Environmental Accounting: an Essential Component of Business Strategy

Home , Environmental accounting

Business Strategy and the Environment Bus. Strat. Env. 13, 65–77 (2004) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/bse.395 ENVIRONMENTAL ACCOUNTING: AN ESSENTIAL COMPONENT OF BUSINESS STRATEGY

Mehenna Yakhou*1 and Vernon P. Dorweiler2

1 Georgia College and State University, USA 2 Michigan Technological University, USA

Environmental accounting is on an emphasis of the research is on generation expansion path. With increasing social of reports and their standards, for the focus on the environment, accounting range of business and regulatory fills an expectation role, to measure purposes. Copyright © 2004 John Wiley & environmental performance. The status of Sons, Ltd and ERP Environment. environmental awareness provides a dynamic for business reporting its environmental performance. Examining Received 18 October 2002 the integration of environmental policy Revised 12 May 2003 with business policy is the focus of this Accepted 9 July 2003 research. The business firm’s strategy includes responding to capital and INTRODUCTION operating costs of pollution control equipment. This is caused by increasing nvironmental accounting is an inclusive public concerns over environmental field of accounting. It provides reports issues, and by a recent government-led Efor both internal use, generating trend to incentive-based regulation. This environmental information to help make paper describes the environmental management decisions on pricing, controlling component of the business strategy, overhead and capital budgeting, and external producing the required performance use, disclosing environmental information of reports and recognizing the multiple interest to the public and to the financial com- skills required to measure, compile and munity. Internal use is better termed environ- analyze the requisite data. Special mental management accounting (Bartolomeo et al., 2000). For the purpose of this research, both * Correspondence to: Dr. M. Yakhou, The J. Whitney Bunting internal and external uses are considered. The School of Business, Georgia College and State University, Campus Box 15, Milledgeville, GA 31061-0490, USA. contribution of multiple disciplines provides E-mail: [email protected] a base for determination of environmental impacts and related costs. Specific details of that Copyright © 2004 John Wiley & Sons, Ltd and ERP Environment determination serve one or both of the uses. M. YAKHOU AND V. P. DORWEILER

Impact of business activity on the environ- • Senior managers at the institutional level ment is found in several forms. establish environmental policy and assess environmental performance. • Media: air, water, underground pollution. • Environmental managers at the operational • Targets: drinking water, land and habitat for level implement environmental policy. endangered and threatened species. • Environmental staff is involved in capital • Global sites: oceans, atmosphere, land mass. decision-making for environmental control An array of pollutants, including toxic, equipment. hazardous and ‘warming’, is accountable to So multiple functional activities are included: business activities. From this range of capital budgeting and expense budgeting; environmental impacts, multiple disciplines financial and non-financial performance are needed for analysis of effects, and for measurements; budget control and product integration into management decisions and costing. Multi-disciplinary teams have a clear accounting reporting. distribution of tasks and functions, at institu- Non-accounting disciplines needed include tional levels and at operational levels. (i) environmental science, Note that relationships in environmental (ii) environmental law and regulation, reporting are integrated. The data sources are (iii) finance and risk management and based in design, engineering and operations (iv) management policies and control systems. records, rather than broad areas such as energy costs and waste minimization. The extensive The range of environmental costs, energy and data are converted as input to the accounting material use and waste disposal, insurance and system. fines and penalties, shows participation of A side benefit is the decreased need for allo- multiple disciplines, along with accounting cation of environmental costs to products and sub-disciplines. The yield of this effort is the processes. Also, the nature of environmental decision support system, in which environ- costs determines the capital investment assess- mental impact can be determined specifically ment method. Discounted-cash flow is pre- in the following terms: ferred, rather than payback period, given the longer time horizon for benefits from environ- • FCA, full cost accounting, mental capital investment (Grinnell and Hunt, • TCA, total cost assessment, 2000). • LCC, life-cycle costs, • LCCA, life-cycle cost analysis, and • TQEM, total quality environmental management. ENVIRONMENTAL ACCOUNTING

Results of environmental reporting include Before tracing the role of business strategy and full-cost pricing and ‘eco-accounting’. Also, environmental accounting, a base understand- an environmental management system, EMS, ing of environmental accounting is useful. This provides a databank of environmental perfor- is the purpose of the following. mance data, from which environmental cost At the outset, environmental accounting has accounting, ECA, relating all environmental proceeded through a period of uncertain costs, can be directly produced (Lally, 1998). status. Mathews (1997) describes the develop- Cross-functional goals and procedures indi- ment in four phases: cate that business policy and environmental policy are intertwined (Dorweiler and Yakhou, 1970s descriptive, with normative 2002); see Figure 1. models of conduct;

66 ENVIRONMENTAL ACCOUNTING

BUSINESS POLICY and ENVIRONMENTAL POLICY

MISSION Boards of Directors Constitution and Institutional Investors Environmental policy Corporate sustainability STATUS-ANALYSIS Business purpose Environmental protection GOALS Use of resources Responsibility to environmental Capital principles* Workforce NEPA prevent environmental Markets degradation Media, location OBJECTIVES Performance targets Statutory policy by location, market Statutory standards STRATEGY Compliance at maximum Compliance within standards cost effectiveness and preserving the environment IMPLEMENTATION Supply chain Neighbors, community Manufacturing sustainability of resource use Distribution system TACTICS Set mode of operations for Use of resources maximum productivity material, energy, other natural resource ‘greening’ product, process OPERATIONS Optimize production Avoid violations Minimize waste Emissions, discharges of within operating guidelines pollutants Operate within permit MONITOR & CONTROL Financial statements Environmental impacts Operations reports ‘Voluntary Environmental Reporting Initiative’ Financial and Management comparability Accounting transparency Environmental Accounting STRATEGIC ADJUSTMENTS Redeploy resources Volunteerism** Correction tactics Agreement with agency Implementation

*environmental principles: Valdez principles. **Voluntary Environmental Reporting Initiative – VERI.

Figure 1. Integrating business policy and environmental policy (Dorweiler and Yakhou, 2002)

1981–1990 debate on the role of accounting now the role of environmental in disclosing information on accounting is viewed as environmental activities; measuring environmental per- 1991–1995 maturing of environmental formance exceeding regulatory accounting, in making en- standards. This role was vironmental disclosures, and initiated in about 1996. in launching environmental auditing;

67 M. YAKHOU AND V. P. DORWEILER

An environmental accounting framework is example, incentive-based regulation, are yet to develop; such a framework would con- incorporated in analysis and reporting (Fryxell tribute standards for reporting, and standards and Vryza, 1999). for accounting. The state of the regulatory framework is given by Mathews (1997). The emphasis of a framework is to provide a Environmental cost accounting general fit over the area regulated: An advanced step of development of environ- (i) raise awareness of environmental issues; mental accounting is development of environ- (ii) develop guidelines to assist identification mental cost accounting (ECA). Cost accounting of environmental issues and evaluation is defined as use of the accounting record to and reporting of those issues; directly assess costs to products and processes (iii) provide education programs across (Lally, 1998). In this approach, costs are disciplines focused on environmental accounted for by their specific causes. issues and their accounting treatment and Environmental cost accounting directly (iv) develop practices of environmental places a cost on every environmental aspect, accounting, with recommendations on and determines the cost of all types of related best practices. action. Environmental actions include pollution prevention, environmental design and A fifth direction is to link teaching with devel- environmental management. Past approaches opments and practices in business. on environmental impacts were based mainly Such a framework is to demonstrate that the on environmental cleanup costs and past accounting profession is accepting the chal- product disposal. lenge of a contemporary issue: environmental The contribution of ECA is to account for a impact of business activity (Medley, 1997). way of doing business; see Box 1. Arbitrary Accounting professionals appear to focus on allocation of environmental overhead is elimi- the role of environmental accounting, under nated or reduced, and true costs of products consideration that environmental issues are are determined. Environmental cost account- fundamental to human survival. The nature ing in producing environmental costs is of environmental accounting practice is described in two ways (Grinnell and Hunt, considered next. 2000).

Environmental management accounting • One is the A–B–C framework, looking for ‘cost drivers’ at organizational levels: unit, Environmental management accounting batch, product-sustaining and facility. (EMA) is defined as the generation, analysis • The other is a cost-of-quality framework, and use of financial and related non-financial which defines environmental costs in pre- information, to support management within a vention, appraisal and internal and external company or business (Bartolomeo et al., 2000). failure. This cost-of-quality approach sup- EMA integrates corporate environmental and ports pollution prevention as an appropriate business policies, and thereby provides guid- management strategy. ance on building a sustainable business. EMA analyzes environmentally related Another significant contribution of ECA is its financial costs and benefits, contributing to linkage to ISO 14000. The environmental data recognition of the high and increasing levels of in an environmental management system capital and operating expenses, for pollution (EMS) based on ISO 14000 standards is con- control equipment, and environmental taxes. sistent with environmental cost accounting. Also, possible environmental initiatives, for Where a company adopts ISO 14000 standards,

68 ENVIRONMENTAL ACCOUNTING

Box 1. Environmental accounting practice in Europe environmental policy has become a proactive (Bartolomeo et al., 2000). Environmental management decision of business organizations. accounting practice in Europe is compared with practice An alternative view is given as business’s in the United States. response to a threat of interventionist regula- Environmental management is based on management tion. An organized lobbying effort, to forestall accounting with activity-based costing as a main additional, more interventionist regulation, analytical approach to determining environmental has been unsuccessful through the history costs and to quantify cost savings due to environmental performance. of environmental protection since the 1970s Environmental effects are established by setting (Mathews, 1997). Further, the cost of response hypotheses for whether or not to adopt proactive to increasing regulation provides a real practices: pollution prevention and accounting for incentive to adopt a proactive approach to the environmental costs-to-causes. environment. Environmental policy can be compared between the US and Europe. Environmental management is found The proactive approach is not only more to be involved in the same activities with a substan- cost-effective, but it also opens new business tial difference in regulatory enforcement: the US uses avenues; see Table 1. For new business, world- liabilities and penalties while the European Union wide and in ‘green’ markets (eco-labeling does not. Equivalence is shown by the prominent role and recycling), opportunities are open to a of environmental management in European business company that is expressly environmental, not organizations and business strategies. European companies are adopting ISO 14001 standards at a faster necessarily an extreme ‘green’ company. rate than US companies. From new avenues, cost savings are As noted in the body of the paper, the International achieved through energy conservation and Standards Organisation develops standards for use waste minimization. These savings, which independently or for use within an EMS by an increase proﬁtability, are generated by produc- organization. tion and engineering disciplines. For example, the contribution from strategic management specialists and the technical expertise required to address product problems of recycling and ECA is a tool, part of a process for treating the re-engineering will be jointly necessary in the environment as integrated with (i) business development of strategies of reducing impacts strategy and (ii) decision-making (Lally, 1998). on the environment. In both approaches, the company’s competitive advantage is improved. INTEGRATING ENVIRONMENTAL POLICY IN BUSINESS STRATEGY The interdisciplinary approach to environmental accounting Development and implementation of new An inescapable feature of environmental business strategies for meeting environmental accounting is the need for multiple disciplines. challenges will be a central issue for companies Inescapability is found in several dimensions in the years ahead. Accounting for environ- of environmental accounting (Grinnell and mental costs, and associated accounting edu- Hunt, 2000). cation, will play critical supporting roles. The adoption of environmental policy as a • First is the need to position environmental component of business policy is currently con- policy in the overall business policy and sidered voluntary (Gallhofer and Haslam, strategy. 1997). The term adoption implies that busi- • Second are the disciplines involved in ness policy was without express concern for producing environmental accounts and the environment, and since the mid-1990s their reporting.

69 M. YAKHOU AND V. P. DORWEILER

Table 1. Business uses of environmental accounting data (Gallhofer and Haslam, 1997). The integration of environmental policy with business policy has been adopted by enterprising business companies; see Figure 1. This action provides costs savings, avoiding regulatory processes, and ﬁnding new business opportunities. Business uses are described in program terms and the targets for the programs.

Program Target

Government directed Common sense initiatives Pollution control Transportation partners Use of vehicles Green Lights Program Energy efﬁciency Waste Wise Program Recycling Climate Wise Program Emissions control Corporate sponsored Proactive environmental policies EMS, ISO 14001 Environmental accounting and auditing Performance Environmental life-cycle and supply chain management Products and suppliers Integrated environmental program EMS and full-cost accounting

• Third is the audit requirement to assure consider users of the accounting reports. An compliance with environmental regulation array of goals for users is aligned as follows and appropriate reporting by environmental (Bebbington, 1997): accounting. • to assure compliance with regulations; • Fourth is education of students, future prac- • to increase efficiency of resource use energy titioners, to provide technical and legal and material, and to decrease waste; bases in academic preparation and to avoid • to reduce or minimize damage to the ‘discipline insularity’. environment over the life-cycle of products Possible reasons for multiple disciplines and processes and given by Mathews (1997) include organiza- • to continually improve environmental tional legitimacy and the need to influence the performance in the above areas. capital markets. There are other motivating These goals are direct goals for operational factors, whose relative importance of any managers, and are integrated goals for general particular influence is not known in general. management and for environmental managers; The contribution of other disciplines must be see Figure 1. recognized. Accounting research will need to be interdisciplinary in nature. Development will provide challenges and opportunities Training environmental auditors different from those of the past, but, also, will Environmental auditing is a determinative lead to a much richer set of data, or more function (Medley, 1997). Credibility of the envi- comprehensive set of models for the solution ronmental audit is crucial. From a discipline of problems of environmental disclosures point of view, environmental scientists initially (Bebbington, 1997). performed the audit. That audit was to determine compliance with regulation. It has since advanced to determine compliance with Producing environmental accounts management’s environmental controls, noted A concise way to view the disciplines involved above to be higher requirements than in producing environmental accounts is to statutory.

70 ENVIRONMENTAL ACCOUNTING

A discipline development is to train envi- products and processes. (See below ‘Environ- ronmental auditors separately from financial mental management’.) auditors (Medley, 1997). This development again places impetus on standards in INTEGRATING THE environmental accounting; these are reliable ENVIRONMENTAL DEPARTMENT measures of environmental impact, assets and WITH BUSINESS FUNCTIONS liabilities. The audit is thereby based on reliable environmental representation in the An objective of integration of the environmen- accounting record and performance. The tal management department with operational environmental scientists have reduced their functions is to enhance environmental perfor- knowledge into the accounting records, along mance of the organization (Fryxell and Vryza, with non-environmental accounts (financial 1999). So the levels and the mechanisms of accounts), to the performance analysis. In this integration, to achieve improved environmen- way, accountants are offered environmental tal performance, are of organizational interest. opportunity and are prepared to deal with One level of integration is aimed at involv- those demands. ing environmental considerations in every day It is recognized that the enabling potential of decisions. That integration is based at the level environmental accounting arises from its of adopting a corporate culture into environ- engagement with practice (Bebbington, 1997). mental awareness. This crucial approach puts There are clear examples of business and the impetus for considering environmental environmental accounting having beneficial impacts into business strategy and decisions. impacts on the environment within business The other level of integration is organiza- activity. These areas, and users, identify data tional, deciding which business functions are gathered for accounting purposes. Specifically to be integrated. As functions have a conven- regarding environmental accounting, quantify- tional purpose in the hierarchy of the organi- ing environmental costs is a target within zation, integration takes the form of accounting. The extent of disciplines needed is coordination. Organization theorists identify seen from generating environmental cost and such mechanisms as conventional and as cost savings within complex, interdependent non-conventional. Non-conventional is in the processes and facility locations. context where the environment exerts The weight of non-accounting disciplines direct influences on the organization through is shown in education of accountants on env- regulations, international standards and ironmental activities (Gibson, 1997). The multi- shareholders. discipline approach is useful as it involves The two sets of integration mechanisms are potential users in the same education effort. the following (Fryxell and Vryza, 1999): The operational managers are shown the need for data and the nature of environmental conventional non-conventional reports. General management is shown department schemes cross-departmental potential for improvement in environmental relations performance. central decision-making management Educating environmental managers repre- information senting the multiple disciplines is important systems for base line reasons (Wycherley, 1997). Oper- written policies and ad hoc group ational managers consider that accounting procedures mechanisms systems are created for financial purposes and formal planning integrator roles not for the operational needs in their manag- output and behavior socialization ing and controlling environmental impacts of control

71 M. YAKHOU AND V. P. DORWEILER

It is recognized that conventional mechanisms Box 2. A business environmental management system exist, and are displaced by non-conventional (Sutherland, 2002). ones to cope with time-oriented changes; these Goal: Shaping environmental success changes are in the environment or are required Setting and attaining goals for sustainable environmental performance. future responsibility shared by all sectors: government, industry, environmental groups and citizens Environmental management Goals for 2010 From these needs and mechanisms, the func- Fully implement globally environmental tion of an environmental management depart- policy ment is to facilitate integrative development. Promote environmental ethics Implement principles of sustainable To achieve this integration, the department development and eco-efficiency into is responsible for the following (Wycherley, business strategies 1997): Guiding principles and environmental code • scanning and monitoring the changing Community awareness and emergency environmental context of the business; response Process safety code • identifying critical information; Employee health and safety code • requiring change to environmental practice Product stewardship code and performance; Distribution code • validating and channeling the information Pollution prevention code to ensure compliance with regulatory Business principles mandates. Company values Re: people, customers, products and Note that these functions may constitute both services, conduct code and guiding direct influences and contextual change. Principles Each function represents a discipline spe- Auditing performance management cialization, and hence makes a unique contri- Auditing program bution to environmental performance (Fryxell Business standards and Vryza, 1999). Resolution of differences is Government regulation the clearest for technical functions (production Industry initiative Environmental health and safety auditing and legal), and is most complex for non- plan technical functions (marketing and public Frequency and level relations). The long-run environmental goal brings a balanced, optimal level among the functions. • energy efficiency and conservation and The environmental management system • opportunities to enhance environmental impacts. A useful vehicle for integration is the environmental management system (EMS), with ISO The EMS provides control and coordination by 14001 standards; see Box 2. The EMS integrates the environmental management department. functions through each function’s interfacing The reason is to cover gaps due to functional with input and output of that system. differences in departmental roles (Fryxell and The means toward activating an EMS are Vryza, 1999): found in outcomes from the EMS: (i) bridge differences in basic values, due to • reduction of emissions and waste, specialized training; • product design for the environment (ii) communicate, avoiding technical jargon;

72 ENVIRONMENTAL ACCOUNTING

(iii) recognize separations in organization and Environmental management should be part location; of every corporate business strategy. Not only (iv) resolve expectations on rewards and are there specific environmental effects in conflicts on reward criteria. strategies and plans, but there are also environmental programs to reduce and prevent These differences are viewed as conflicts. In the environmental impact. conflict situation, integration is viewed as a resolution by alignment of the organization with the firm’s environmental goal. Corporate environmental policy and the The corporate EMS is identified as based in environmental management system surpassing environmental obligation under Benefits of an EMS, utilizing ISO 14000 (see regulation. The EMS is said to provide specific Table 1), provide a competitive advantage on a tools (including life cycle accounting and worldwide basis. Competitive advantage is environmental cost accounting), and, also, over companies that do not have a high level general practices to evaluate environmental of environment performance from such an performance. Environmental auditing is a EMS. main evaluation mean. From this integrative view of an EMS, major Rondinelli and Vastag (2000) suggest components of an EMS are described as an that a voluntary, above-regulatory-standard operational approach to its implementation approach is needed to advance national envi- (Rondinelli and Vastag, 2000): ronmental policy. Interdependent principles of economic viability, energy conservation and • a senior management commitment to an environmental quality constitute a compre- environmental policy; hensive environmental policy, and are given as • a planning process that identifies all the needed impetus. Basing the EMS on ISO environmental aspects of operations, sets 14001 standards puts the corporation in global objectives for environmental improvement markets and provides a competitive advantage and outlines effective environmental (Owen and Lehman, 2000). management programs; • a structure of responsibility for environmental management, training, awareness and The corporate environmental policy competence, documentation and com- Rondinelli and Vastag (2000) make the case for munication, procedures for control of a corporate environmental management environmental impacts and preparation policy. After reviewing the present status of US for emergency preparedness and response; environmental regulation, as command and • a system for monitoring and measurement, control, Rondinelli and Vastag show that the for reporting non-conformance and for proactive approach to environmental manage- taking preventative and corrective actions ment consists of and • a management review process, to assess the • life-cycle analysis of products and processes, effectiveness and adequacy of the EMS. • environmental policies of companies in the supply chain, The design of the EMS is to provide assurance • recycle, remanufacture and redesign of of continuous improvement of performance. products, • monitoring and auditing environmental Development of environmental standards performance and • accounting for environmental costs and A main premise of the EMS is use of standards savings. of an international nature (ISO 14000); see

73 M. YAKHOU AND V. P. DORWEILER

Box 3. This use of internationally based stan- compliance with their environmental per- dards provides a comparison to ascertain formance. The other potential problem is whether companies are complying with responding to inquiries based on these expected environmental performance. enhanced measures of environmental per- There are dual problems with this approach. formance by government agencies, ﬁnancial One is the assumption that the company institutions and shareholders. is using the standards to go above legal

Role of environmental manager

Box 3. ISO development of environmental standards The environmental manager is a central (Lally, 1998). focus of environmental management in the company. Key roles of this management The international environmental management standards are set in the ISO 14000 process. The resulting function are (Wycherley, 1997) to standards are voluntary for a company and are higher standards of performance than from regulation. The • assess, review and monitor the environmen- standard-setting process was set as part of the Global tal performance of the company, Environmental Initiative in 1992 in connection with • monitor legal requirements, the UN Conference on Environment and Develop- • implement and manage the EMS and ment. • promote better environmental awareness in Key advantages of ISO 14000 are the company. (i) to set environmental performance standards above regulation and The function has a wide range of responsibili- (ii) to set the company as environmentally alert. ties. The more direct are The first advantage moves the company above an increasingly complex set of regulations, yet in full • at the base level, systems to ensure compliance. The second advantage puts the company compliance with environmental standards into an internationally competitive position in (regulatory and EMS), markets. Both are achieved by incentives to adopt pol- • at an on-going level, increasing efficiency in lution prevention practices. use of resources and reduce waste, and The following are components of the ISO 14000 standard-setting process: • at an overall level, avoiding risks of damage to the environment. • ISO 14001 – the basic framework of an EMS; imple- ments corporate environmental policy An integrative view of these responsibilities • ISO 14004 – a checklist to implement ISO 14001 and includes involvement in new product and method to assess environmental impacts • ISO 14031 – setting objectives and targets of EMS process development, capital project autho- • ISO 14010 – guidelines for environmental auditing rization and an environmental stance with • ISO 14011 – guidance for audit procedures shareholders, consumers and employees. • ISO 14012 – qualification criteria for environmental From this pivotal location in the organiza- auditors tion, the environmental manager’s view of • ISO 14020 – standards on environmental labeling • ISO 14040 – guidance for assessment of product environmental accounting is somewhat deter- life-cycle environmental impact minative of effect. Environmental managers view environmental accounting as providing Environmental cost accounting (ECA) is the integrating feature of an EMS. All elements of environmental the financial data with the technical–functional measures are brought together in the ECA calculation. improvements required by the role of the envi- By recognizing the complete set of environmental ronmental manager. Areas of conflict are iden- costs, the company can be both environmentally tified as accountants’ concern over their own responsible (for example, Responsible Care program) costs to the detriment of needs in measuring and cost-effective in recouping its costs. performance.

74 ENVIRONMENTAL ACCOUNTING

A survey of environmental managers (i) the financial burden of environmental (Wycherley, 1997) shows that environmental regulation, accounting is considered primarily for provid- (ii) the impacts on environment and society ing measures of key environmental data. These and costs are used in measuring use and waste, and (iii) the costs of measuring environmental also as criteria in capital investment projects impacts. and targets for efficiency setting. These costs CEE is for internal use as managerial account- are also used in management control systems ing providing a business perspective. to improve operational efficiency, and in EMS From a control perspective, four types of to monitor environmental policy. environmental cost need to be recognized: prevention, internal failures, external failures and appraisal. These costs reflect BUSINESS USES OF • costs for prevention or correction of envi- ENVIRONMENTAL ronmental impact in facility construction or ACCOUNTING COSTS use of facility, • prevention costs related to correction of A broad view of environmental accounting, defects and and the EMS, includes application of • cost of end-of-the-pipe control, preventing techniques and procedures to support man- repetitive error. agement decision making, performance measurement, recognition and reporting of CEE is applicable due to complexity of regula- liabilities and contingencies, capital market tion in the construction industry as reflected reactions to accounting disclosures and taxes by multiple environmental standards and (Bebbington, 1997). Tax implications include ambiguous formulation of standards. This is likely due to poor knowledge in the content of • specific environmental taxes, environmental and other standards in multiple • appropriate treatment of environmental materials. expenditures, CEE is indeed a managerial tool with real • pollution allowances as tradable permits project uses in the construction industry and (Gulch, 2000). The overall effects on the firm • general Federal income tax issues. include legitimacy, responsibility allocation, An example is Superfund surcharge taxes for creating consensus, facilitation of communica- EPA environmental cleanup. tion and keeping score. Probably the most significant use is relating costs to causes of errors, more specifically, environmental costs to errors. A construction industry illustration An illustration of environmental accounting and environmental cost determination shows ENVIRONMENTAL POLICY VERSUS how ‘costs of environmental errors’ (CEEs) are ENVIRONMENTAL REGULATION treated (Gulch, 2000). In an accounting context, this is an illustration of managerial accounting There is a growing understanding that envi- applied to environmental impacts. Managerial ronmental policy must fit within the accounting and CEE both provide the full company’s business strategy (Gallhofer and range of accounting treatment; see the Haslam, 1997). Companies do adopt an envi- introduction. ronmental policy. The question is whether a CEE is designed to determine voluntary policy should forestall regulation

75 M. YAKHOU AND V. P. DORWEILER

(interventionist regulation). As environmental EDUCATION FOR THE policy and environmental performance are MULTIDISCIPLINE TEAM expected to be above legal regulation, there is interest to change from regulatory policy to Courses provide environmental education voluntarism; see Figure 1. across the interdisciplinary range (Gibson, An intermittent ground is to avoid regula- 1997): economics and commerce, environmen- tion of environmental accounting. Environ- tal sciences, environmental law and environmental accounting is parallel to financial mental accounting. (business) accounting: an environmental plan Business strategy requires environmental is developed and budget control established planning with measurement and environmen- to the plan. Following environmental perfor- tal management issues included. This strategic mance based on the plan, an environmental approach requires understanding of environ- audit for the environmental impact is per- mental law and regulations and integrated formed. By imposing standards on environ- decision-making. Consideration of several mental accounting and environmental business areas, financial results and tax auditing, the company is left to set standards effects presents complete effects on a business. for performance without regulatory interven- An extended view of accounting and tion (Reynolds and Reynolds, 2001). environmental accounting is shared with all Bebbington (1997) recognizes the realism of disciplines (Grinnell and Hunt, 2000). The actuating impacts on society. The business objectives of this education are organization has impact through capital, ownership and societal uses of products and (i) environmental protection and services, with impact on the environment: (ii) sustainable use of resources. resources, sinks and habitat. Environmental accounting translates into how environmental The issues affect disciplines in the operating management practice adapts to beneficial sphere and in financial effects. Addressing impact on the environment. From environ- these issues only on the accounting sphere rec- mental accounting comes accountability for ognizes the contribution of accounting to effects on and uses of the environment. achieve business goals of profitability and So then, environmental accounting is the survivability. enabling vehicle to form a common basis for Several areas have identified shortcomings users of the environment: in accounting education related to environmental accounting (Gibson, 1997). The range of • internal (capital, ownership, consumers) broad education should be viewed function- and ally, making the environmental accountant a • external (social–political) controls. member of the business team. This business The effective vehicle is environmental report- range starts with profit and profitability and ing (Dorweiler and Yakhou, 2002). Reporting covers environmental impact and sustainable portrays accountability to outside interests. use of resources. These interests may require openness and transparency regarding the environment, and require change in the organization, changes in CONCLUSION business products and processes and change in organization structure. While such changes are A contextual view of the need for integration early in developing, a projection is for change of an environmental policy with business to occur in other business areas (Bebbington, policy, and for a multidisciplinary team, is 1997; Reynolds and Reynolds, 2001). given from a business perspective:

76 ENVIRONMENTAL ACCOUNTING

• the role of accounting in supporting Lally AP. 1998. ISO 14000 and environmental cost both corporate environmental strategy and accounting: the gateway to the global market. Law and corporate business strategy and Policy in International Business 29(4): 501–538. Mathews MR. 1997. Twenty-five years of social and envi- • the several accounting sub-disciplines ronmental accounting research. Accounting, Auditing, related to environmental issues. and Accountability Journal 10(4): 481–531. Medley P. 1997. Environmental accounting – what does it Emphasis on the multi-discipline team is to mean to professional accountants? Accounting, Audit- support a top-level strategy and to achieve ing, and Accountability Journal 10(4): 594–600. the benefits from directing a company in an Owen D, Lehman G. 2000, Social and environmental environmentally sound manner. accounting: trends and directions for the future. Accounting Forum 24(1): 1–4. Reynolds P, Reynolds MA. 2001. The vision process. Ohio CPA Journal 60(1): 14–20. REFERENCES Rondinelli D, Vastag G. 2000. The value of ISO 14001 environmental management systems. European Man- Bartolomeo M et al. 2000. Environmental management agement Journal 18(5): 499–510. accounting in Europe: current practice and future Sutherland P. 2002. Corporate Governance, BP-Amoco potential. The European Accounting Review 9(1): 31–52. Annual Report 2002; 28–29. Bebbington J. 1997. A review essay on environmental Wycherley I. 1997. Environmental managers and account- accounting. Accounting, Auditing and Accountability ing. Journal of Applied Management Studies 6(2): 169–184. Journal 10(3): 365–376. Dorweiler VP, Yakhou M. 2002. Dimensionality of environmental accounting. Journal of Accounting and Finance Research 9(4): 47–64. Fryxell GE, Vryza M. 1999. Managing environmental BIOGRAPHY issues across multiple functions: an empirical study of corporate environmental departments and functional Dr. Mehenna Yakhou, (corresponding author) co-ordination. Journal of Environmental Management is Professor of Accounting at the J. Whitney 55: 39–56. Bunting School of Business, Georgia College Gallhofer S, Haslam J. 1997. The direction of green accounting policy: critical reflections. Accounting, and State University, and can be contacted at Auditing, and Accountability Journal 10(2): 148–174. Campus Box 15, Milledgeville, GA 31061-0490, Gibson K. 1997. Courses on environmental accounting. USA. Accounting, Auditing, and Accountability Journal 10(4): Tel.: +1 478-445-2582 584–593. Fax: +1 478-445-3199 Grinnell DJ, Hunt HG. 2000. Development of an inte- E-mail: [email protected] grated course in accounting: focus on environmental issues. Issues in Accounting Education 15(1): 19–42. Vernon P. Dorweiler (Professor Emeritus) is Gulch P. 2000. Costs of environmental errors. Greener based at Michigan Technological University, Management International Autumn 31: 23–36. Houghton, MI 49931, USA.