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The Industrial Green Game: Implications for Environmental Design and Management The Industrial Green Game. 1997. Pp. 185–199. Washington, DC: National Academy Press. Accounting for Environmental Cost RICHARD MACVE Today's challenges to business to improve environmental performance come from many quarters. They arise from new legislation and government regulations, market pressures from the "green" consumer, interests of stakeholders such as investors and employees, and general public awareness focused by the activities of environmental groups and media reporting. It has become essential for companies to increase their responsibility regarding all aspects of the environment and to adapt existing practices to cause less environmental damage. Harnessing this awakening responsibility within the corporate sector is therefore a key element in any strategy for achieving the goal of sustainable development. (See, for example, Deloitte Touche Tohmatsu International et al., 1993.) Assessing the feasibility of such a strategy requires not only the resolution of scientific and engineering problems, but also attention to the political, economic, social, and organizational changes that may be needed. A key factor will be changes in the way in which businesses make decisions that affect the environment, and in this regard it is important to understand how business accounting systems and performance accountability requirements may influence corporate decision making. An external report can be an important element of the social control of a company's internal behavior. However, for any such reporting to be substantive, it needs to be the output of an internal system of management control and reporting just as annual financial statements are the output of an internal system of management accounting and reporting. The relation between feasible measures of accountability and their effect on managerial behavior has always been problematic (Ezzamel et al., 1990). This paper1 explores the significance of the developments that are being made in the greening of accountancy (both for external reporting and internal management decision making and control), and outlines
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The Industrial Green Game: Implications for Environmental Design and Management some of the problems that accountants face in extending these developments. The current lack of development in related internal management-reporting, decision making, and cost-accounting systems is argued to be the major inhibitor to further improvement. ELEMENTS OF EXTERNAL REPORTING A report of the Environment Research Group (ERG) of the Institute of Chartered Accountants in England and Wales (ICAEW) (Macve and Carey, 1992) recommended2 that, as part of the annual reporting cycle, a U.K. company should publish details of the company's environmental policy; the identity of the director with overall responsibility for environmental issues; the company's environmental objectives, which should be expressed so that performance against them can be measured (environmental targets and performance as far as possible should be reported in quantifiable technical or financial terms); information on actions taken, including details of the nature and amount of expenditure incurred, in pursuit of the identified environmental objectives; the key impacts of the business on the environment and, if practicable, related measures of environmental performance; the extent of compliance with regulations and any industry guidelines including, if applicable, whether the company's sites are registered under the European Community's ecology-audit scheme and the details relating to applications and approvals for registration under British Standard 7750 (Environmental Management Systems); significant environmental risks not required to be disclosed as contingent liabilities; and key features of external audit reports on the enterprise's environmental activities, including those relating to particular sites. It was also recommended that when this information is provided in a document separate from the company's annual report and accounts, the latter should contain a reference to the availability of such information. COMPANY RESPONSES TO EXTERNAL REPORTING Recent surveys indicate a very limited response by U.K. companies to reporting on environmental issues (Butler et al., 1992; Federation des Experts Compatible Europeans, 1993; KPMG, 1993; Macve and Carey, 1992). There are,
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The Industrial Green Game: Implications for Environmental Design and Management however, some signs that the situation is improving. Over the past 3 or 4 years, it has become normal for the largest U.K. companies to include information on environmental issues in or in conjunction with their annual reports. Some of these companies provide an extensive review. Within Europe, the amount of disclosure of environmental information appears higher in Germany than in any other country (Roberts, 1991). Much of the information currently provided in the United Kingdom remains nonspecific. Emphasis is on statements of policy with relatively little quantification of technical or financial factors; quantified achievements against targets are provided by a few companies such as ICI, British Telecom (BT), and IBM-UK. Even when quantification is provided, only a few financial implications are mentioned. For example, ICI's environmental report presents its annual environmental expenditure and gives the costs of some individual new plants. The report also refers to some of the financial savings achieved through reductions in waste, energy, and water usage. British Petroleum (BP) devoted nearly a full page of the financial review section of its 1993 annual report and accounts to environmental investment. BP estimated its 1993 operating expenditure on pollution prevention, control, abatement, or elimination to be £200 million, although its chief financial officer noted that environmental expenditure is difficult to identify because it is embedded within other day-to-day operating costs. In addition, BP charged about £160 million against profits for environmental remediation programs at service stations and other sites. Capital investment was about £250 million. In its accounting policies, BP has a section on environmental liabilities; provisions for environmental restoration stood at£345 million at the end of 1993, whereas provisions for dismantling costs stood at £1,530 million. Potential contingent liabilities also were discussed (Accountancy, 1994). Information on environmental costs in financial statements (or notes thereto) is more common in the United States where there are Securities and Exchange Commission (SEC) and Financial Accounting Standards Board requirements relating to disclosure of such information (Macve and Carey, 1992). Over 25 percent of the U.S. companies surveyed by KPMG (1993) gave some information on environmental expenditures. There is increasing debate worldwide as to what extent more explicit guidance should be given by regulators and accounting bodies to companies on their reporting of and accounting for environmental costs. Most of the concern regarding financial accounting has focused on issues such as the reporting contingent liabilities for environmental restitution costs and penalties and of impairment to land and other asset values. Issues that need to be dealt with under ordinary accounting and reporting requirements differ in their environmental aspects, mainly because their potential financial impacts may prove much larger than those that companies have already faced. As such, they are of enormous potential concern to investors and lenders (and hence to regulators such as the SEC). The fear of litigation and of raising further the level of stakeholders' expectations
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The Industrial Green Game: Implications for Environmental Design and Management inhibit the adoption of more extensive environment reporting by more companies. The major inhibitor, however, is the inadequacies of internal environmental-management systems. Few companies have systems "that allow them to produce this kind of data and therefore many have a significant hurdle to jump before they can produce an environmental report for public consumption" (KPMG, 1993, p. iii). MEETING THE NEED FOR INTERNAL SYSTEMS Changes needed in internal systems are both organizational and technical in nature. Top-down mission statements are inadequate without a wholesale change in management culture from top to bottom and in the education, training, and incentives provided to middle managers and other employees. To effect these changes, several steps may be taken (Macve and Carey, 1992). Management should establish clear lines of responsibility on environmental matters and give a board member overall responsibility for such issues. The company should set out its environmental policy, prioritize objectives, and develop information systems for monitoring performance. This is needed for external regulation and reporting as well as for internal decision making and control. The structure and systems adopted should be integrated within the company's mainstream management structure and systems. This is necessary to provide clear signals and incentives for action at all levels throughout the organization. There should be an internal environmental auditing program to ensure that environmental policies are being implemented properly. Companies that may suffer environmental incidents, such as oil spills, should establish procedures for managing such events. The evidence that companies are achieving necessary internal changes is less than that for external reporting. It is not yet clear whether this is because the changes have not yet taken place or because researchers have not yet investigated them adequately.3 Technical Costing Changes Conventional accounting systems may inhibit environmentally oriented actions and expenditures because the costs that are reported—and included in investment appraisal budgets—focus on the immediate direct costs of actions, processes, and products and ignore the levels of costs at which savings are most likely to occur (i.e., indirect and longer-term costs). Accounting systems also may fail to evaluate the potential benefits of environmental decisions. Thus, an exercise by the U.S. Environmental Protection Agency (EPA) and Du Pont, and a similar exercise in the United Kingdom on individual sites in the Aire and Calder Valley, showed that there are "many pollution prevention projects with paybacks of less than a year which are not being implemented," either because of competition for management attention or the difficulties of identifying the relevant causal
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The Industrial Green Game: Implications for Environmental Design and Management factors (Bennett and James, 1994). A change in approach is needed if companies are to move from "end-of-pipe" clean-up solutions to preventative design. To provide a disciplined framework for evaluating all relevant costs, EPA has developed the total cost assessment (TCA) method, and experiments have been undertaken to investigate the effect on decision making about pollution-prevention projects in the pulp and paper industry (Tellus Institute, 1992). In the two projects studied, the new recognition that costs result from not adopting the prevention measures (in particular, future liability costs and foregone energy savings for freshwater and wastewater pumping and treatment and for freshwater heating) improved the financial acceptability of the prevention investments on all normal decision criteria (net present value, internal rate of return, and payback).4 TCA recognizes four tiers of costs: Tier O, direct costs only; Tier 1, Tier 0 plus indirect costs (overheads); Tier 2, Tiers 0 and 1 plus legal liability costs; and Tier 3, Tiers 0 through 2 plus intangible costs and benefits. Conventional accounting systems and evaluation procedures measure the indirect costs at Tier 1 but suffer either from not tracing these costs to processes and products or from allocating them arbitrarily, distorting their relevance (Todd, 1994). Tiers 2 and 3 may not be recognized at all. A paradox exists here. The whole thrust of the Tellus-EPA approach is that environmental activity such as pollution prevention is in companies' self-interest. Environmental costs are also companies' costs, but companies are failing to achieve what is in their best interests (and thereby environmentally beneficial) through the inadequacies of their cost-accounting systems. Companies are thereby needlessly causing environmental damage that is in both their own and society's interest to reduce. This leads to concern that market-based incentives (such as taxes and tradable pollution licenses) may not be effective if companies are unable to recognize the relevant costs and benefits. The approach also raises the organizational issues of why current accounting systems are inadequate. Tellus Institute (1992) points to the additional complexities of the evaluation procedures it recommends and the additional time needed to undertake them. A cultural change is needed if managers are to give sufficient priority and attention to such evaluation schemes. Without a shift in thinking, approaches like TCA will not be able to compete with other potential investments and activities or be considered as viable options in the capital budgeting process. If managers do not get over that first hurdle, there will be no opportunity for the merits of the TCA analytic procedures to be demonstrated. TCA methodology has controversial aspects. For example, the time horizons may need to be extended to capture the most significant costs and benefits (especially relating to future liability). There is also the broader issue of whether the discount rates normally used (reflecting capital market requirements) properly reflect "social time preference" as between current and future generations (Milne, 1994; Tellus Institute, 1992). TCA itself has been criticized as incomplete: Its Tiers 0 and 1 cover the
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The Industrial Green Game: Implications for Environmental Design and Management relatively certain costs and its Tiers 2 and 3, the probable costs and benefits. However, a management thinking strategically about environmental issues and likely changes in pressures from external stakeholders should also be considering possible future costs and benefits arising from, for example, new regulatory requirements or changes in consumer perceptions. The emphasis must be on the total life cycle costs and benefits to the company5 from current, future, and potential perspectives. Here, there is a potential link to the need for accounting to develop ways to measure impacts on the environment. Today's externalities may become internalized costs in the future, whether though regulatory or fiscal measures (Bennett and James, 1994). Companies have begun to move up the TCA tiers. Bennett and James (1994) have interviewed companies, including Rhone-Poulenc, Baxter Healthcare, and 3M, that have identified ways to save costs by expanding their identification of relevant environmental costs. Organizational Changes Attempts have been made to identify the organizational difficulties that inhibit such developments.6 Apart from the additional complexity of TCA calculations (Tellus Institute, 1992), tracing relevant environmental costs may cut across traditional organizational divisions. Information may need to be collated from various functions (sales and marketing, manufacturing, purchase, supply, research and development, finance, personnel, etc.) (Houldin, 1993), and responsibility may need to be relocated.7 For example, are decisions on environmental factors currently exclusively allocated to the legal department or to specialist environmental managers instead of being integrated across the organization (Epstein, 1994)? such integration may alter the patterns of internal incentive structures, product profitability, and managerial responsibility. A move to a TCA-like approach, therefore, may be resisted by managers who have a vested interest in the status quo (Todd, 1994). Therefore, positive steps, which may require external regulatory stimulus, are needed to overcome organizational inertia. It does not appear likely that this initiative will come from accountants themselves. A recent study of the attitudes of accountants, based on a questionnaire survey of the finance directors of the 1,000 top U.K. companies (Bebbington et al., 1994), indicates that a significant proportion (over 50 percent in the case of energy issues) have introduced, or are at least thinking about introducing, some accounting (in financial or statistical terms) for environmentally related activities (in particular for energy, investment appraisal, waste, packaging, and aspects of legal compliance). However, there are also, surprisingly, many accountants who have no plans to address or even claim never to have heard of any of these issues; two-thirds or more expressed negative views about issues such as packaging, legal compliance, environmental budgets, water pollution, recycling, contingent liabilities, remediation costs, air pollution, land pollution, sustainability and life
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The Industrial Green Game: Implications for Environmental Design and Management cycle analysis (Bebbington et al., 1994). Where companies are undertaking relevant activities, the extent of accountants' involvement does not appear to be high; the mean response on a scale of 1(low) to 5(high) only rose above 3 for ''disclosure in financial statements" (Bebbington et al., 1994). By contrast, the attitudes expressed by accountants indicate enthusiasm for innovation and development of new systems, recognition of increasing regulatory demands (especially from the U.K. government and the European Community), and overall support (even if lukewarm) for companies to take on environmental responsibility, of stakeholders' rights to information about companies' environmental performance, and of the need for accountants to be involved in the preparation of such information (Bebbington et al., 1994). Thus, the accountants' self-perception appears to conflict with their actual involvement in companies' environmental developments. The attitudes expressed correlate slightly with the actual extent of the employer organization's environmental disclosure practice. However, overall the attitudes are very homogeneous and therefore appear to reflect accountants' personalities and professional training and culture as a group. The researchers speculate that there may be aspects of the nature of professional accountancy training (which emphasizes financial measures, precision, prudence, and resistance to change—caricatured as the bean-counters who say "no") that inhibit accountants from initiating or even responding readily to change. The official pronouncements from professional accountancy bodies that encourage greater environmental activity (e.g.; Macve and Carey, 1992) have so far largely washed over accountants in practice. Companies also seem unsure about how to use the accountants' potential contribution. Bebbington et al. (1994, p. 119) quote "a senior finance director whose company is one of the UK's leaders in responding to the environmental agenda": We found it extremely difficult to see how we could put these things [environmental matters] into the accounting records … accounting approaches encourage short-term attitudes—community investment, like environmental investment, requires a long-term attitude. Incentives The critical problem of performance assessment has bedeviled many environmental initiatives (Gray et al., 1993, p. 155). Ex ante control … does not guarantee success. That is, the ex post audit and evaluation must take explicit cognizance of the environmental criteria. This is especially difficult in highly decentralized organizations. For example, Albright and Wilson's early environmental response was to set internal best available technology not entailing excessive cost (BATNEEC)8 across all sites. Managers soon learned, however, that if they failed to meet financial targets—as opposed to environmental, BATNEEC considerations—they were penalized.
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The Industrial Green Game: Implications for Environmental Design and Management Epstein (1994, p. 15) reported on innovations at Browning-Ferris Industries in the United States, where one-third of total compensation is at-risk pay based on performance, and the environmental component is integrated through the use of an "environmental multiplier." The amount of the individual's bonus based on business-unit and other performance variables is multiplied by an environmental performance score. Thus, employees receiving a score of 80 out of 100 on meeting the environmental objectives, receive 80 percent of their bonus. A score of less than 70 is considered unacceptable: a multiplier of 0 is assigned and the entire bonus lost. It is with such approaches that corporations can effectively change their cultures and provide for a significant change in the environmental sensitivity of all employees at all levels. Such developments in incentives do not seem to be widespread at present. However, individuals are essential elements of the sustainable development process, both as decision-makers in the company and as decision-makers in the government. The implication is that "sustainability can no longer be decoupled from individual responsibility" (Whelan, 1994, p. 16). If the accounting incentive-reward structure for individual organizational members is not brought into line with environmental objectives, it will be difficult for the organization as a whole to respond effectively to the environmental challenge. At Monsanto, an internal tax is imposed on all internally generated waste, thereby doubly penalizing—and doubly motivating—management responsible for waste production. Such initiatives are pointers to the kinds of developments that may be experimented with (Gray et al., 1993). Small Firms A particular issue, identified in a recent white paper on sustainable development (U.K. Government, 1994), is how small firms, including agricultural enterprises, are to be given incentive to adopt more environmentally responsible behaviors. Their access to information about environmental issues and opportunities may be much more restricted than that of larger firms. For such firms, cost savings from environmental investment may also differ from those for larger firms. For example, savings in labor costs may not be apparent if a firm's labor costs are a function of what the company can bear rather than the real workload (Tellus Institute, 1992), and there may be other diseconomics of scale. However, Epstein (1994, p. 18) provides the example of Hyde Tools in Massachusetts, which employs some 300 people and uses "sound business analysis to improve both its bottom line and the environment." The company has eliminated the use of toxic chemicals and reduced annual wastewater production from 29 million gallons to 1 million gallons in 3 years.
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The Industrial Green Game: Implications for Environmental Design and Management THE ROLE OF ACCOUNTING IN ENVIRONMENTAL DECISIONS The previous sections reviewed some recent developments in external environmental reporting and adaptations to internal costing systems to better capture relevant costs for environmental decisions and refocus management's priorities. This section covers three major issues that remain problematic both in theory and in practice: whether the environmental costs to a business can be regarded as equivalent to costs to the environment; the nature of the respective roles of quantitative physical measures and financial measures; and the fundamental nature of accounting's methodology for identifying costs. Costs of or to the Environment? Most of the initiatives discussed above deal with environmental impacts on companies (such as the potential liabilities or asset impairments that may need to be reported in external financial statements) and the potential cost savings and other benefits that may need to be recognized if companies are to take appropriate action to reduce waste, prevent pollution, etc., By responding to these environmental impacts, companies may benefit both the environment and their own bottom line. This approach avoids conflicts between these often contradictory outcomes because the externalities that it imposes do not presently have to be internalized—through regulatory or fiscal mechanisms—as its own costs. Thus, reporting of expenditures on environmental cleanup may not signify an environmentally "friendly" company but an "unfriendly" company that is doing something to mitigate the environmental damage it is causing. Full accountability needs to extend beyond the company's own costs and revenues to capture effects on the environment, for example through emerging—but still controversial—approaches of environmental impact assessment and life cycle analysis. (See, for example, Milne, 1994.) Clearly, given the state of the art, any such accounting is fraught with theoretical and practical difficulties (Cope and James, 1990), although pioneering attempts have been made, for example, in BSO/Origin's annual reports (Macve and Carey, 1992). Various bodies (such as the United Nations and International Institute for Sustainable Development) have called for further research and experimentation with natural resource accounts that measure the impairment of natural and environmental resources and provide, for example, a "sustainable development profit and loss statement based on sustainable development accounting principles" or an environmentally adjusted "value added statement" (Macve and Carey, 1992, p. 75). Moreover, uncertainties and measurement difficulties have not inhibited accountants from reporting intangibles that companies do benefit from, such as research and development, brands, and goodwill, when user demands or management requirements and incentives have been sufficiently strong (Arnold et al., 1992). If stakeholders are to receive a full account of a company's
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The Industrial Green Game: Implications for Environmental Design and Management environmental performance, the development of an accounting for these externalities is a priority for research and practical experimentation. Physical or Financial Measures? "You can't manage what you can't measure." "Change what you count and you change what counts." The potential for quantification of targets and achievements through physical measures—tons of hazardous wastes, proportions of recyclable to nonrecyclable materials, concentrations of particulate emissions, etc.—is clear. Such measures are already illustrated in the publicly available reports on pollution control including, increasingly, companies' annual environmental reports (Collier et al., 1993). Internally, such measures may also be used as part of an array of targets and performance indicators within a balanced scorecard (Epstein, 1994). The increased use of nonfinancial measures, at least at lower organizational levels, is also a feature of modern management control systems with their focus on quality and continuous improvement and is increasingly important where organizations promote bottom-up empowerment rather than top-down control and are downsizing and flattening their structures (Epstein, 1994; Tyson, 1994). However, the power of the financial bottom line has always made it accountancy's strongest weapon, both in its apparent capability to summarize organizational performance across a diverse range of divisions, activities, and products and in its behavioral linkages to incentives and rewards (Ezzamel et al., 1990). Despite the major reorientations of management accounting systems in recent years, top managements are likely to continue to manage by the financial numbers (Tyson, 1994). The need to capture internal environmental considerations in terms of financial consequences (as in TCA) and to attempt to measure impacts on the environment financially external to the organization is a major challenge for the further development of environmental accounting (Cope and James, 1990). Increasing quantification (whether physical or financial), however, carries its own dangers. It gives a spurious objectivity to numbers that often reflect highly subjective and judgmental assumptions and estimates. It marginalizes qualitative factors whose subjectivity is thereby further emphasized but that may be more important. The interpretation of accounting numbers remains as important as, if not more important than, the actual numbers. The numbers should provide the means to sharpen analysis and questioning but do not in themselves provide the answers and certainly not the complete answers.
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The Industrial Green Game: Implications for Environmental Design and Management THE NATURE OF ACCOUNTING COSTS In calling for technical improvements in accounting systems to better capture environmental costs and impacts, it is necessary to understand both the limitations of accounting numbers and the power that the process of embedding a new accountability has to change managerial decision making and organizational behavior. This is illustrated by the nineteenth century development of early cost and management accounting. Since the nineteenth century, engineers, followed by accountants and more recently by managerial economists, have focused on the nature of business costs (Wells, 1978). An influential book argued that early cost management, focusing on estimates, was a common-sense and useful engineering activity that assisted management decisions (Johnson and Kaplan, 1987). However, cost management later became enmeshed in the accountants routines for systematic recording and was overlaid by the concerns of external financial reporting, thus losing its relevance. The nature of cost accounting has always been problematic. It was primarily engendered by a new managerialist concern with standards of human performance—standards that do not have the neutral objectivity of physical engineering standards, not least because human beings react to the standards by which they are appraised (e.g., by internalizing) (Ezzamel et al., 1990). The central technical problem has always been the treatment of indirect or overhead costs, in particular in multiactivity and multiproduct firms. The practical approach was to regard overhead as just another cost, which attached to units of products as did direct costs (Wells, 1978). To find the true unit cost of a product such indirect costs needed to be allocated systematically, and the arithmetical accuracy of the calculations gave an appearance of objectivity to the resulting answers. Engineers and accountants argued long and hard over the correct ways to carry out such allocations. Engineers favored systems that purported to identify the physical causal relationships in operation, however remote those links. This approach has recently gained a new lease of life in the activity-based costing systems that now attempt to trace costs to their cost drivers (Tyson, 1994). However, from an economic and decision making perspective, such allocations are inherently arbitrary and largely (if not totally) irrelevant. Cost does not create value. Value is based on the interaction of supply and demand. For economic decisions, what matters is how costs will change as a result of each decision. Therefore, the concern is whether the extra costs are justified by the extra revenue or other benefits that result. Such effects of decisions are unlikely to be captured by routine reports of past costs allocated in some inherently arbitrary fashion, however arithmetically precise.9 The nineteenth-century engineers' concerns with identifying true total cost were therefore misplaced. The engineers' approach was believed to be a scientific approach to identifying causes and effects. This led them to defend what are essentially indefensible allocations (Wells, 1978). However, the accountants' parallel concerns in identifying true total cost reflected a different motivation,
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The Industrial Green Game: Implications for Environmental Design and Management which arguably explains the accountants' later dominance in management (accompanied, at least in the United Kingdom, by higher social status and greater material rewards [French, 1994]). Their approach is best understood as focused on the development of systems of accountability and responsibility for costs and profits that would provide norms and standards of human performance. These norms and standards could be linked to incentives and internalized by organizational members, from shop-floor workers to top managers, in a reciprocal hierarchy of surveillance, control, and self-control (Ezzamel et al., 1990). The success of the approach lay not in its creation of a new scientific knowledge about costs, but in its power to stimulate successful organizational performance (a new power knowledge) (Hoskin and Macve, 1994). Cost is therefore not an objective engineering datum about a product or process; it is constructed through convention for an economic and social purpose. There is a continuing tension between the engineers' objective efficiency perspective and the accountants' more subjective economic and behavioral perspective on business activity and on how to control performance. This tension sometimes amounts to hostility (French, 1994). In the context of U.K. pollution control, this tension is focused in the concept of BATNEEC, whereby scientific and technical features are balanced, if not subordinated, within managerial disciplines such as cost accounting. Thus, the U.K. Department of the Environment has been characterized as strong in engineering but not in management disciplines such as accounting and as needing strengthening in these latter skills (Power, 1994). The final challenge for environmental costing, therefore, is not just to increase the technical sophistication by which environmental factors are traced through to activities, but to construct a new accountability that is linked to real incentives. Only then can environmental performance become as culturally dominant in management for sustainable development as, for the past 150 years or so, financial performance has become in the kind of business management that has largely created environmental problems. CONCLUSIONS In response to various pressures, businesses have begun to report externally on their environmental policies and performance. The significance of such external reporting depends on the extent of changes in management culture and systems and on how new measures influence management decisions. The greening of accountancy involves a reappraisal of how to identify and measure the relevant costs of processes and products (such as TCA) and a redesign of incentive mechanisms. Through these changes, managerial decisions and corporate behavior may be refocused on the goal of achieving sustainable development, for example by pursuing a viable industrial ecology. Evidence suggests that organizational inertia, including the relative lack of involvement of accountants themselves, inhibits such changes.
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The Industrial Green Game: Implications for Environmental Design and Management There is a paradox: Improving environmental performance is often advocated as remedying defects in a company's assessment of its own self-interest. This new role of accounting is embryonic. Several theoretical and practical issues need research and experimentation if its potential is to be realized. A new dimension—costs that represent environmental benefits (and vice versa)—needs to be recognized. The appropriate balance between the roles of physical and financial performance indicators is not yet established. Moreover, the fundamental relationship between accounting and management decision making has always been problematic. The nineteenth-century debates between engineers and accountants illustrate both the subjectivity of the nature of cost and the power effects of its construction as part of a new system of accountability. A reorientation of accountability to focus on environmental performance is the major challenge in the greening of accountancy. ACKNOWLEDGMENTS I am grateful for the work of the ICAEW's Environment Research Group (Macve and Carey, 1992) and to Martin Bennett of the University of Wolverhampton and Peter James of Ashridge Management Center for their advice in connection with recent research into changes in management accounting systems. Responsibility for all inadequacies and errors in the paper is, however, entirely mine. NOTES 1. This paper draws in part on the report (Macve and Carey, 1992) of the Environment Research Group (ERG) of the ICAEW, which was chaired by the author. Group members included accountants, auditors, academics, business managers, investment analysts, economists, and civil servants. 2. In compiling its recommendation, the ERG of the ICAEW drew on reports, such as those of the International Chamber of Commerce, the U.K. "100 Group" of Finance Directors, the International Institute for Sustainable Development (IISD), the United Nations, the European Community Commission, and others such as Deloitte Touche Tohmatsu International/IISD/Sustainability (1993). 3. A major study currently under way in the United States on the measurement and reporting of corporate environmental performance (sponsored by the Institute of Management Accountants [Epstein, 1994]) may shed light on the extent of changes in internal systems and barriers to change. 4. Kreuze et al. (1991) and Bailey (1991) contain worked examples of TCA. 5. This should not be confused with the life cycle analysis of external environmental impacts. Analysis such as this may identify costs and benefits that may affect the company as regulations or fiscal incentives change in the future. (See, for example, Bailey, 1991.) 6. Similar failures of present cost and management accounting systems have also been identified in relation to nonenvironmental investment decisions that involve long-term benefits intangible benefits, or both—including improvements in cost and management accounting systems themselves. (See, for example, Tyson, 1994.) 7. Again, similar complexities arise in tracing costs to cost drivers in modern activity-based costing systems (Tyson, 1994).
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The Industrial Green Game: Implications for Environmental Design and Management 8. BATNEEC is the criterion used by Her Majesty's Inspectorate of Pollution in the United Kingdom to assess acceptability of processes (Slater, 1994). 9. The history of cost accounting is replete with examples of situations where divisions, processes, or products appeared unprofitable under the basis of overhead allocation adopted, so that the management wisely changed the basis (Wells, 1978). REFERENCES Accountancy, 1994. Environmental Investment May: 101. Arnold, J., D. Egginton, L. Kirkham, R. Macve, and K. Peasnell. 1992. Goodwill and Other Intangibles: Theoretical Considerations and Policy Issues. London: Institute of Chartered Accountants in England and Wales. Bailey, P. E. 1991. Full cost-accounting for life-cycle costs: A guide for engineers and financial analysts. Reading 20 in Accounting and the Environment: Readings and Discussion, L. Molinaro, ed. Arlington, Va.: Management Institute for Environment and Business. Bebbington, J., R. Gray, I. Thomson, and D. Walters. 1994. Accountants' attitudes and environmentally-sensitive accounting. Accounting and Business Research 94:109–120. Bennett, M., and P. James. 1994. Financial dimensions of environmental performance: Developments in environment related management accounting. Paper presented at British Accounting Association Annual Conference, Winchester. Butler, D., C. Frost, and R. Macve. 1992. Environmental issues. Pp. 53–76 in Financial Reporting 1991–1992, L. Skerratt, ed. London: Institute of Chartered Accountants in England and Wales. Collier, J., I. Doolittle, and P. Broke. 1993. Environmental disclosures. Accountants Digest 303. Cope, D., and P. James. 1990. The enterprise and the environment. UK CEED Bulletin 30:6–9. Deloitte Touche Tohmatsu International/IISD/Sustainability. 1993. Coming Clean: Corporate Environmental Reporting. London: Deloitte Touche Tohmatsu International. Epstein, M. J. 1994. The integration of environmental measurements into management decision making. Paper presented at British Accounting Association Annual Conference, Winchester. Ezzamel, M., K. Hoskin, and R. Macve. 1990. Managing it all by numbers: A review of Johnson & Kaplan's 'Relevance Lost'. Accounting and Business Research 78:153–166. Federation des Experts Compatibles Europeans (FEE). 1993. Environmental Accounting and Auditing: Survey of Current Activities and Developments. Brussels: FEE. French, E. A. 1994. Accounting Courses for UK University Undergraduate Engineering Students. Working Paper, University of Wales College of Cardiff. Gray, R., J. Bebbington, and D. Walters. 1993. Accounting for the Environment. London: ACCA/Paul Chapman Publishing. Hoskin, K., and R. Macve. 1994. Reappraising the genesis of managerialism: A re-examination of the role of accounting at the Springfield Armory, 1815–1845. Accounting, Auditing and Accountability Journal 7(2): 4–29. Houldin, M. 1993. Financial management and the environment. Address to Institute of Chartered Accounts in England and Wales Annual Conference, London. Johnson, H. T., and R. Kaplan. 1987. Relevance Lost. Boston, Mass.: Harvard Business School Press. KPMG. 1993. International Survey of Environmental Reporting. London: KPMG. Kreuze, J., G. Newell, and S. Newell. 1991. Cost allocation example. Reading 14 in Accounting and the Environment: Readings and Discussion, L. Molinaro, ed. Arlington, Va.: Management Institute for Environment and Business. Macve, R., and A. Carey, eds. 1992. Business, Accountancy and the Environment: A Policy and Research Agenda. London: Institute of Chartered Accounts in England and Wales.
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