Environmental viewpoint of business transactions from a case study .
The last decade has seen developments challenging the abilities of managerial accounting theories in supporting firms with environmental conscious decision-making that are grounded in the expanded accountability of firms toward nature and society. Critical theorists have argued that the shortcomings of the accounting theories to interpret the impacts of business activities on nature have its origin in the missing accounting standards, under-defined contractual boundaries, and the absence of a valid numéraire (monetary equivalency). In this chapter, the author posits that these shortcomings are a legacy of the economic paradigm within which the accounting frameworks operate and would remain so, unless a paradigm change evolves to handle environmental-related considerations on its own, even if it means rewriting rules to generate accounting interpretations of business activities. Instead of offering a methodological solution, this chapter ideates how having “environment” as integral to the accounting paradigm would enable firms in evaluating, accounting, and reporting environmental performance transparently and improve flow of information to help management face sustainability-related challenges better.
- environmental accounting
- ethical rights
- accounting dimensions
Managerial accounting has evolved over the years as a valuable aid for management to interpret accounting and other organizational inputs and generate information necessary to improve scientific temperament in the decision-making process. However, last two decades have also witnessed developments that challenged its abilities to support sustainability and environment-related issues and help businesses manage societal expectations better. These challenges, in all earnestness, have questioned the efficacy of firms to act as economic agents of society and remain a conduit of continuing progress. The absence of suitable language to comprehensively describe the evolving decision considerations is one end of the problem; inability of current accounting language to satisfy information needs beyond economic viewpoint is proving to be another. Instead of proposing a comprehensive solution to this polyvocal problem, this chapter aims at going beyond the arguments of greening managerial accounting to understand how changes in the core accounting construct might help firms connect better with the sustainability-related issues and shape microlevel application of sustainability to emerge as inherent to the accounting sciences.
2. Sustainability and underlying philosophies: implications for business firms
Sustainability, in simple terms, embodies the eternal principles upholding well-being of mother earth to sustain and improve human and other life forms along with the nonliving world, and enrich natural environment over time. While scientific understanding of energy and matter and how it flows through the diverse activities in nature to support different life forms and abiotic world is inadequate to meaningfully explain its multidimensional nature and long-term ramifications of anthropocentric activities, the ensuing debate within academic disciplines to have largely remained fragmented along the respective epistemological boundaries has been less surprising . Still, some convergence has been witnessed toward acknowledging the need of developing interdisciplinary and transdisciplinary studies to improve understanding of sustainability-related issues (see Abraham  in engineering, Bergmann  in fine arts, Bosselmann  and Mueller  in education, Gray  in accounting, Stegall  in design, Taylor and Theyel  in business education, and others). At the same time, critical theorists have argued how increasing materialistic lifestyle and drive to improve economic prosperity of societies have steadily increased the risks of continuing environmental exploits and ecological losses, including loss of biodiversity, global warming, and increasing levels of resource consumption that are seriously threatening intra- and intergenerational equity (supported by the last Millennium Ecosystem Assessment report  as well). Jones and Solomon  believe that the ecological losses of this era are of the worst type and perhaps can even eclipse previous natural disasters in terms of impact and magnitude, as the twin issues: (a) these being human-induced ones and (b) our inability to understand the impacts in entirety are pushing ecosystem toward a state that is least understood in terms of its life-supporting capabilities. Meanwhile, the inability of global organizations and governments of sovereign countries to push for formal mechanism to uphold accountability of industries toward the impending disaster that can drive significant changes in the behavior of the industries to act responsibly has been equally disturbing. Metcalf and Benn  have questioned the “fit for purpose” of corporate firms to continue as the social mechanism of development and changes needed for them to be responsive toward the interconnected, dynamic, economic, environmental, and social systems.
This brings us to the debate if ecological sustenance should be focal to agenda of economic growth and human progress, as ecocentric philosophy proposes, as compared to anthropocentricity that views sustainability as a key to further human existence on this planet. While ecocentric views integrate everything, including our collective knowledge, to improve understanding of our relationship with nature (biotic and abiotic world), anthropocentrism believes the purpose of nature, and its resources are to enrich human life and harness knowledge to serve human needs better . Between these two extremes, the question—how (un)sustainability of human activities is to be viewed against the backdrop of everything else—remains unanswered. In normative terms, sustainability of a region is dependent on pursuing and practicing policies that would sustain ecological balance and natural wealth over time, but to redefine the role of business in effectively participating and supporting the cause, which has hardly been explored, has remained relatively under-defined in ascertaining “what” and “how much” of sustainability should be the responsibility of microlevel entities. This effectively creates a problem for the accounting theories to define “what” needs to be accounted for, even before deciding “how” this could be achieved. To define nature of information needed by firms and its stakeholders to be reflective about the current form of development and how that might be impacting sustainability is also relevant to this discussion. Within the prevailing diversity, how firms and managements could improve their accountabilities toward society and nature would need us to explore advancements in accounting theories and how this could be relevant in helping businesses live up to the challenges of our times (Section 3). This is followed by exploring how accounting sciences would need to rewrite rules to capture environmental impacts of firms and its activities (Section 4), before summarizing how this might change the accounting world for the better (Section 5).
3. Sustainability and critical accounting theories
Firms’ need to account for environmental duress due to its economic affairs has been philosophized under the aegis of social and environmental accounting (SEA), where different philosophical approaches have contributed to advance the arguments in favor of improving the nature and state of accounting sciences to support the cause. The context of discussion in this chapter is not to critically examine theoretical approaches that have contributed to advance arguments in favor of environmental accounting but to validate few important ideas that have shaped the need for the accounting theories to play a vital role in supporting sustainability. This includes
3.1. Contemporary developments within the critical accounting theories to support sustainability
We start the discussion with the
Subsequent developments within the social and environmental accounting (SEA) theories eased some of the operational limitations of newly introduced approaches by extending its support for voluntary reporting mechanisms that can be used to disseminate information on how firms are/would be contributing to the societal expectations (intent follows action), even when the uncertainty regarding the loci and contents of such broadcasts add to the unresolved questions of traceability and assurance of disseminated information. Further, voluntary reporting remains disconnected from the formal accounting and reporting processes, thereby lending credibility to the widening gap between the accountability of organizations toward environment and the efforts required to promote changes in the overall behavior of firms to incorporate ethical considerations as a part of normal business conduct [20, 21]. Moreover, this has also resulted in institutionalizing multiple reporting platforms like Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), United Nations Global Compact (UN COMPACT), and Greenhouse Gases (GHG) reporting, not to mention CSR bandwagon, giving way to establish plurality in standards and languages [17, 22, 23] that has overshadowed the need to have fact-based or assured information that Hazelton  argues is the information right of citizens, especially where common assets are involved. Without threading out issues like trust and belief that the firms need to address while disseminating information, voluntary reporting could hardly play the role of a catalyst to successfully mediate a meaningful dialogue between the firms and society and to ensue debate regarding firms’ contributions to sustainability .
The argument here is that in the absence of a systemic integration of environmental
3.2. Methodological improvements: environmental management accounting (EMA) framework and other techniques
While the ethical approach of SEA theories (from previous subsection) depended on businesses to act in a righteous way so as to improve the overall welfare of the society, it seems wishful and contrary to the real behavior of firms, if learning from the industrial revolution and current state of earth’s resources is anything to go by Millennium Ecosystem Assessment . Moreover, in the absence of necessary legal framework to enforce firms to uphold their end of the ethical bargain, firms’ motivation to behave ethically and (re)orient its conduct toward superior environmental performance, that the market and society in general would expect and reward, demands a mechanism that can easily be relied on to support internal and external information and decision-making needs of firms [17, 25]. To pursue the argument, this subsection has relied on the instrumental view and explored how the methodological advances from the recent past promoted under the umbrella term of environmental management accounting (EMA) has furthered environmentally conscious methodologies to support decision-making efforts of management, and has improvised the role of accounting in helping firms target costs that are related to generation and prevention of waste. The innovations are not an enactment of the ethical stand but aimed at offering methodological support to businesses in improving environmental risks and achieving win-win outcomes. Developments within EMA did not lead firms to break away from the current goals of business in favor of environmentally superior ones, instead leveraged the innovations to improve outcomes, as instrumentalist approach would expect.
Methodological improvements advanced under the umbrella term of EMA framework  have helped firms in dealing with the need of environmentally sensitive information. This included waste accounting and reporting methodology  that advocated firms to develop cost drivers to analyze already recorded overheads in the books of accounts and identify environmental-sensitive expenditures that are getting diverted from the value chain [27–29]. A number of case studies experimented with the advancements to support the claim that the firms can improve environmental impacts and bottom line by identifying causal relationship of costs with activities generating waste and effectively control costs as well as waste (lower waste and, hence, improve costs). Another line of development proposed material flow cost accounting (MFCA) and developed waste flows, where valuation of nonproduction outputs (waste) from the production cycles improved visibility around drained resources. Pathbreaking in treating waste equivalent to finished goods, MFCA allocated costs to waste by using the principle of mass balance to generate information on the equivalent economic value being diverted from the organizational value chain . A good number of case studies from around the world experimented with these innovative ideas that culminated in MFCA getting institutionalized as an ISO standard (ISO/DIS 14051) .
During the same period, innovative methodologies like environmentally enhanced life cycle costing (E-LCC) and full cost accounting (FCA) breached organizational definition of cost by developing considerations for contingents and intangibles that are less definitive and have traditionally remained outside the formal accounting considerations. Changing paradigm in business environment made these increasingly relevant to managerial decision-making (e.g., new projects, impact of future environmental laws, and others), helping firms to be cognizant of their actions beyond the economic boundary. Subsequent developments within EMA supported environmental costs to include “less tangible costs” that covered out-of-boundary and difficult-to-quantify external costs . While the shifted focus of EMA supported accountability of firms toward externalized liabilities, subsequent studies have not always supported the view [32–34], where experimentation involving out-of-boundary costs in different decision-making situations reported usefulness of expanded views, for example, in evaluating environmental aspects as a physical asset of the firm or to deriving opportunity income by reducing emissions [35, 36]. The new ideas contributed to the growing arsenal of computational and algorithmic solutions that supported legitimacy claims of businesses while remaining disconnected from the epistemological roots of the underlying accounting theories, failing to provide for any foundation to unify environmental accounting as a part of existing management accounting system, as envisioned by Gray and Laughlin . Readers interested in exploring EMA-related developments further can refer to Debnath et al. .
3.3. Developments in formal accounting standards to support environmental challenges
With the advent of International Financial Reporting Standards (IFRS) as the global generally accepted accounting principles (GAAP), there have been some advancements in literature in examining how IFRS can help firms handle changing societal expectations better. This subsection is more of a preemptive discussion to emphasize how moving away from country-specific GAAP to IFRS has not diverted the primary focus of financial accounting and reporting from the economic viewpoint that the market system supports. For example, Negash  offered a prescriptive treatment how the provisions of IAS 38 (impairments of emission rights), IAS 32 (financial instruments: presentation), and IFRS 7 (financial Instruments: disclosures) can support environmental imperatives that a firm might need to adhere to, where IAS 39 (new IFRS 9) could deal with the presentation, disclosure, recognition, and measurement of financial instruments from the perspectives of carbon trade. Similarly, IFRIC 1 and IFRIC 5 can be used to deal with the financial implications and related liabilities that arise due to decommissioning, rehabilitation, and restoration events of certain industries in certain countries, whereas, IAS 37 can be used to deal with the provisions and contingencies associated with these events. Similar assertions by Firoz and Ansari  explained how the aforesaid provisions of IFRS could be used to report material aspects of social and environmental accounting, including accounting and reporting environmental assets (environmental rights and associated values purchased/contracted, actuarial value of insurance or similar risks, and capitalized values in environment-related R&D expenses) and associated liabilities (physical data to quantify aspects toward rehabilitation and restoration of impacted sites and use).
Further reading of these standards reveals the need of a legal framework to reflect: (a) how firms might have chosen to deal with “certain” environmental areas that the law demands (e.g., environmental restoration funds and compliance-related regulations), (b) quantification and possible monetization of impacts resulting from legal compulsions instead of a proactive declaration of externalized liabilities, and (c) how market-based initiatives (e.g., carbon trading and emission rights) would impact accounting, which is also related to disruptions due to initial carbon emission allowance and associated risks of recognizing these as asset in financial accounting [39–41]. Highlighting IFRS’ confined boundary to support market mechanism, the author views this to be hardly at an arm’s length from the existing financial reporting and of little help to firms and regions where legal support is inadequate, for example, developing and underdeveloped nations.
3.4. What are we missing?
To recapitulate, accounting innovations have supported the legitimacy claims of firms and pursued improvements to achieve lower waste levels and improve bottom lines. At the same time, methodological complexities and under-defined causality made FCA an unviable choice, and only a handful of companies could develop detailed account of extended costs. So, while shift in focus from “accounting” to “accountability” that SEA supported is a good beginning, accounting innovations failed to keep the momentum beyond rhetoric. No surprise, these innovations worked around the existing constraints, instead of challenging the core construct. This abstinence could be due to the perceived equivalence of accounting language with that of the framework itself where
4. Environment: a missing element of accounting paradigm
To begin with, although we perceive the accounting practices to be restrictive and less caring for environment and sustainability, and we believe that they are not living up to the contemporary challenges, we have to understand that the accounting frameworks are fundamentally designed
If we consider accounting to be the language to interpret business activities, its enactment is based on the norms and standards that are part of the chosen framework through which the business transactions are analyzed , where the theoretical underpinning of the framework provides the generalization of “what account is accounting.” In other words, if data and information generated by accounting processes could be considered as symbols, its utility lies in the usefulness that the contents generate within the broader social perspective. As sustainability-related information needs of firms and stakeholders are beyond the economic existence of firms, more so, because it involves environmental and social implications of doing business that brings in concepts like externalities, social costs, and constancy of natural and other types of capitals to the accounting theories, current economic viewpoint would fall short to incorporate these, as the mainstream economics has failed to incorporate externalities and market failure. So, the core viewpoint that an accounting framework supports cannot be reengineered beyond what could be seamlessly integrated within the belief system. Otherwise, the outcomes might result in disruptive changes, severely compromising cost and quality of information.
To substantiate the unidimensionality of accounting framework and its dependency on a core viewpoint that defines its operating boundary, the author would like to cite the origins of cost accounting as a source of valuable insights. Cost accounting evolved as a response to the constraints faced by the decision-makers in extracting information on organizational value creation process from the financial accounting . Management’s need of information on the value creation process and actual flow of costs led to the development of cost accounting and its techniques, which grew (mostly) outside the formal structure of financial accounting. By leveraging double-entry principle, cost accounting legitimized materials and resources accounting and satisfied accountability, control, and decision-making needs of management (e.g., financial well-being vs. overhead cost analysis) . Although in due course, the two frameworks merged to form integrated accounting, and represented abstraction of the nominal form of accounting, it is beyond doubt that this commonality is more on account of common measurement scheme (monetary valuation) that they share, as against the purposes they continue to serve. So, it would be unfair to expect the accounting practices to interpret transactions and develop, support, or forecast the (un)sustainability-savvy behavior of firms, especially when this has been neither the intent of the underlying frameworks nor the lingua franca of the mechanism through which the business events are being interpreted. Accordingly, environmental viewpoint would remain a challenge for the existing frameworks to adjust to and natural for them as well to ignore the needs. In order to understand the environmental implications of doing business, accounting theory would have to first conceive environmental viewpoint as a part of its core belief system so as to lay foundations to support corresponding information needs (Figure 1).
Figure 1 is a schematic representation to reflect that an accounting framework (say XF) is a mechanism to translate a business transactions (transaction X in time t) in accordance to the norms and principles of the framework (financial accounting in this case) using accounting language that is grounded in the core viewpoint that it supports (owner/shareholder perspective), which would generate information to satisfy the relevant interests of the stakeholders, for example, by evaluating how the entity has been performing within the chosen dimension. We have to understand that the transactional information captured by an accounting system is not the whole truth about it, but a partial view or projection of the transaction on to the respective accounting plane. Accordingly, bookkeeping process would ignore other aspects of the transaction and save for the contextual elements that are relevant in evaluating the implications of the transaction within the chosen framework. Selective acuteness of the accounting paradigm heightens the focus around the intended objective(s), which could be perceived myopic at first, but is a basic necessity for the process to remain aligned to achieve the intended objective. This results in “environment” being a missing element of the prevailing paradigm that needs to be incorporated first (may be within a new framework), where calibrating environment well-being is held central or core to the framework, so as to enable the accounting language and necessary measurement scheme to interpret firm—environment exchange. At this juncture, it would be pertinent to clarify that accounting viewpoint or dimension used interchangeably throughout the chapter reflects isolated boundaries of information needs, conceived to map transactional elements and satisfy information demands, and in no way reflects dimensionality proposed by Ijiri .
While the loci to capture environmental impacts of business activities have not been defined for the accounting theories to pursue (Section 2), ethical rights theory can be leveraged (Section 3) by the proposed framework to define how firm-environment exchange might result in ethical negatives that the business activities would generate or subsume, for example, how environmental assets (aspects like waste and emission) impact nature and society (e.g., social and health impacts). Moreover, this can be related to quantify ethical positives to reflect how firms have chosen to deal with them (e.g., improved product design, waste disposal system, and end-of-life product return policy). Using provisional, social, and externalized costs, it is theoretically possible to record externalized liabilities to bring those in within the firm’s boundary and integrate within the social contracting process, as theorized . To illustrate, Appendix 1 has tabulated transactions from a case study conducted by the author previously  to exemplify how business transactions can be analyzed and evaluated in terms of environmental aspects and impacts and could be used to develop an environmental accounting framework (Figure 2). Figure 2 details a four-step accounting process where suitable environmental technique can be used for quantification of aspects (e.g., ISO 14031, ISO 14051, input-output analysis, life cycle analysis) and suitable monetary conversion (e.g., at cost, at replacement cost, market determined rates, contingent valuation method, cost avoidance method, or any other combinatorial proxy) could be employed to translate these into equivalent externalized costs. The use of multiple methods for quantification and monetization can also be experimented with to improve visibility to the organizational activities.
Although it is natural for us to be critical of the risks associated with the exploratory nature of the framework and under-defined rules, standardization of environmental accounting can be taken up at national or supranational level or could be left for firms to experiment with. This would expand the boundaries of accounting by absolving it from being subservient to the economic interests alone, as also to reduce dependency on monetary unit as the
5. Concluding remarks
For the firms to care for nature and society would require them to manage externalities better (proactive), instead of waiting on the policy enforcements and acting responsibly (reactive). However, proposed methodological improvements from the last decade did not go beyond fulfilling the internal decision-making needs of firms (business as usual) in improving the overall accountability (long-term objectives). In this chapter, the author has argued that the current developments within accounting literature owe its origin to the economic paradigm within which the accounting frameworks operate and serve to satisfy corresponding information needs. Accordingly, pushing the prevailing frameworks to account for the environmental impacts might force the existing frameworks to reengineer beyond what could be seamlessly integrated, resulting in contributing to distorted views and misinformation. To be able to capture the experiences of environmental interactions of firms and support ecological choices of firms, accounting theories would need to evolve
|Business transaction||Analysis of environmental concerns||Aspects||Impacts|
|1. Receives 100 MT of raw material say lye against purchase order number PO # 131||Emissions from transportation of the materials||Secondary emissions due to transportation of goods||Eq. environmental load of GHG|
|2. Dispatch of 1000 MT of banana puree from Mumbai to Rotterdam via ship by Coffee Inc.||Emissions due to the shipment of products||Same as 1||Same as 1|
|3. Ripening of mangoes in the ripening chamber||Emissions due to the use of electricity purchased from grid||Secondary emission due to shipment of goods||Same as 1|
|4. Steam used in production generated by briquette boiler||No emission due to the use of biomass fuel||None||None|
|5. Production of 1000 tons of mango pulp/puree and concentrate||a. Energy consumption||Secondary emissions due to energy consumption||Same as 1|
|b. Water||Water drained and not recycled||Social liabilities of not treating wastewater|
|c. Solid waste generated||Solid waste transferred to municipality||Social liabilities toward municipal waste management|
|6. Availing 400 hours of consultancy services toward system development by IT Services Ltd.||a. Energy consumption in software, server, etc.||Same as 5(a)||Same as 5(a)|
|b. Traveling of consultants (tCO2)||Secondary emissions due to traveling||Same as 1|
|7. Disposal of 100 MT of solid waste through contracted services||Environmental aspect of waste disposal depending on the disposal option||Same as 3(c)||Same as 3(c)|
|8. Salary and wage disbursement to the employees||Not relevant||No impact||No impact|
|9. Facility services availed toward cleaning and housekeeping||Environmental aspects of services like water, energy, and emissions are accounted against it||Same as 5(a–c).||Same as 5(a–c)|
|10. Jobs subcontracted to the service providers||Environmental aspects produced in subcon jobs inventorized||Same as 5(a)||Same as 5(a)|
|11. Funds invited for investments in new schemes||No impact||None||None|