Management of Environmental Quality: An International JournalEnvironmental management and regulation: pitfalls of environmental accounting?Enrico Bracci Laura Maran

Article information:To cite this document:Enrico Bracci Laura Maran, (2013),"Environmental management and regulation: pitfalls of environmentalaccounting?", Management of Environmental Quality: An International Journal, Vol. 24 Iss 4 pp. 538 - 554Permanent link to this document:http://dx.doi.org/10.1108/MEQ-04-2012-0027

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Environmental managementand regulation: pitfalls of

environmental accounting?Enrico Bracci

Department of Economics and Management,University of Ferrana, Ferrana, Italy, and

Laura MaranDepartment of Accounting, RMT University, Melbourne, Australia

Abstract

Purpose – The present paper is aimed at arguing the fallacy of those political arguments when aneconomical evaluation of those advantages is implicated. The present analysis will unearth thepartisan nature of the specific accounting rules and principles to fill up the Italian financial reportingin spite of any environmental sensitivity. The paper attempts to suggest a mediation through acomprehensive view on hegemonic discourses of environmental management and their counter-evidences of accounting practices about environmental management.Design/methodology/approach – The discussion is pivoted on the counter-evidences of the presentmanagement tools both at the level of financial reporting and analytical accounting.Findings – The evidences stress the limits of the accounting regulation, since the categories of costsin the financial report scheme open a few possibilities to distinguish the environmental costs. Thoseconsiderations are an obstacle to the “internalization” of environmental externalities and they do notsupport the main issue of a pro-active environmental system.Originality/value – The present work shows the potential of accounting to make things visible andmeasurable and the will to take this opportunity to solve the urgency of the environmental problems.In so doing, the work contributes to the present debate on environmental management systems,through a detailed and in-depth analysis of the accounting loci for environmental issues.

Keywords Environmental, Accounting, Regulation

Paper type Conceptual paper

1. IntroductionThe potential role of accounting to ensure environmental sensitivity in businessesthrough “environmental accounting” is an intriguing issue (Lohdia, 2003).

In organizations, accounting performs a fundamental role through both the internaldecision making and the external reporting on a firm’s performance. At a broadersocietal level, accounting is embedded within social and political issues and itrepresents or recreates the reality (Hines, 1988).

The emphasis on the social responsibility of a firm has been highlighted in recentdebate on the accountability function of accounting (Gray et al., 1996; Gray andBebbington, 2001), with controversial evidence (see Elad, 2001; Burrit and Saka, 2006).

The fundamental premise driving environmental accounting is the search for“firm internalization” of environmental costs. Currently, those costs are “external”,meaning that society is affected by both positive and negative impact of a firm’s

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/1477-7835.htm

Management of EnvironmentalQuality: An International JournalVol. 24 No. 4, 2013pp. 538-554r Emerald Group Publishing Limited1477-7835DOI 10.1108/MEQ-04-2012-0027

The work is the result of a joint effort. The paper can be attributed to Enrico Bracci for y1, 2 and6, and to Laura Maran for y3, 4 and 5.

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environmental behaviour, because when we refer to the environment, we are largelyreferring to public good.

However, an extended definition of external environment should involve a setof levels that characterize any organizational context. The organization is located inits environment with an osmotic relationship: it adapts itself and defines variousinterlinks with the environment. The coherence between organizational goals andsocio-environmental issues represents one of the conditions for the legitimacy of thepublic and private activity and entrepreneurship. Thus, Horngren et al. (2011) believe thatwhen an organization is made accountable for the costs of its adverse behaviour towardsthe environment, it should be driven to minimize the adverse effects of their activity.

The need for appropriate environmental management has emerged in the lastten years in relation to the recognition of the importance of the environment.That recognition depends on the effective seriousness of the environmental problems,the social insights towards these problems and an increasing environmental awarenessat both the European and national levels.

Each organization has to adapt itself to the context of reference but it also benefits fromthe emerging opportunities of preserving the environment. A pro-active environmentalmanagement searches for the relationship between organization and environment, inregards to competitive opportunity. In that case, the environment influences thetechnological and strategic choices and the evaluation tools and parameters.

Specifically, environmental accounting can lead firms to forecast their possiblenegative impact on the environment, through the requirement of estimating thecontingent liabilities and creating provisions for environmental risks. Furthermore, theenvironmental reporting can provide accountability to the society of the firm’scommitment towards environmental consciousness.

In Italy, the number of ISO 14001 certifications and EMAS registrationshas progressively increased. The increase in ISO 14001 certifications and EMASregistrations was fostered by a series of political discourses on the advantages ofhaving an environmental management system: reduction of the environmental costs,normative compliance, enhancement of the relationships with banks, financial andinsurance markets and improvement of the organization competitiveness and image.

The paper aims to identify and explicate the inconsistency between Europeanand Italian accounting laws and regulations and sustainable investments andtheir accounting disclosure. The discussion is based on the support of the presentmanagement tools both at the level of financial reporting and analytical accounting.The paper also focuses on the debate around the “greening of enterprise” thatemerged in the literature. Gray et al. (1995), Elad (2001) and Lohdia (2003) discuss therole of the accountants in order to respond to the environmental agenda and theyquestion the nature of “environmental accounting”. Saravanamuthu (2004) evidenceshow the conventional form of accounting standardization privileges economicgrowth over social needs.

The present analysis will reveal the partisan nature of the specific accounting rulesand principles to complete the Italian financial report in spite of any environmentalsensitivity. The paper attempts to suggest a solution through a comprehensive view onleading discourses of environmental management and their counter-evidences ofaccounting practices about environmental management.

The paper is organized as follows: the first section depicts the theoretical framework,the second one identifies a definition of “environment” and the normative discourses.The third one demonstrates the type of economic discourses around the “environmental

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sustainability”, before discussing some analytical accounting counter-evidences andconcluding remarks.

2. Theoretical frameworkThe paper considers the accounting system as interrelated with the organization andthe broad societal context. Accounting is never unproblematic and it entails a complexof influences that may either provide the possibility for change, or hinder it (Hopwood,1992). The accounting system is considered to play an active role in the construction oforganizational order and values (Hopwood, 1990; Dent, 1991).

Power (1990, 1992) shares with Hopwood (1990) the possibilities of accounting tooffer new images, vocabulary and issues in the organization: “[y] Accountingprovides a very selective but powerful symbolic representation of the corporate entity.The detailed language of ‘assets’, ‘liabilities’, ‘costs and profits’ provide a range ofcorporate imagery and vocabulary which is important for the self-reproductionof organizational rationality [y] Accounting functions to define the operational limits ofthe enterprise and provides a technology which reinforces very particular conceptionsof organizational autonomy and receptivity to environmental disturbances” (p. 6).

Potter (2005, p. 256) stresses the importance of local, time-specific factors which “shapeaccounting change within particular instances”: organizations are not closed systems, butopen ones and they are linked to the societal system (Luhmann, 1986; Bertini, 1995)“which provides socially-defined purposes for such organizations, that need to beunderstood and acted upon” as further discussed by Broadbent and Laughlin (1987, p. 8).

According to Laughlin and Broadbent (2005), the accounting system and theorganizations tend to be stable, rather than changing. The changes occur when someform of “disturbances” (Laughlin, 1991, p. 209) shakes up such inertia, and bothchanges and status-quo are worth to be studied.

In Gray et al.’s (1993) interpretation, the Laughlin’s (1991) model can appear toofunctionalist as it implies a sort of rigid concept of organization whose changes passthrough the conventional accounting practice and reasoning. These are seen as thegateways through which the environmental issues can enter the organization.

The latter rich and very complex conception about the relationships organization-accounting-environment leaves open the arguments of Stead and Stead (1992) andCramer et al. (1991) about the individual freedom within the organization and itscapability to drive values and shift the organizational boundaries.

The response of an organization towards the environmental issues can be of bothresistance (greening as a “passing fad”), compliance towards the public opinion(greening as significant but not critical, thus, re-orient able) or real evolutiontowards the new values.

Bebbington et al. (1994) assign to accounting a fundamental role of “representation”and “change” and they tie that role to the “accounting profession” that can act at threelevels: to maintain a conventional/traditional role, to recognize some new issueswithout overtaking the tradition, to act as new explorer of “environmental accounting”and as a change factor.

Indeed, accounting rules and categories bias social perception (Cooper, 1980), and theinsistence on the structure of intentionality enshrined in accounting convention canprevent the search for regulatory solutions (Young, 1996). Ahrens and Chapman (2007)evidently conclude that theoretical accounting concepts cannot be used by practitioners as“means” to pursue their “ends” because means and ends are constructed simultaneouslyin practice (Lave, 1988).

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The paper mainly focuses on accounting issues and accounts: the role of theaccounting profession can be inferred through the legislative prescriptions and theItalian agreement on the International Financial Reporting Standards (IFRS). Thus, thework does not directly question the “profession” but the “accounting rules”, discussingthe differences between the accounting spill-over, driven from the environmentalnormative and the opportunities for change through the present accounting rules.

Willmott et al. (1993) evidence that any form of environmental accounting weightsup the visibility to the environmental discourse and the need to preserve the definitionof “environment” into controllable and accountable boundaries.

Aside from the research problem related to the social processes that let the accountsbe accepted, the analysis concentrates on accounts and the possibilities they offer toaccount for environmental issues (Hines, 1988; Handel, 1982).

The accounting rules are further important as they allow a possible measurement andRobson (1992) states that measurement is attractive because it reduces ambiguity, ittranslates “things” into the known world and it allows control to be exercised.Saravanamuthu (2004) highlights that there is an intrinsic tension in the “economicnecessity” to define rules of measurement (for instance the IFRS). That tension concernsthe social construction and the attempts to promote environmental managementpractices. The rationale for unique harmonized accounting rules is certainly economic:financial reporting measurements facilitate a simplification of the complex social,economical and environmental issues into precise boundaries of information. The originof this process is questionable and it has been interpreted by Latour (1987) as the finalresult of a power struggle among the members of a social network.

3. Environment and the sustainable development in the normativediscoursesA sustainable development is a development that guarantees a durable satisfaction ofthe human needs and increases the quality of life, because the satisfaction of thepresent needs will not sacrifice the future generations or, in other words, the presentuse of the environmental resources does not have to compromise the environmentalstock (and real income) for the future generations (Brundtland, 1987). The need for anappropriate environmental management has emerged in the last ten years, in relationto the recognition of the environment as a significant criticality.

A pro-active environmental management searches for the reciprocal compatibilitybetween the organization and its environment, in regards to competitive opportunity.Nevertheless, it requires changing the way we think: recognition of the larger contest,acceptance of uncertainty and ambiguity of an organization’s potential impact,challenge of the world view, emphasizing inclusion of more external stakeholders’ viewand cost of externalities (Figure 1).

A pro-active environmental management potentially attracts actual and prospectiveinvestors, sponsors, employees, consumers and local authorities.

The way a pro-active environmental management has been emphasized refers to abroader body of discourses and normative. At the international level, the GlobalReporting Initiative (GRI) provides the world’s most widely used sustainabilityreporting framework: a number of indicators address a wide range of economic, socialand environmental issues, in the understanding that they are equally as important asfinancial reporting to an organization’s success.

The International Federation of Accountants (IFAC), the GRI and the Prince’sAccounting for Sustainability Project are collaborating to establish and International

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Integrated Reporting Council (IIRC) to oversee the development of global integratedstandards and guidelines.

In 2009, the European Commission organized five series of workshops to discuss theESG (Environmental, Social and Governance) reporting from different stakeholders’perspectives, identifying motivations, barriers and challenges of addressing these issues.

Nevertheless, the European Commission still has its own timetables and tools tosupport its environmental policy: some of those tools (such as the EPA’s reports and theSERIEE scheme) are broadly described in the following section.

A set of specific European normative links to the sustainable development:environmental quality (ISO 14001 and EMAS), process quality (ISO 9001), social equity(SA8000), health and security in the work context (OHSAS 18000).

In 1997, the European Commission started a process of green housekeepingactivities concerning the environmental policy and subsequently in 2001, designed anenvironmental management system; as laid down in Regulation (EC) 761/2001,allowing voluntary participation by organizations in a Community eco-managementand audit scheme (EMAS).

In 2009, the Commission decided to extend this environmental management systemto all its activities and buildings in Brussels and Luxembourg as described in DecisionC (2009) 6873.

Concretely, through the EMAS, the Commission commits to minimize theenvironmental impact of its everyday work and continuously improve itsenvironmental performance by taking measures to prevent pollution and to achievemore efficient use of natural resources (mainly energy, water and paper), takingmeasures to reduce overall CO2 emissions (mainly from buildings and transport),encouraging waste prevention, maximizing waste recycling and reusing andoptimizing waste disposal, stimulating the sustainable behaviour of all staff andsubcontractors through training, information and awareness-raising actions,promoting the systematic integration of environmental objectives into communitypolicies, ensuring the effectiveness of environmental legislation and funding increating environmental benefits, as well as promoting transparent communication anddialogue with all interested parties. EMAS highly matches ISO 14001 and according toClausen et al. (2002) the preference between the two depends on the cost ofimplementation and registration in comparison to the perceived reporting benefits and

Naturalresources

MaterialsPrimary, transformed,

recycled resources

ServicesSupport or functioning

Energy

Organization(assets)

Solid waste

ProductsMain products,

recycled products

Acoustic pollutionAir emissions

Water waste

Servicesprovided by the

organization

INPUT OUTPUT

Figure 1.The environment:a general view

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the consistency of the firms’ existing quality management with the one or the other. Asa consequence, the number of ISO 14001 certifications or EMAS registrations is apossible indicator of firms’ sensibility towards the sustainable issues. However, it mustbe understood that standards such as EMAS or ISO 14 001 can only prescribe detailsof enabling elements. They cannot define the possible results, which the participatingorganizations are free to define, set as a target and achieved.

In Italy, the number of ISO 14001 certifications and EMAS registrations hasprogressively increased from 2002 onward. ISO 14001 registration and EMAScertification concern both private and public organizations and they are issued byspecific environmental auditors who are enroled in the ISPRA (a nationalgovernmental institution, that is also an agency member of the EPA network).

The increasing number of ISO 14001 certifications and EMAS registrations has beensupported by a series of political discourses on the advantages of having anenvironmental management system: reduction of the environmental costs, normativecompliance, enhancement of the relationships with financial and insurance markets andimprovement of the organization competitiveness and image (Vernon et al., 2009). Theway the environmental discourse is supported refers to the keywords of prevention,accountability, responsibility, organization, integration, interaction and communication.

The floating of environmental variables to the day-to-day management is assumed toprovide a competitive advantage, in terms of quality issues and reputation (Figures 2 and 3).

1 12 17 41 43 51 94 142 185 206 246

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Figure 2.Evolution of the number

of EMAS registrationsin Italy between 1997

and 2008

0921

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8,000

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2002 2003 2004 2005 2006 2008

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Figure 3.Evolution of the number

of ISO 14001 certificationsin Italy between 2002

and 2008

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The participation to the European Union requires the effort of each member country totranslate the European guidelines and normative into its own national normative.

The Italian ISPRA supports the adoption of the environmental discourse throughthe following topics:

. Reduction of the environmental costs tied to the energy and water consumption,the waste and the packaging.

. Reduction of the administrative penalties about the waste.

. Enhancement of the relationships with the financial and insurance market.For instance, the reduction of the interests over the liabilities that were contractedto make sustainable investments, the reduction of the insurance expenses.

. Improvement of the organization’s competitiveness and image with a possibleincrease in the market share, societal legitimacy and supporting open dialoguewith the institutional authorities.

The topics mentioned above demonstrate the wideness of the sustainable discourse;however they overlook a loose link with a strong economical debate, especially at afirm level. Therefore, they try to enlarge the boundaries of the system thinking in spaceand time, but they do not take into account that the firm’s perspective is narrower andshorter. From a space perspective, they refer to an extended value chain (that embracesthe involvement of suppliers and other external stakeholders) and, from a timeperspective, they are concerned with a long-term intangible perspective.

The results of the 2009 European Report on EMAS show that the financial reasonsare the least important to implement such a system, while the legislative complianceand the expected improvement in reputation are listed as the most important.

4. The sustainable development in the economic discoursesThe economic evaluation is important when a choice on the resources distribution isimplied within the organization and/or in the social community. That evaluationis intended to make the choice among alternatives systemic and “objective” (Hines,1988; Hopwood, 1990): identifying the relevant alternatives and making “measurable”the uncertainty on their impact.

Nevertheless, the problems of the economical evaluations undertaken by anyenvironmental management system are just tied to the identification and recording ofthe environmental costs.

The most problematic issues are the definition of the eventual outputs and benefitsof those programmes and the identification of a precise method to associate expensesand cost records to assets and environmental activities.

All the normative definitions of the environmental costs and expenses are tiedto the externalities, thus they depend on the ability to locate and determine the costof the external loss of environmental functions that result in disadvantagingthe society.

In order to measure this “disadvantage” there is a distinction between:

. the prevention and control costs that the society/public institutions have to payin order to prevent the environmental decay from the productive activities; and

. the compensation expenses to eliminate or defend the society from negativeeffects of a certain environmental decay that has already occurred.

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Nevertheless, in this approach there are not any references to the way firms caninternalize external costs and expenses.

At the European level, the System for the Collection of Economic Information on theEnvironment (SERIEE)[1] scheme and the Environmental Public Agency’s (EPA)[2]report drive to an official method to report the environmental costs and expenses andlink them to specific environmental activities (Figure 4) but at the organizational level,the environmental costs that can be included in the financial reporting accounting or inthe analytical accounting are only a partial amount of the whole cost of anenvironmental programme or activity.

The SERIEE scheme, as represented in Figure 4, does not systematize theenvironmental costs and expenses for their firm’s internalization but it simply definesthe typologies of costs and expenses along with their functions, thus the SERIEEscheme can be considered a method to couple single environmental costs/expenses tospecific expenses categories.

Nevertheless, that distinction is different from the accounting distinction within afirm: the “environmental cost” for a firm will vary its classification according to therelevant aim of the economical measurement:

. communication to the shareholders;

. communication to the banks/other funders;

. internal communication;

. efficiency control of the productive processes; and

. evaluation of the future responsibilities due to environmental risks.

Furthermore, the possibility to internalize some of those costs and expenses cannot bedirectly tied to that scheme.

What is relevant for an organization is the distinction between:. externalities: the costs due to the activity of the organization that are supported

by other organizations/individuals; and

(1)Expenses for prevention

activities integrated inthe productive process

(2)Expenses for preventionactivities separated fromthe productive process

(3)Expensesto restore

environmentalfunctions

(4)Compensation expenses(defensive with respect

to the environmentaldecay)

(5)Compensation expenses

of the negative effectsof the environmental

decay

PREVENTION expenses

PROTECTION expenses

Source: European Union data

DEFENSIVE expenses

Figure 4.The SERIEE scheme

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. internal costs: the costs that are sustained by the organization in order to limitthe environmental effects tied to its activity.

Only when the organization in itself bears the economical weight of its ownenvironmental impacts, it is possible to say that the organization is “internalizing”those externalities.

When an externality becomes an internal cost, it becomes relevant for theaccounting system of the firm and for its decision-making processes.

The perception of its own environmental impacts can notably vary for the firm,according to the way the linked costs are measured or calculated.

The Figure 5 shows the width of the eventual environmental costs for a firm and itdefines three limits for their accounting. Passing from the conventional environmentalcosts to the internalization of the environmental inefficiencies, the width of the firm’scosts will increase, however the rules of accounting will limit the possibility to accountfor them as well as their “tangibility” will diminish.

The conventional environmental costs are those effective costs that are “reliable” forthe financial reporting accounting.

The intangible and potential costs are referred to:

. the reliable estimated costs: they are costs that the firm will certainly sustain inthe future but at the time they are introduced in the accounting system, the firmdoes not have all the elements to define their exact amount or their exact date ofrecording; and

. the likely estimated costs: they are costs whose future existence and amounts arequestionable, for instance the firm sets aside a certain amount of costs to facefuture environmental risks/penalties.

The costs for environmental externalities are tied to those environmental damages forwhich the firm will not be directly asked to cover the related amount. Their amountwill be covered by the society despite the firm contributed to their formation because ofits productive activity.

5. The accounting discourse: some counter-evidencesThe question raised by the accounting system of a firm is where and how to accountfor environmental costs and expenses. Despite the uniqueness of the accounting

Width

Conventionalenvironmental costsThey are calculated by thebalance-sheet accountingand various statisticalbureaux

Intangible and potential costsCosts for environmental

inefficiencies(externalities)

Physical and economical data

Figure 5.The limits to theenvironmental costsaccounting for a firm(EPAs’ reports)

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system, the Italian tradition recognizes a partition between the financial reportingaccounting and the analytical accounting.

The former is aimed at filling up the financial reporting and it is informedby the double-entry bookkeeping method, moreover, it follows the IFRS and theprinciples of the Italian civil code. The latter is aimed at assisting the generaldirection and the management of a firm in their decision-making processes, thus itdoes not follow a prescriptive normative but it is concerned by physical and/or economicalmeasures about the firm and its productive processes. The financial reporting is one ofthe most important means to communicate the organizational performances to thewider audience.

Both the financial reporting and the analytical accounting seem to be incounter-position with an environmental management systems embedded in strongeconomical evaluations.

As shown in Figure 5 the most important part of the environmental costs are theintangible or potential ones and the externalities. The costs of the externalitiestheoretically enlarge the boundaries of the organizational accountability to the socialcommunity; however, it is not possible to include those costs in the financial reportingaccounting or in the analytical accounting.

As a matter of fact, both the Italian civil code and the IFRS principles indicate thatthe financial reporting has to abide by a precise discourse of clarity, comparability,relevance, competence and fair representation of the organizational economicperformance. Those principles question the type and amount of environmental coststo be considered, excluding the “costs for environmental externalities”.

About the category of “intangible and potential costs” the accounting rules are verystrict in their recording as the “fair representation” means the possibility to define arelevance link between those costs and the firm’s performance as addressed to thefinancial reporting readers.

Furthermore, the “conventional costs” category requires the separate explication ofthe “environmental costs” and the obligation to identify supplementary information inthe notes to financial statements. The additional information has to guarantee thereadability, comparability and clarity of the financial reporting.

Table I provides the results of a comparison between the environmental normative onthe potential firm’s pro-environmental activities and the financial reporting prescriptions.It indicates both the main recognized “environmental costs” in the accountingprescriptions and how they can find a representation in an Italian financial reporting.

The environmental costs and expenses have only an indirect reflex in thefinancial reporting.

In the Italian law, the profit and loss statement classifies the expenses per “origin”and not per “nature”. The environmental costs are a common output of the financialreporting accounting as they are already included in the costs classified per “origin”.It is difficult to identify their specific amount, except for the eventual indicationabout their nature.

The financial reporting estimates and represents the economical and financialeffects of the environmental themes on the firm’s assets and revenues. However, the“environmental costs” are only those referable to the activities that will alter the firm’sfuture impacts on its environment and not the costs that the firm will eventually payfor its not eco-sustainable past behaviour.

The Italian normative distinguishes only two possible categories where the firm’senvironmental expenses can be considered: capitalized costs and risk funds.

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The opportunity to capitalize costs for environmental programmes depends on thepossibility to link costs to identified future revenues and not to likely future benefits.In that case:

. the eco-sustainable products/processes of reference have to be clearly definedand the quote of costs referred to them must be identifiable and measurable;

. the technical feasibility of the environmental project has to be verified;

. the management of the firm has to declare the intention to produce/sell/use theeco-sustainable product or process;

. the potential market for the eco-sustainable product/process has to be defined aswell as the internal utility to address that market; and

. the financial resources to afford the eco-sustainable project have to be adequate,in the availability of the firm or reasonably available to complete the project.

In other words, the opportunity to capitalize environmental costs depends on thepresence of future tangible economic advantages for the firm and it cannot bejustified with a generic change in the ecosystem. The future tangible economicaladvantages have to be directly associated with identifiable firm’s assets and thecapitalized cost will be amortized in a period whose length is less or equal to the lifeof the asset.

This consideration restricts the set of capitalized environmental costs to theenvironmental programmes undertaken for law prescriptions or that guarantee aprecise profitability.

The voluntary environmental costs have to be considered as operative costs if thereis not a reasonable certainty about an increase of the related eco-sustainable product/process.

According to the existing normative, the risks funds have following characteristics:

. identifiable nature;

Profit and loss report Balanced sheet Not reported

Note to the financialstatements andmanagement report

Costs for energy consumption Capitalized costsreferred to eco-sustainableinvestments

Expenses tied toenvironmentaldamages/payment ofpenalties

Definition andcomposition of therecord related toenvironmental costsand expenses

Costs tied to the wastemanagement/digestion

Funds forenvironmental risks

Definition of theenvironmentalstrategy of the firm

Costs for the prevention,protection and environmentalsecurity

Funds for futurecosts in applicationof the environmentalnormative

Costs to remedy, reduce, restoreenvironmental damages

Other environmentalrisks

Quote of costs to specificenvironmental funds

Table I.Environmentalinformation in thefinancial reporting

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. certitude or probable existence; and

. amount or date of manifestation uncertain.

They are tied to potential liabilities, thus the possibility to consider the “environmentalrisks” among those risk funds has to be attentively evaluated by the top management.

The further IFRS conditions for the inscription of quotes to risk funds are:

. the legal or contractual firm obligation towards the reduction/prevention/repairof environmental damages; and

. the long-term commitment of the firm direction to reduce/prevent/repair theenvironmental damages.

For instance, those requisites are valid for a fund related to the long-term dismantlementof derricks or nuclear plants.

Besides, certain technical aspects of accounting actually mitigate against theenvironment (Maunders and Burritt, 1991). For example, the entity concept draws upartificially societally constructed entities which are accounting “units”. Businesses areentities with fluid, ever-changing and unclear boundaries, where externalities outsidethese units are ignored. Moreover, the interactions between these entities and theenvironment may also go unrecognized and unrecorded (Saravanamuthu, 2004, p. 298).Periodicity, divides time up into artificial and discrete periods. In financial reporting,this is conventionally a year, while environmental problems are long term in nature. Asargued by Saravanamuthu, (2004, p. 299): “The matching concept is blind to the cost ofshort-term management strategies [which cause] the loss of bio-diversity throughpollution of air, water and land”.

The financial reporting normative further prescribes correct information to bedisclosed in the disclosures to the financial statements. “Correct” information meansthat it is required to provide qualitative and quantitative data to evidence theenvironmental commitment of the firm and illustrate its environmental-tied records.

Among the qualitative information, the following data are suggested:

. existence of an environmental strategy;

. content of the environmental strategy;

. an annual environmental report;

. indications about the main environmental problems;

. firm’s ability to implement the present environmental normative and to affordthe prevention costs;

. presence of specific insurances on environmental risks;

. presence of legal actions; and

. presence and frequency of environmental audits.

Among the quantitative information, the following are suggested:

. amount of funds for environmental loss and costs;

. description of the incertitude situation tied to a potential environmental liability;

. principles and criteria for the evaluation;

. variances in the amount of the funds and their causes;

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. motivation on eventual modification of the evaluation criteria and representationof their economical impact;

. risk of further loss than the risks funds; and

. other complementary information.

In the light of the analysis of the IFRS options to account for environmental costs,it is possible to stress a friction between the national and European policy for theenvironmental protection and the corporate social responsibility, and the economicdiscourse at the base of the accounting principles. In this sense, accounting is still playinga role of maintaining a conventional/traditional approach over the environmental problem(Bebbington et al., 1994).

As a consequence, environmental accounting is still far from being committedin ways that produce specific systematic effects on the constitution and functioningof organizations and states, and thus define what might historically qualify asaccounting practices.

Conventional accounting does not seem to be suitable for environmental accounting,since it is not designed to and does not capture human beings’ impact upon the naturalenvironment ( Jones, 2010). Environmental accounting has not traditionally beenincluded in the remit of accounting standard setters; even though the IASB recently setan agenda to accounting for CO2 emissions (Cook, 2009). Accounting is pivotal inconnecting the macro-world (environmental policy) with the micro-world (financialaccounting practices), through a release of productive activities and communicativeinteraction (Llewellyn, 1994), and as such plays a role in boundary maintenance.In particular, financial reporting acts as a coding agent of external elements as being(or not) relevant to the organization. Only in this situation, the environment canbecome a “cost” or a “liability” entering into the organizational discourse and decision-making process. Environmental accounting systems are certainly used in efforts atsecuring the interests of remote managers or shareholders, but the real difficulty forenvironmental accounting lies in determining what activities can support such ends,how such activities are to be brought about throughout the organization, and how suchactivities can help recast organizational ends (Ahrens and Chapman, 2007).

6. Concluding remarksThe present work is concerned with the potential of accounting to make things visibleand measurable (Hines, 1988; Hopwood, 1992) and the willingness to take thisopportunity to solve the urgency of the environmental problems.

The analysis concentrated on the accounting system for the financial reporting as theprivileged gateways to be involved in the environmental awareness of a firm. The paperidentifies the accounting potential of a firm to respond to the environmental issues inlight of the rooms left open through the normative and IFRS prescriptions. The paper isaimed at contributing to the actual debate on environmental management systems,through a detailed and in-depth analysis of the accounting loci for environmental issues.

The environmental accounting practice has received specific attention in light of theprogressive social awareness towards the damage to the environment, due to theorganizations’ productive activities. The European policies on ISO 14001 and EMASdevote a detailed emphasis on the implementation of environmental managementsystems. Nevertheless, the political discourse seems to be loosely coupled with therecognition of tangible and measurable advantages. Therefore, it challenges theboundaries of any firms in the space (inclusion of external stakeholders and their own

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evaluation) and in time (long-period effects). One of the main issues of a pro-activeenvironmental management is the “internalization” of the damaging “externalities”whose identification and measurement is difficult for their own nature (Lohdia, 2003).

It is shown that the need to accommodate the environmental normative is partiallyprescriptive in two European tools (ISO 14001 and EMAS), however, the possibility toaccount for the certification/registration expenses is considered only in terms of “periodcosts” and the Power’s (1997, p. 125) assumption that: “regulation is increasingly pusheddown into organizations and their internal systems of self assessment and control” ispartially sustained.

In terms of financial reporting accounting, there is a general presumption that thecompliance to IFRS would lead to a “true and fair view” (see also Elad, 2001), thus to a“well managed” firm.

The rooms to account for environmental awareness are very limited and in this way,the presumed IFRS “economic fit” will prevail as “forms of intervention and controlwhich are more indirect and distant, seeking to act on and through the interests andmotivations of subjects and organizations” (Power, 1997, p. 125). Further, “quantificationis a way of making decisions without seeming to decide” (Porter, 1995, p. 8).

The rationale for unique harmonized accounting rules is certainly economic:financial reporting measurements facilitate a simplification of the complex social,economical and environmental issues into precise boundaries of information. Theorigin of this process is questionable, which is interpreted by Latour (1987) as a powerstruggle between participants of a social network (see also Delmas and Toffel, 2004 foran insight on stakeholders’ struggle on environmental issues).

However, the economic discourse implied in the financial reporting prescriptionsseems to enforce an “environment” where management’s ability to generate and accountfor revenues prevails over other considerations. This growth agenda sacrifices socio-environmental needs in two ways: type of reporting and environmental responsibilities.

The analysis demonstrated that the reporting for the pro-active environmentalissues of a firm is bounded in the disclosures to financial statements. The type ofinformation contained in that report is fundamentally qualitative and it is limited to aspecific agenda of data.

The evidence further shows that the categories of costs in the financial reportingscheme open a few possibilities to distinguish the environmental costs. Theopportunities to consider environmental investments or environmental risk fundswithin the assets of the firm are still very limited. Those considerations limit the“internalization” of environmental externalities and they do not support the concept ofa pro-active environmental system.

According to Saravanamuthu (2004), the environmental responsibility “does notinclude responsibility for assets of the wider community that an organization utilizes, inthe form of quality of air, water and soil that we are collectively responsible for” (p. 298),thus management continues to maximize the elements that accounting makes visible.The limitations to the internalization of environmental externalities are supportedthrough the arguments of “matching, clarity, fairness”, for instance: “environmentalactivities can be accounted as investments if it can be connected to future financialrevenues”. This subtly excludes further social or environmental implications.

Therefore, rooms to account for environmental issues are only left in the internalmanagement, when the personal sensitivity to such issues are considered in thestrategic and decision-making processes, beyond the strict “economical/quantitative”values. We hope that the urgency of environmental issues will interpenetrate the

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technical practices of accounting and open “the meanings and significances that areattributed to them and the other organizational practices and processes in which theyare embedded” (Hopwood, 1978, p. 37). We invite studies to go deeper in theunderstanding of real-world environmental accounting practices (Ahrens andChapman, 2007), beyond theoretical accounting and its limits.

Notes

1. The European SERIEE was set in 1994. It represents a conceptual framework for a monetarydescription of environment-related activities in line with the recommendations of ChapterXXI of the 1993 System of National Accounts. http://europa.eu.int/comm/eurostat.

2. The European Network of EPA is an interest group set up to facilitate high-level dialogue oncritical issues surrounding environmental policy implementation. The main tasks of EPAsare information gathering, information handling and provision of advice. The Europeanmandate is to help the community and member countries make informed decisions aboutimproving the environment, integrating environmental considerations into economic policiesand moving towards sustainability. Furthermore, EPAs coordinate the Europeanenvironment information and observation network.

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Further reading

Rennings, K., Ziegler, A., Ankele, K. and Hoffmann, E. (2006), “The influence of differentcharacteristics of the EU environmental management and auditing scheme on technicalenvironmental innovations and economic performance”, Ecological Economics,Vol. 57 No. 1, pp. 45-59.

About the authors

Enrico Bracci is working as a Senior Lecturer in Business Economics for the University ofFerrara, Department of Economics and Management. He completed his PhD in BusinessEconomics at the University of Ferrara, and a degree in Economics and Commerce at theUniversity of Bologna. Enrico Bracci is the corresponding author and can be contacted at:Enrico.Bracci@Unife.It

Laura Maran is working as a Lecturer in Accounting for RMIT Melbourne. She completed herPhD in Business Economics at the University of Ferrara, and a degree in Economics andCommerce at the University of Ferrara.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.comOr visit our web site for further details: www.emeraldinsight.com/reprints

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