality of life" (GAO, 2007). In order to assess sustainability, knowledgeable individuals require accurate and reliable data. This raises the question; does the accounting profession have a professional obligation towards sustainability? According to John Flower, a central idea in the concept of sustainability is that our current economic system is unsustainable in the long run. Therefore, in order for the world to continue to prosper, it is necessary that there are significant changes in man's behavior and the behavior of firms (Flower, 2010). Flower contends that if firms, consumers, and governments are provided with full information of the firms' impact on sustainability, they will make correct decisions, which will in turn lead to sustainable development (Flower, 2010). As mentioned in the preceding paragraph, the accounting profession can aide in providing accurate and reliable information that is useful to consumers, firms, and governments in the decision-making process. Therefore, the accountant has the responsibility to summarize the firm's effects on the environment, including its use of natural resources. This concept will be discussed in detail with our discussion of the triple bottom line concept.
As mentioned in the preceding paragraphs, the accountant plays an important role on the sustainability of the environment. In a similar way, the accountant plays a role in distributive justice. According to Flower, sustainable development deals with the degradation of the environment, which is a significant injustice to secondary stakeholders as a result of the firms' actions (Flower, 2010). Therefore, it follows that the distributive justice concept would require the division of the revenue stream to those stakeholders who are negatively affected. The environmental accountant can play a role in assessing non-financial information such as consumption of natural resources and pollution. This information, if reliable and accurate, can contribute to distributive justice.
The accounting profession's role on distributive justice and the sustainability of the environment leads us to the ethics of the environmental accountant. As mentioned throughout our discussion, one of the accountant's roles is to summarize and disclose environmental costs and the firms' use of the world's finite natural resources. With this information, consumers and firms can make decisions knowing the firm's impact on the environment. Since full disclosure of environmental impact and sustainability reports are not required in the United States, it is our belief that the United States does not currently fulfill all of its ethical requirements to the environment. This belief is consistent with John Rawls' ideals on ethics and universal principles. According to Rawls, an ethical action requires that an individual put himself in 'the original position.' From this position of equality, one does not know what they might become, so they must consider each position objectively. Therefore, since an individual does not know whether they are to become someone affected positively or negatively by an action or principle, they must weigh the morality of the action without bias. Only in this position, Rawls claims, an individual can set universal principles that are morally correct. In applying this concept to the environment, the most logical conclusion is that the firm has the responsibility to disclose all material effects on the environment and sustainability. While the U.S. government provides tax incentives for the firm to be more environmentally conscious, efforts for full disclosure and development of environmental accounts are no longer being funded by Congress (GAO, 2007). Rawls would most likely take the position that universal principles would require full disclosure of all reliable and available information. In the original position, if one turned out to be a manager of a firm, they may not want to disclose their high pollution and consumption of natural resources, in fear of public perception issues. However, from the perspective of a potential secondary stakeholder, such as a fisherman whose ocean is being polluted by the firm, they would most likely want full disclosure. Only with full disclosure will consumers, firms, and governments be able to make informed decisions which will help sustainability efforts. Therefore, an individual in the original position must consider the worst of consequences, which would most likely entail that a universal principle would require full disclosure of the firms' environmental impact.
Technical Accounting for Environmental Costs
Environmental accounting attempts to provide a framework for the compilation of information regarding natural resources and other environmental assets. The international community has categorized environmental accounts into four distinct classifications: the natural resources assets accounts, the pollution and material physical flow accounts, the monetary and hybrid accounts, and the environmentally-adjusted macroeconomic aggregates.
The first account we will discuss is the natural resource asset account, which primarily focuses on stocks of natural resources. This accounts' data shows the opening and closing balances and changes to natural resource stocks. Changes to natural resource stocks are differentiated between changes due to economic activity and changes due to natural processes. An example of a change due to economic activities would be mining natural resources or fisheries, where changes from natural process would include the birth or death of trees. Further, the asset accounts are distinguished between physical asset accounts and monetary asset accounts. Physical asset accounts track the physical amount of a particular resource whereas monetary asset accounts create a monetary value for the total national wealth of an individual resource. Consequently, physical asset accounts can help managers supervise resources more effectively and consider the effects of different policies on ecological sustainability. These accounts are helpful for determining the total wealth of a country, how diverse a country's environmental assets are, and how vulnerable the assets are to fluctuations in price.
The next categorization of accounts are the pollution and material physical flow accounts, which provide information at an industry level about natural resources used in economic activities and the negative byproducts of such activities. Resources measured often include energy, water, and other materials whose byproduct include wastewater, solid waste, and emissions. The accounts are usually organized to show the origin and destination of natural materials and possible pollution. A popular example is a physical flow account for carbon dioxide emissions over a period of time.
Monetary and hybrid accounts are the third category of environmental asset accounts. These accounts focus on expenditures and taxes related to protecting and managing the environment. And there are five types of monetary and hybrid accounts, which are described below.
Environmental protection and resource management expenditures accounts identify relevant expenditures made by industries, the government, or households that effect the environment or natural resources.
Environmental goods and services industry accounts consider the contribution of environmental assets to factors of a country's economy, such as GDP, employment, and exports.
Environmental and resource tax accounts consider taxes and levies collected by the government for pollution or use of natural resources.
Monetary flow accounts generate a monetary value for the costs and benefits from resource use and pollution.
Hybrid flow accounts display physical flow accounts and monetary flow accounts in one matrix.
Each of these accounts provides information regarding the costs of environmental regulation and the effectiveness of different policies. These accounts can also be used to assess the effects of expenditures on industry prices, productivity, and ability to compete internationally.
The final account category is environmentally-adjusted macroeconomic aggregates, which use the previous three types of environmental accounts to assess overall environmental health. An example of such an account is adjusting gross domestic product to account for environmental costs and benefits. This could be effective in identifying potential policy problems. However, such a measure has been difficult in application due to the lack of a standard environmental accounting method, resulting in a lack of comparability between countries. To further our discussion on environmental accounts, we will examine the application of these accounts in today's society.
Application of Green Accounting
Environmental accounts can be used to address the complicated environmental issue of climate change. Since climate change is a direct result of global economic expansion throughout the last century, it is necessary for policy makers to be able to connect economic data to environmental data and develop policies that allow for economic growth and environmental protection. For example, international carbon trading has been vouched for by environmental accounting experts in an attempt to benefit countries consciously preserving forests. Since forests act as carbon sinks, forest asset accounts can be used to estimate changes in carbon stocks. These accounts can also be used to help countries set a target level of carbon dioxide emissions that can be compared to actual results. Further, water accounts can also be effective in measuring environmental policy effects on climate change. Freshwater is decreasing due to the climate change and when combined with the increasing population, can create a problem for our planet. The costs associated with purifying, storing, and obtaining freshwater are included in water accounts. Also, increasing sea levels will result in high costs such as dams and levees to prevent rising water from covering land or destroying infrastructure. The costs of these preventative measures are also included in water accounts.
These accounts mentioned are not required by GAAP. Furthermore, in financial reporting today, GAAP tends to focus on shareholders. GAAP accounts for shareholders ownership in the business and how they are affected by different transactions. Â However, many philosophers believe that a company needs to do more than just focus on their shareholders and financial well-being. These philosophers, such as John Ekington, advocate for an idea called the triple bottom line. The triple bottom line is a way of valuing and measuring the full impact of an organizations success. Â By measuring not only the financial aspect of the business, the triple bottom line looks at the organizations effect on the planet and the stakeholders in the business. For example, if a car manufacturer decides to build a new plant in Blacksburg, the company needs to not only account for the financial impact of the plant, but also the social and environmental impact of this plant on the surrounding community. In this brief analysis of the triple bottom line, we'll discuss how it came about and the advantages and disadvantages of it.
Â Â Â Â The idea of the triple bottom line was first looked at in the early 1980's when Freer Spreckley presented it in his publication Social Audit - A Management tool for Co-operative working (Spreckley, 1981). However, the phrase "Triple Bottom Line" wasn't coined until 1997 by John Elkington (Brown). In the early 1990's, corporations were focused on cost-cutting. However, the hidden social and environmental costs of those cost-cutting actions didn't become apparent until companies began to implement the triple bottom line. For example, Nike had to examine their sourcing policies and watch their ethical standards of their suppliers (Triple Bottom Line). In another example related to the environment, things such as indiscriminate logging of the Amazon basin have occurred.
Fast forward to today, and many articles and papers researched by our group are critical of how the triple bottom line is being construed as it focuses on accounting. For example, in Frank Vanclays paper, Impact Assessment and the Triple Bottom Line: Competing Pathways to Sustainability?, he states:
"TBL is meant to be a way of thinking about corporate social responsibility, not a method of accounting. On this point, Elkington (1997: 70) is unambiguous, likening TBL to a Trojan Horse which is wheeled in by corporations. In the beginning they succumb to an accounting procedure, but ultimately they are meant to embrace a wider vision of sustainability. Unfortunately, too many agencies and companies have not appreciated the philosophy behind TBL, and are responding only to the reporting requirements."
To further this criticism, Edward E. Lawler of Forbes magazine, wrote that going green can be very profitable. Companies like Wal-Mart have found that reducing emissions and packaging materials have actually reduced costs and this is creating a mindset that in order to focus on sustainability, a company must focus on reducing costs and maximizing profits (Lawler, 2012). Lawler goes on to explain a similar idea of Varclays:
The alternative to this profit-above-all approach is a sustainably effective approach that focuses on the triple bottom line of people, planet and profit. Â Organizations that practice and integrate sustainability thinking put it into all of their operations - they do not just work on what leads to profits. Â They integrate sustainability into their very DNA, and everything proceeds from that"
The meaning of these criticisms is to give evidence on how there has been too much focus on the accounting and the related reporting requirements and not enough on the meaning and implementation behind the triple bottom line. These criticisms come with advantages though and will be briefly discussed in the subsequent paragraph.
Â Â Â Â One of the main supporting arguments for the triple bottom line is that it can turn the focus from not only financial gains but to environmental gains. Similar to what Lawler and Varclay mention in their criticisms, companies who can make an organizational wide change to focus on the triple bottom line can do things that are not only profitable but environmentally friendly. In most of the information found, when talking about the advantages, researchers brought up the environmental improvements that can take place and the potential for new business opportunities that are sustainable (Willard, 2012).
A good example of the triple bottom line implementation is the green balance sheet, which is a recent development in environmental accounting. A green balance sheet considers all internal and external costs of a firm's activities. Examples would include side effects damaging worker health, emissions and pollution, depletion of finite natural resources, and others. A green balance sheet would also have to include internal and external environmental benefits generated by the firm. Examples include savings from reductions in pollution or more efficient use of raw materials. The use of these "green accounts" helps improve corporate social responsibility by comparing the costs of preventing environmental damages to the costs of corrective activities.
Despite the positive benefits associated with green accounting, the actual implementation of an accurate system has proven to be difficult. There is no standard for a green accounting system, which results in difficulties when attempting to compare the effectiveness of different firms or countries. To further hinder the adaptation of a standard green accounting system, the valuation of relevant costs is difficult, especially when the natural resource being valued is not usually sold and many pollutants emitted by one country or firm have adverse effects on another. Implementation of a green accounting standard would also create difficulties in measuring the costs of protective expenditures or damage already done to the environment. While the measurement of environmental costs and benefits will always be difficult to ascertain, the adoption of a global green accounting standard is necessary in order for green accounting information to provide significant value.
Future Outlook and Conclusion
The future outlook of how accounting and environmental factors relate are in debate. In our research, we determined a majority of our information is from European sources. Why is that? The United States Government Accountability Office conducted a study on this titled Measuring Our Nation's Natural Resources and Environmental Sustainability. This study provides a large amount of related information on green accounting. They begin by stating that many countries such as Australia, Canada, France and some developing countries have components of environmental accounting and are continuing to refine these accounts like the ones mentioned previously. The question worth asking is, where is the United States in all this? They answer this question by stating:
"In the United States, in 1992, the Department of Commerce's Bureau of Economic Analysis (BEA) began developing a set of environmental accounts called the Integrated Economic and Environmental Satellite Accountsâ€¦.However, from fiscal year 1995 through fiscal year 2002, congressional appropriations committees directed BEA not to pursue this initiative"
The United States attempted to create a nation-wide database of information but failed. This provides U.S. companies with inadequate information about environmental impacts of their decisions, making it hard for business to implement green accounting and the triple bottom line. For example, the United States lacks reliable information on fish stocks and the extent to which certain fish stocks are being depleted (GAO, 2007) If the managers of these fishing organizations had better information they could identify appropriate harvest limits (GAO, 2007).
John Flower talks about the GRI guidelines and that there are some standard disclosures that should be required in regards to the environment. These standards are not required by law and are released as part of an independent nongovernmental organization. In those standards, environmental performance should be disclosed on 30 performance indicators including "total direct and indirect greenhouse gas emissions by weight" (Flower, 2010). In a current example, Apple has been criticized for its labor and environmental practices. However, since 2006, Apple has released their Environmental Footprint Report, which examines their environmental impact of every facility, product and service it offers. This report states "Apple has reported our environmental impact comprehensively by assessing the full life-cycle greenhouse gas (GHG) emissions associated with every product and service we offer" (Apple, 2012). In the report, they also mention that they follow GRI guidelines. This indication shows the continued adoption and relevance of accounting and the environment. While policy makers haven't released reporting requirements like these, large multi-national companies, like Apple, have begun to adopt these sustainable reporting practices.
In conclusion, accounting plays a critical role in the firms' sustainability strategy. Our ethical analysis supported the importance of accounting in the environment and while U.S. policy makers are hesitant to adopt strong environmental accounting policies, organizations are beginning to implement stronger environmental policies. The GAO report mentions:
"In 1999 and again in 2005, two independent National Academy of Sciences (NAS) panelsâ€¦.found that developing a set of comprehensive environmental accounts should be a high priority for the nation." 
Most importantly, the United States should be a leader in sustainable accounting. The GAO study continues to discuss strategies for developing the United States environmental accounting with things such as understanding other countries experiences with green accounting, developing an economic case for environmental accounting and identifying policymakers and environmental experts who can help promote this field (GAO, 2007). A more widespread environmental accounting system can provide firms with the tools they need to make decisions that improve the sustainability of our planet.