The utilization and benefits of using environmental management accounting for firms

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Abstract

This thesis highlights on the utilization and benefits of using environmental management accounting for firms. In order to realize the uses and benefits of such a system, a framework is drawn to develop and implement an environmental management accounting system within an organization. The paper also compares and finds the difference between traditional financial accounting method and environmental management accounting to outline the importance of the later system in the current business environment. The research paper also discusses the methods of finding environmental costs and how the companies can accrue saving and generate revenues by separating environmental costs from general accounting (Parker, 2002).

The thesis attempts to find out the basic benefits companies can garner by adopting an efficient environment management accounting practice which has the primary role to lead a company in the path of progress through eco-friendly initiatives. Furthermore, the research would validate the use of system in aiding management decisions regarding designing environmental friendly products, attuning production process and managing wastes (White and Savage, 1995).

Chapter 1

Introduction

Statement of the problem

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In today's globalized economy, companies have become too competitive and are even using unethical means to pip the other firms in the race. The greatest concern these days have been on the effect of environment that these companies are putting to earn higher revenues and increasing their bottom-line. Thus, government, non-governmental organizations as well as the general public are increasingly putting pressure on the companies to become responsible towards the environment and invest substantial amount of money and effort to protect the environment (White and Savage, 1995).

Therefore, the issue of safeguarding the environment has gained prominence throughout the world in the past few decades, which has in turn made it important for companies to re-think their accounting structure and emphasize on accounting for environmental and other such related issues in the annual reports and management decisions. Thus, the need of the hour for companies are not just analyzing financial data but also to take into account various environment-related information in the end-of-the year results. The issues related to environment has garnered greater media and public attention in the past few decades due to major incidents like the Exxon Valdez oil spill of 1989 and the Bhopal chemical leak of 1984. These incidents were not just individual corporate failures but in fact became global talking points which in turn steered the attention of the world towards issues such as global warming, climate change, fast depletion of fuel and other non-renewable resources, deforestation and the loss of natural habitats (United States Environmental Protection Agency, 1995).

Such issues have also pointed fingers and raised questions against the unethical business practices followed by the companies and many since have called for change in policies to regulate the corporate and make them more responsible towards the environment. Not just non-governmental organizations such as the Greenpeace and Friends of the Earth has raised their voice about environmental issues but even the United Nations, the European Union, and several other governments around the world have also adopted various policies to safeguard the environment. Many agreements are also formulated on the global level to prevent the future damage of the environment. Some of these prominent agreements include the Kyoto Protocol, the Rio Declaration and the Montreal Protocol (Votta and White, 1998).

1.2: Research objectives

The central theme of this paper is to illustrate the benefits of environmental management accounting system and find out how businesses can implement this system to garner better market value and position. Some of the major benefits of the environmental management accounting include aiding companies to take responsible decisions relating to issues such as allocating costs, capital budgeting or designing processes. Experts believe that companies can use the following steps to implement the accounting system in an effective manner. The first and the foremost step are to identify the opportunities so that unnecessary costs are eliminated that does not give any value to a product or process.

Furthermore, companies need to find out the environmental costs from the account sheets which are often hidden under the overhead accounts, direct labor accounts or direct material accounts. It has been found that in most cases, environmental costs are hidden in different parts of the management accounting system. For instance, the below diagram illustrates that the environmental cost is being hidden under direct labor, direct material and overheads.

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To accrue greater benefits from the environmental management accounting system the company should also identify opportunities that may generate revenue by selling waste by-products and integrating the environment with various other aspects of business management that support and implement the system. The firm should also determine the costs and savings that the system might generate, and identify the precise method for pricing products as per industry standards. Last but not the least; companies should also focus on designing more environmental friendly products and attuning the processes that might provide a competitive edge to the company over its nearest rivals (Rikhardsson and Schaltegger, 2002).

1.3: Methodology

I propose to use qualitative research methodology for undertaking this thesis, as I believe that qualitative research is significant for analyzing the concept of environmental management accounting and how handling of environmental issues inappropriately can damage the reputation of a business in the market. Furthermore, it is also imperative to conduct an in-depth secondary research to understand the surrounding world. A qualitative methodology is the best fit for this topic because it provides an initial understanding and benefits of environmental management accounting system while also providing a base for further research. This methodology will be more subjective than quantitative surveys because I will be able to decide which specific examples to report. As the thesis deals with larger social question of the need to incorporate environmental issues in the accounting system, I consider that quantitative research methodology would not be suitable for this thesis. On the other hand, qualitative methodology would not only help in summarizing a few key issues such as finding out the elements that constitute a environmental management accounting system but at the micro level, finding out the differences between the traditional accounting system and the environmental management accounting system. Therefore, to understand this complex correlation, I propose to base my research on qualitative methodology. Qualitative research, being more subjective in comparison to quantitative methodology, would help in examining the intangible aspects of the research subject, for example: identifying environmental costs, which are often hidden under the overhead accounts.

I have also relied heavily on secondary data and research, as the topic demanded an in-depth knowledge about not just the system but also about how environmental issues can create or destroy businesses. Such intensive research could only have been possible through secondary data searches. I have undertaken a secondary search of available literature on the topic from secondary sources, such as published media reports and published research reports on the subject line. Some of the common sources of secondary data undertaken for this research paper include academic papers, organizational surveys, and government records.

The vast scope and access of the study makes it imperative to undertake a qualitative research. This kind of research is also chosen for the fact that while one understands the phenomenon of a particular topic, one simultaneously get more experienced and informed about the same. It is the current thinking that gives way to the future thought, resulting in the emergence of new, interesting and more viable theories.

Chapter 2: Background

2.1: Defining Environmental Management Accounting

Environmental management accounting (EMA) is considered to be a subset of environmental accounting and is generally used to provide information for decision-making in an organization. EMA related to proving information for internal decision-making is consistent across all levels as defined by US EPA (1995). Per the EPA, the process of collecting, identifying and analyzing data/information about environmental costs and performance in order make good decision making. As per International Federation of Accountants (1998), EMA is defined as management of environmental and economic performance by developing and implementing appropriate environment-related systems and practices. This might include reporting and auditing in some companies, environmental management accounting basically involves life cycle costing, benefit assessment, full cost accounting and strategic planning for environmental management.

Chapter 3: Literature Review

3.1: Defining environmental management accounting

The idea of environmental management accounting has gained prominence from the past few decades due to the rise in environmental-related problems and issues. In general terms, the concept of environmental management accounting is defined as a system that identifies, collects, analyses, estimates, reports, and uses information related to environmental costs that are used to make decisions within a firm. In the contemporary world, it has become a widely used tool to balance economic, technological and social factors while developing processes and policies for a sustainable business environment.

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Environmental management accounting is often positioned within the framework of social accounting. Experts such as Parker (2002), in fact suggest that social accounting is the process through which social and environmental effects of organizations are communicated. Gray says that the social accounting system "as such involves extending the accountability of companies beyond the provision of financial accounts to the owners of capital (particularly shareholders)." Taking the cue further, experts such as Epstein also echoed similar opinions and said, "Social accounting and accountability, social responsibility reporting, and sustainability reporting are all terms that refer to the measurement and reporting of an organization's social, environmental, and economic impacts" (Epstein, 2004).

3.2: Environmental management accounting and cost factor

Some of the cost information that managers need to identify and project are environmental performance and the associated economic performance. EMA practitioners and researchers have developed various EMA methodologies and approaches that can be followed by various organizations. It has been seen and dealt with that not all emissions and waste can be reduced. Some of them are inevitable but it is financial best interest of the organizations to use the materials, water and energy in as much less quantity for achieving their goals. Proactive and preventive environmental management that can help reduce the amount of the waste generation, also treating the waste material for reuse can reduce purchase costs of the material not used or lost as wastes. Therefore, assessment of these costs allows the managers to better understand the potential monetary value of the environmental management for preventive measures

3.3: Environmental management accounting and businesses

Irrespective of being employed by a small or large company, the success of an environmental management accounting system depends on the effectiveness of measuring and collecting facts and information related to the environmental impacts and aspects. For small companies, such an elaborate system might not be in place, and therefore, to evaluate the environmental impacts they may highlight on issues such as cost management system or quality management. However, for a big company, the information related to environmental costs might be gathered from various sources such as the environmental management system, assessments of life-cycles, environmental management plans and indicators that evaluate environmental performance.

Chapter 4: Methodology

This chapter analyses the methodology to be used for conducting the research on finding about the benefits and uses of environmental management accounting for firms. Furthermore, the research attempts to undertake an in-depth analysis of environmental management accounting system and the need to draw a framework to develop and implement an environmental management accounting system within an organization. It would further discuss the use of qualitative methodology for conducting this research to understand the importance of environmental management accounting system in today's business scenario, while also providing a base for further research.

I propose to use qualitative research methodology for undertaking this thesis, as I believe that qualitative research is significant for analysing the concept of environmental management accounting and how handling of environmental issues inappropriately can damage the reputation of a business in the market. Furthermore, it is also imperative to conduct an in-depth secondary research to understand the surrounding world (Mannose, 1998).

4.1: Using qualitative and secondary research methodology

A qualitative methodology is the best fit for this topic because it provides an initial understanding and benefits of environmental management accounting system while also providing a base for further research. This methodology will be more subjective than quantitative surveys because I will be able to decide which specific examples to report. As the thesis deals with larger social question of the need to incorporate environmental issues in the accounting system, I consider that quantitative research methodology would not be suitable for this thesis. On the other hand, qualitative methodology would not only help in summarizing a few key issues such as finding out the elements that constitute a environmental management accounting system but at the micro level, finding out the differences between the traditional accounting system and the environmental management accounting system. Therefore, to understand this complex correlation, I propose to base my research on qualitative methodology. Qualitative research, being more subjective in comparison to quantitative methodology, would help in examining the intangible aspects of the research subject, for example: identifying environmental costs, which are often hidden under the overhead, accounts (Howes, 2002).

I have also relied heavily on secondary data and research, as the topic demanded an in-depth knowledge about not just the system but also about how environmental issues can create or destroy businesses. Such intensive research could only have been possible through secondary data searches. I have undertaken a secondary search of available literature on the topic from secondary sources, such as published media reports and published research reports on the subject line. Some of the common sources of secondary data undertaken for this research paper include academic papers, organizational surveys, and government records. There are several advantages of collecting data through secondary research, which includes saving time, and collecting a large database (Hibbitt and Collison, 2004). However, the major disadvantage of this kind of research is that the researcher could not personally check the reliability of the data. Secondary data analysis is usually conducted by researchers to get a better understanding of a concept. Secondary data helps a researcher to support his or her concept and define the goals of the research by interpreting the data. However, as secondary research totally relies on already published reports, it is imperative to collect the data from reliable sources and check the validity of the data. The data can be easily located with advanced online searches, but one needs to be careful about using out of date or inappropriate data. In order to evaluate the validity of the data a researcher should examine the secondary data and ensure that it is appropriate for the purpose of their study (Constanza and Maxwell, 1999).

Thus, for this particular report, I have used various secondary data as it allowed me to conduct analyses of various accounting processes and find out the relevant system that can find out environmental costs effectively. It also saved me time and money since the work has already been done and helped me in avoiding the problems associated with the data collection process.

I would not be conducting any sample surveys for this research, since this dissertation will be based on secondary data taken from articles, journals and case studies. Furthermore, this dissertation will not only analyze and summarize data, but also identify the different factors involved. Therefore, analytical and predictive research will also be used in the dissertation. Analytical research is an extension of descriptive research and predictive research is to speculate on future possibilities, based on analysis of available evidence of cause and effect (Bennett and James, 1998).

The vast scope and access of the study makes it imperative to undertake a qualitative research. This kind of research is also chosen for the fact that while one understands the phenomenon of a particular topic, one simultaneously get more experienced and informed about the same. It is the current thinking that gives way to the future thought, resulting in the emergence of new, interesting and more viable theories. Not only that, qualitative research also has unique value for investigating complex topics as this one. Qualitative research also has the distinction of generating more interesting and detailed information of value. Though dubbed as a curse, the detail in most qualitative research is more than a blessing too, since it tells the story from the participant's viewpoint, replete with rich descriptive and element (Bennett, 2004).

4.2: Data collection

Since data will be gathered throughout the research process, it requires the use of conceptualization and classification for data analysis. In order to produce a well-grounded conclusion, qualitative data analysis will be used in this dissertation. To conduct a good-structured qualitative analysis, data should be classified into categories, then allocate data into appropriate categories. Afterwards, recognize and develop relationships within and between categories of data. Finally, develop and test hypotheses or propositions (Bebbington and Kirk, 2001).For this dissertation, I have collected data through various secondary sources and academic papers, which outlines the benefits and utilization of environmental management accounting. The gathered information is then researched further and bucketed into separate segments to come out with a hypothesis for the thesis. Secondary data helped me in basing my research on the available information and thereby, saving my time in collecting the data. Furthermore, as the research topic demands in-depth understanding of various accounting methods, therefore, it is easier to base the research on already published materials, rather than undertaking huge surveys (White and Savage, 1995).

As the thesis attempts to find out the basic benefits that the companies can garner by adopting an efficient environment management accounting practice which has the primary role to lead a company in the path of progress through eco-friendly initiatives, the paper has outlined these benefits through the presentation of various case studies.

Although, environmental management accounting is a new approach to improve the environmental performance of a company, proper implementation of the system can assure transparency for the company to report the environmental costs clearly and help them in accessing their corporate social responsibility initiatives as well. All this, in turn enhance the image of the company in the media as well as amongst its shareholders. Thus, the concept of environmental management accounting is worth exploring and investing into (Bebbington and Walters, 1993).