Environment Management Accounting [EMA]: An Overview

Dr Vijay Pithadia

Many people are willing to pay more for a product that is environmentally friendly. Many companies are now interested in being "green," as many investors place a high value on environmental responsibility. The concept of environment management accounting is new for Indiabut the recent policies of Indian government of liberalization have catalyzed the need or practice of environment management accounting in India. EMA focuses on costs internal to the company; EMA does not include external costs to individuals, society, or the environment for which a company is not legally held responsible. More accurate and comprehensive information to support the establishment of and participation in voluntary, cost-effective programs to improve environmental performance

Key Words: Environment accounting, Rig-Veda, Environmental accounting background and overview, Reasons for change, External Environmental Auditing, EMA, Evaluation of Facility-Level, Implementing EMA

Availability of Data: Quoted data and information are available from public sources, which are mentioned in references.

Environmental costs and obligations are significantly growing and continue to grow as the world becomes more environmentally conscious. Public corporations are being held more responsible and accountable to be good environmental citizens. A number of environmental legislations have been enacted to address the emergence of a worldwide “green movement.”  

In some cases in years past, environmental issues were virtually ignored by both corporations and individuals. Hazardous waste and other such items were considered a cost of a growing economy. Times have changed as people now realize the effects of waste products that potentially could damage parts of the environment. Many people are willing to pay more for a product that is environmentally friendly. Many companies are now interested in being "green," as many investors place a high value on environmental responsibility. Some corporations have had to pay to clean up their past environmentally "unfriendly" behavior. However, most firms have established good reputations as environmentally “friendly.”

Conceptual frame work of environment management accounting has been describe in "Rig-Veda", the pioneer religion theorem of Hindu Philosophy as according " sky is like a father, earth is like a mother, a space as their children " Thus Rig-Veda reflects that environment is to be valued like parents and love like children. The concept of environment accounting and auditing may be new for western accounting thinkers. There may be conflicts between understanding and implementation. Few notes started its relevance for country. Such as establishment of new accounting standards concerning to environment management accounting in India. Secondly it should require to include into specialized accounting education syllabus and to create awareness of importance of environmental accounting to the accounting practitioners for serving its exact purpose.
EMA: Background and Overview

Environment Management Accounting (EMA) is the identification, collection, estimation, analysis, internal reporting, and use of materials and energy flow information, environmental cost information, and other cost information for both conventional and environmental decision-making within an organization.  For companies that have the goals of saving money, especially environmental costs, and reducing environmental impacts, EMA provides essential information for meeting those goals. Key points to note are:

EMA focuses on costs internal to the company; EMA does not include external costs to individuals, society, or the environment for which a company is not legally held responsible.

EMA places particular emphasis on accounting for environmental costs.

EMA also encompasses explicit information on physical flows and fates of materials and energy.

EMA information can be used for most types of management activity or decision-making within an organization, but is particularly useful for proactive environmental management activities.

EMA is not merely one environmental management tool among many - rather, EMA is a broad set of principles and approaches that provides the materials/energy flow and cost data critical to the success of many environmental management activities. Terms or tools such as full cost accounting, total cost assessment, cost accounting, materials accounting, life cycle assessment, life cycle costing, and activity based costing are associated with EMA.

EMA: Reasons for Change

EMA researchers and proponents recognize the limitations of conventional management accounting approaches for management activities and decisions involving significant environmental costs and/or significant environmental consequences/impacts. The unintentional "hiding" of many environmental costs in overhead accounts Inaccurate allocation of environmental costs from overhead accounts back to processes, products, and process lines Inaccurate characterization of environmental costs as "fixed" when they may actually be variable (or vice-versa) and The actual lack of inclusion of relevant and significant environmental costs in the accounting records at all.

EMA brings many potential benefits to industry including:

The ability to more accurately track and manage the use and flows of energy and materials, including pollution/waste volumes, types, and fate
The ability to more accurately identify, estimates, allocates, and manage/reduce costs, particularly environmental types of costs More accurate and comprehensive information to support the establishment of and participation in voluntary, cost-effective programs to improve environmental performance More accurate and comprehensive information for the measurement and reporting of environmental performance, thus improving company image with stakeholders, such as customers, local communities, employees, government, and finance providers.

Environment Management Accounting: Implementing EMA 

EMA provides two types of data to assist companies in making decisions about capital investment, product/process costing, strategic planning, or other business opportunities. One type is cost information; the other type is physical flow information (e.g., raw materials use and waste generation rates). Companies may approach the data collection in different ways. For example, some companies may simply conduct a more careful examination of existing cost data and combine it with existing materials flow knowledge to make more informed decisions. Other companies may do actual mass balances on their processes to better understand previously hidden losses. Some examples of physical flow information include: quantity of chemical brought on-site, quantity of chemical produced on-site, quantity of chemical consumed in the manufacturing process, q quantity of chemical in the product, quantity of chemical in the waste, water use, wastewater generation, and energy use.

Surveys of Industry Practices

The surveys of current industry practices in environment management accountings of major corporations within a variety of industries and provides a perspective of the current state of the art of environmental management accounting, as well as some important differences in organizational approaches. Here the reporting, data handling, and follow-up processes of selected leading environmental management accounting programs were analyzed in-depth to develop perspectives on the diversity in audit reporting techniques, formats, and approaches to provide clear and appropriate disclosure of audit findings. In addition, we have informally surveyed hundreds of companies at our various audit seminars and workshops.
 External Environmental accounting for the Board of Directors

Working for a committee of the boards of directors of several major U.S. companies, serve as external auditors and conduct an independent environmental verification program. As part of these client assignments, the corporation to further develops and strengthens its internal EHS, and product safety audit program. The boards of directors find our assistance to be very valuable to them in assuring compliance.

Audits in Highly Sensitive Situations

Working for outside counsel in dozens of highly sensitive situations, we conduct audits of numerous facilities that pose significant environmental problems. In one such assignment, a team of audit experts conducted several field visits to independently determine compliance with national, state, and local environmental regulations; assess whether facility operations and practices pose potentially serious health or safety risks; and determine conformance with corporate policies and procedures.

Evaluation of Facility-Level Environmental Compliance

For a large international manufacturer of industrial/agricultural equipment, we developed a program to evaluate the environmental compliance and management systems in place at the facility level. The purpose of the assessments was to identify those areas where environmental risks had not been identified or had not been adequately addressed and to evaluate the management systems in place to direct environmental issues. We provided two to six team members with project- and industry-specific expertise for each assessment. The assessments involved interviews with management, engineering, maintenance, and operational personnel; inspections of environmental activities and review of environmental documentation and programs


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Appendix - 1
Environmental Accounting Practices of
Listed Companies in Japan

The number of Japanese corporations, which publish environmental reports, has been increasing very rapidly. According to the ''A Survey of Environmentally Corporate Behavior'' [Ministry of the Environment (2001a)], the proportion of listed corporations surveyed which disclosed environmental information showed a rising trend from 35.7 per cent (1998) to 40.9 per cent (1999) to 51.0 per cent (2000). Out of these companies the proportion of those which published environmental reports also increased from 30.9 per cent (1998) to 37.3 per cent (1999) to 45.9 per cent (2000). This sort of trend is likely to increase further, judging from the publication of ''Environmental Reports Guidelines (Fiscal 2000)'' by the Ministry of the Environment (MOE) in February 2001 and the ''Environmental Reporting Guideline for Stakeholders'' by the Ministry of Economy, Trade and Industry (METI) in June 2001.

The number of companies, which disclose environmental accounting information in their environmental reports, is also on the increase. During the first half of the 1990s when the word ''environmental accounting'' was not in general use, only a handful of corporations measured environmental costs. However, according to the Moe’s survey (2001a), out of the above-mentioned listed corporations which replied that they disclosed environmental information, the proportion which disclosed environmental accounting information showed a steeply-rising trend from 10.4 per cent (1998) to 20.9 per cent (1999) to 27.0 per cent (2000). Concerning the question on the introduction of environmental accounting, 17.3 per cent replied that they had already introduced it, while 34.2 per cent replied that they were considering its introduction. These trends were obviously influenced by the environmental accounting guideline published by the Environmental Agency (now the Ministry of Environment: MOE) in May 2000. The draft guideline was published in 1999. Furthermore, both of the Moe’s and the METI's environmental reporting guidelines recommended environmental accounting information disclosures in the environmental reports Therefore, more and more companies are expected to introduce and publish environmental accounting.

Although such guidelines are likely to have a considerable influence on environmental accounting and reporting practice, they are not mandatory rules, but voluntary. The methods and procedures for environmental accounting in the Moe’s guideline are quite flexible and even ambiguous. The guideline leaves much discretion to companies. This means that how and to what extent the guideline influence environmental accounting practice becomes an important research issue. The object of this study is twofold: to clarify the special characteristics of Japanese environmental accounting practice by examining the environmental accounting information disclosure by Japanese corporations; and to analyze the influence on Japanese corporations by the MOE environmental accounting guideline. Before examining these issues, some main governmental initiatives on environmental accounting and previous studies on Japanese environmental accounting practices are briefly studied.

Appendix – 2

Governance of Environmental Accounting Practices in USA

Industry accountants must ensure that their firms are in compliance with accounting standards, including those pertaining to environmental issues. Several rules governing environmental disclosures have been developed in USA. At the highest level of generally accepted accounting principles (GAAP) are the Statements of Financial Accounting Standards (SFAS), which are issued by the Financial Accounting Standards Board (FASB). Some of the key accounting pronouncements that regard environmental reporting is the following:

(1) SFAS No. 5 states under "Accounting for Contingencies" that a liability should be recognized in the financial statements if a loss is probable and the amount is estimable. If the loss amount is not estimable which is often the case, the contingency must be described in the footnotes to the financial statements.
(2) ETIF Issue No. 90-8 required that all environmental contamination costs be expensed as incurred unless costs extend the life or increase capacity of the property, costs mitigate or prevent future environmental contamination (that would otherwise occur), or costs are incurred to prepare a property for sale.
(3) ETIF Issue No. 93-5 concluded that an environmental liability must be evaluated independently from any potential claim for recovery. This recovery claim can reduce the liability only if it is probable. Securities Exchange Commission (SEC) standards state that it is appropriate to net the asset and liability if the asset's recovery is recognized as probable. The asset and liability should be disclosed in the notes to the financial statements. The SEC approves discounting of liabilities to their present value.
(4) AICPA Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," covers auditing and accounting topics dealing with environmental issues. It details the responsibilities of corporations involved in environmental cleanup, and responsibilities of corporations to avoid environmental destruction.