By Salwana Selamat and Nazirah Naiimi, Faculty of Accountancy, Universiti Teknologi MARA, Cawangan Perlis
Environmental accounting is a crucial field that has gained increasing prominence in recent years as societies and businesses recognize the pressing need for sustainable and responsible practices. The worldwide awareness of environmental concerns has significantly increased over the last twenty years which the obvious concerns such as climate change, the exhaustion of restricted resources, and the destruction of natural habitats. Inadequate environmental practices can significantly bring harm to both the business and its financial interests as well as the society. This article will explore on the definition, goals and challenges that associated with environmental accounting.
Yakhou and Dorweiler, (2004), defined environmental accounting as an inclusive field of accounting which provides reports for both internal uses, generating environmental information to help make management decisions on pricing, controlling overhead and capital budgeting, and external use, disclosing environmental information of interest to the public and to the financial community. It involves the systematic collection, measurement, and integration of data related to resource consumption, emissions, waste generation, and other environmental aspects into an organization's financial and managerial accounting systems. Environmental accounting is a specialized branch of accounting that focuses on quantifying, analyzing, and reporting the environmental impact and costs associated with an organization's activities, products, and services. This is in line with Stanko et al., (2006) portrayed environmental accounting as the identification, measurement, and allocation of environmental costs, the integration of these environmental costs into business decisions, and the subsequent communication of the information to a company's stakeholders.
As the environmental accounting becomes more prominent therefore the primary goal of environmental accounting encompasses the following in accordance with Association of Chartered Certified Accountants (ACCA) (2016):
Measurement and Reporting: It refers to the processes and practices of quantifying, documenting, and communicating financial and non-financial information related to an organization's environmental activities and impacts. This would help investors to understand the extent of environmental impacts.
Compliance: Environmental accounting compliance refers to the practice of complying with accounting standards and principles that specifically relate to environmental issues. This includes the accurate recording and reporting of financial information related to environmental activities and obligations in accordance with relevant laws, regulations, and accounting policies. Environmental accounting compliance helps organizations track, measure, and disclose their environmental performance and financial impacts, ensuring transparency and accountability in their environmental reporting.
Cost Management: Identify and manage environmental costs that enable organizations to reduce expenditure associated with resource use, waste management, and pollution control.
Resource Efficiency: Promote resource efficiency by analyzing data and identifying opportunities to reduce resource use and improve processes. Enhancing the resource efficiency of an organization is a key factor in boosting its competitiveness. Improving resource efficiency within a company therefore has significant potential to reduce production costs, increase productivity and simultaneously playing a substantial role in addressing environmental issues.
Risk Assessment and Management: Assess and manage environmental risks, including potential liabilities and reputational risks associated with poor environmental performance.
Decision Support: Provide relevant information for decision-making within the organization to encourage investment in sustainability and environmentally conscious practices.
Sustainability: Support sustainability efforts by tracking progress towards environmental goals and identifying areas for improvement. The idea of sustainable development, which emphasizes the preservation of natural resources and the recognition of their value in financial reporting, has increased the responsibility of stakeholders in the field of environmental accounting. In the early stages of economic development, natural resources were not given adequate priority.
Benchmarking: Compare an organization's environmental performance with industry benchmarks and best practices to promote competitiveness and innovation.
Stakeholder Engagement: Engage with stakeholders interested in the organization's impact on the environment, promoting trust and demonstrating commitment to responsible business practices.
These goals collectively aim to integrate environmental considerations into an organization's decision-making processes, financial reporting, and overall business strategy, fostering sustainability and responsible environmental stewardship.
Challenges and barriers in the field of environmental accounting as outlined by Hossain (2019) include:
Data Quality and Availability: The difficulty of obtaining accurate and reliable environmental data, particularly for non-financial aspects, can hinder effective environmental accounting.
Complexity and Standardization: The complexity of environmental issues and the absence of standardized accounting methods can make the development of consistent and comparable environmental challenging. The accounting profession has some recognized accounting standard for the conduct of accounting practice, but there is no recognized international accounting standard for environmental accounting.
Costs and Resource Constraints: Establishing and maintaining environmental accounting systems can be costly, especially for smaller organizations with limited resources. Implementing environmental accounting and reporting will require additional human resources and financial investments. Many businesses, unless mandated by regulations, might be reluctant to bear these additional expenses. Therefore, the prospect of incurring extra costs can be viewed as a challenge in the adoption of environmental accounting.
Data Integration: Integrating environmental data with financial accounting systems can be technically challenging and may require significant information technology infrastructure. Accounting functions as an information system, yet its effectiveness is compromised when there is insufficient data, leading to challenges in the accurate recording and presenting financial data, as accountants may struggle to make proper entries due to the lack of necessary information.
Regulatory Compliance: Complying with ever-evolving environmental regulations and ensuring compliance in reporting can be a major burden for organizations. Every organization establishes rules and regulations to ensure smooth operations and overcome various challenges. A well-defined set of rules and regulations is essential for the effective implementation of environmental accounting.
Lack of Expertise: A shortage of professionals with expertise in environmental accounting can hinder its adoption and implementation. Highly educated and skilled personnel are essential for the successful and efficient implementation of environmental accounting.
Resistance to Change: Organizations may encounter resistance to change from internal stakeholders who are used to traditional accounting practices. Various challenges may arise during the introduction and implementation of environmental accounting. It is crucial to proactively identify these challenges in advance to either minimize or overcome them. This proactive approach is essential to ensure proper implementation and achieve greater efficiency of environmental accounting practices.
Complexity of Environmental Impact Assessment: Assessing the overall environmental impact of an organization's activities, products, or services can be complicated and involve various interconnected factors.
The absence of numerical measures for environmental issues: Only a small number of manufacturing organizations provide numerical information, and this has a detrimental impact on the practice of environmental accounting.
Short-Term Focus: Businesses may prioritize short-term financial gains over long-term environmental sustainability, creating a barrier to the adoption of environmental accounting.
Public Perception: Negative public perception or skepticism about the authenticity of environmental accounting efforts can be a barrier to its adoption.
Integration with Strategy: Aligning environmental accounting with an organization's strategic objectives can be challenging, particularly when environmental considerations are not integrated into core business strategies.
Addressing these challenges and barriers are essential for the successful implementation of environmental accounting and its integration into an organization's sustainability efforts and decision-making processes. In summary, environmental accounting plays a key role in the modern era, addressing the pressing requirement for organizations to quantify their environmental effects and sustainable initiatives. This approach not only ensures adherence to severe regulations but also offers a structure for businesses to proactively participate in conserving the environment, practicing responsible resource stewardship and well-being of what is being managed.
REFERENCES
ACCA. (2016, June 27). Environmental Management Accounting. ACCA Global. https://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study resources/p5/technical-articles/environmental-management.html
Hossain, M. M. (2019). Environmental accounting challenges of selected manufacturing enterprises in Bangladesh. Open Journal of Business and Management, 7(02).
Stanko, B.B., Brogan, E., Alexander, E., & Chay, C. (2006). Environmental Accounting. Business & Economic Review, 52(3).
Yakhou, M., & Dorweiler, V. P. (2004). Environmental accounting: An essential component of business strategy. Business Strategy and the Environment, 13(2).
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