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Copyright 2004 John Wiley & Sons, Ltd and ERP Environment

Environmental accounting is on anexpansion path. With increasing socialfocus on the environment, accountingfills an expectation role, to measureenvironmental performance. The status ofenvironmental awareness provides adynamic for business reporting itsenvironmental performance. Examining

the integration of environmental policywith business policy is the focus of thisresearch. The business firms strategyincludes responding to capital andoperating costs of pollution controlequipment. This is caused by increasingpublic concerns over environmentalissues, and by a recent government-ledtrend to incentive-based regulation. Thispaper describes the environmental

component of the business strategy,producing the required performancereports and recognizing the multipleskills required to measure, compile andanalyze the requisite data. Special

ENVIRONMENTAL

ACCOUNTING: AN ESSENTIAL

COMPONENT OF BUSINESS

STRATEGY

Mehenna Yakhou*1 and Vernon P. Dorweiler2

1 Georgia College and State University, USA2 Michigan Technological University, USA

Business Strategy and the EnvironmentBus. Strat. Env. 13, 6577 (2004)Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/bse.395

emphasis of the research is on generationof reports and their standards, for therange of business and regulatorypurposes. Copyright 2004 John Wiley &Sons, Ltd and ERP Environment.

Received 18 October 2002Revised 12 May 2003

Accepted 9 July 2003

INTRODUCTION

Environmental accounting is an inclusivefield of accounting. It provides reportsfor both internal use, generating

environmental information to help makemanagement decisions on pricing, controllingoverhead and capital budgeting, and externaluse, disclosing environmental information ofinterest to the public and to the financial com-munity. Internal use is better termed environ-mental management accounting (Bartolomeoet al., 2000).

For the purpose of this research, bothinternal and external uses are considered. Thecontribution of multiple disciplines providesa base for determination of environmentalimpacts and related costs. Specific details of that

determination serve one or both of the uses.

* Correspondence to: Dr. M. Yakhou, The J. Whitney BuntingSchool of Business, Georgia College and State University,Campus Box 15, Milledgeville, GA 31061-0490, USA.E-mail: [email protected]

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Impact of business activity on the environ-ment is found in several forms.

Media: air, water, underground pollution. Targets: drinking water, land and habitat for

endangered and threatened species. Global sites: oceans, atmosphere, land mass.

An array of pollutants, including toxic,hazardous and warming, is accountable to business activities. From this range ofenvironmental impacts, multiple disciplinesare needed for analysis of effects, and forintegration into management decisions andaccounting reporting.

Non-accounting disciplines needed include

(i) environmental science,(ii) environmental law and regulation,

(iii) finance and risk management and(iv) management policies and control systems.

The range of environmental costs, energy andmaterial use and waste disposal, insurance andfines and penalties, shows participation ofmultiple disciplines, along with accountingsub-disciplines. The yield of this effort is thedecision support system, in which environ-

mental impact can be determined specificallyin the following terms:

FCA, full cost accounting, TCA, total cost assessment, LCC, life-cycle costs, LCCA, life-cycle cost analysis, and TQEM, total quality environmental

management.

Results of environmental reporting include

full-cost pricing and eco-accounting. Also,an environmental management system, EMS,provides a databank of environmental perfor-mance data, from which environmental costaccounting, ECA, relating all environmentalcosts, can be directly produced (Lally, 1998).

Cross-functional goals and procedures indi-cate that business policy and environmentalpolicy are intertwined (Dorweiler and Yakhou,2002); see Figure 1.

Senior managers at the institutional levelestablish environmental policy and assessenvironmental performance.

Environmental managers at the operationallevel implement environmental policy.

Environmental staff is involved in capitaldecision-making for environmental controlequipment.

So multiple functional activities are included:capital budgeting and expense budgeting;financial and non-financial performancemeasurements; budget control and productcosting. Multi-disciplinary teams have a cleardistribution of tasks and functions, at institu-tional levels and at operational levels.

Note that relationships in environmentalreporting are integrated. The data sources are based in design, engineering and operationsrecords, rather than broad areas such as energycosts and waste minimization. The extensivedata are converted as input to the accountingsystem.

A side benefit is the decreased need for allo-cation of environmental costs to products andprocesses. Also, the nature of environmentalcosts determines the capital investment assess-

ment method. Discounted-cash flow is pre-ferred, rather than payback period, given thelonger time horizon for benefits from environ-mental capital investment (Grinnell and Hunt,2000).

ENVIRONMENTAL ACCOUNTING

Before tracing the role of business strategy and

environmental accounting, a base understand-ing of environmental accounting is useful. Thisis the purpose of the following.

At the outset, environmental accounting hasproceeded through a period of uncertainstatus. Mathews (1997) describes the develop-ment in four phases:

1970s descriptive, with normativemodels of conduct;

M. YAKHOU AND V. P. DORWEILER

Copyright 2004 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 13, 6577 (2004)

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19811990 debate on the role of accountingin disclosing information onenvironmental activities;

19911995 maturing of environmentalaccounting, in making en-vironmental disclosures, andin launching environmentalauditing;

now the role of environmentalaccounting is viewed asmeasuring environmental per-formance exceeding regulatorystandards. This role wasinitiated in about 1996.



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BUSINESS POLICY and ENVIRONMENTAL POLICY

MISSION

Boards of Directors Constitution

and Institutional Investors Environmental policy

Corporate sustainability

STATUS-ANALYSIS

Business purpose Environmental protectionGOALS

Use of resources Responsibility to

environmental

Capital principles*

Workforce NEPA prevent environmental

Markets degradation

Media, location

OBJECTIVES

Performance targets Statutory policy

by location, market Statutory standards

STRATEGY

Compliance at maximum Compliance within standards

cost effectiveness and preserving the

environment

IMPLEMENTATIONSupply chain Neighbors, community

Manufacturing sustainability of resource use

Distribution system

TACTICS

Set mode of operations for Use of resources

maximum productivity material, energy, other natural

resource greening product,

process

OPERATIONS

Optimize production Avoid violations

Minimize waste Emissions, discharges of

within operating guidelines pollutants

Operate within permit

MONITOR & CONTROL

Financial statements Environmental impacts

Operations reports Voluntary Environmental

Reporting Initiative

Financial and Management comparability

Accounting transparency Environmental Accounting

STRATEGIC ADJUSTMENTS

Redeploy resources Volunteerism**

Correction tactics Agreement with agency

Implementation

*environmental principles: Valdez principles.

**Voluntary Environmental Reporting Initiative VERI.

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

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An environmental accounting framework isyet to develop; such a framework would con-tribute standards for reporting, and standardsfor accounting. The state of the regulatoryframework is given by Mathews (1997). The

emphasis of a framework is to provide ageneral fit over the area regulated:

(i) raise awareness of environmental issues;(ii) develop guidelines to assist identification

of environmental issues and evaluationand reporting of those issues;

(iii) provide education programs acrossdisciplines focused on environmentalissues and their accounting treatment and

(iv) develop practices of environmental

accounting, with recommendations onbest practices.

A fifth direction is to link teaching with devel-opments and practices in business.

Such a framework is to demonstrate that theaccounting profession is accepting the chal-lenge of a contemporary issue: environmentalimpact of business activity (Medley, 1997).Accounting professionals appear to focus onthe role of environmental accounting, underconsideration that environmental issues arefundamental to human survival. The natureof environmental accounting practice isconsidered next.

Environmental management accounting

Environmental management accounting(EMA) is defined as the generation, analysisand use of financial and related non-financialinformation, to support management within a

company or business (Bartolomeo et al., 2000).EMA integrates corporate environmental andbusiness policies, and thereby provides guid-ance on building a sustainable business.

EMA analyzes environmentally relatedfinancial costs and benefits, contributing torecognition of the high and increasing levels ofcapital and operating expenses, for pollutioncontrol equipment, and environmental taxes.Also, possible environmental initiatives, for

example, incentive-based regulation, areincorporated in analysis and reporting (Fryxelland Vryza, 1999).

Environmental cost accounting

An advanced step of development of environ-mental accounting is development of environ-mental cost accounting (ECA). Cost accountingis defined as use of the accounting record todirectly assess costs to products and processes(Lally, 1998). In this approach, costs areaccounted for by their specific causes.

Environmental cost accounting directlyplaces a cost on every environmental aspect,

and determines the cost of all types of relatedaction. Environmental actions include pollu-tion prevention, environmental design andenvironmental management. Past approacheson environmental impacts were based mainlyon environmental cleanup costs and pastproduct disposal.

The contribution of ECA is to account for away of doing business; see Box 1. Arbitraryallocation of environmental overhead is elimi-nated or reduced, and true costs of products

are determined. Environmental cost account-ing in producing environmental costs isdescribed in two ways (Grinnell and Hunt,2000).

One is the ABC framework, looking forcost drivers at organizational levels: unit,batch, product-sustaining and facility.

The other is a cost-of-quality framework,which defines environmental costs in pre-vention, appraisal and internal and external

failure. This cost-of-quality approach sup-ports pollution prevention as an appropriatemanagement strategy.

Another significant contribution of ECA is itslinkage to ISO 14000. The environmental datain an environmental management system(EMS) based on ISO 14000 standards is con-sistent with environmental cost accounting.Where a company adopts ISO 14000 standards,



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environmental policy has become a proactivedecision of business organizations.

An alternative view is given as businesssresponse to a threat of interventionist regula-tion. An organized lobbying effort, to forestall

additional, more interventionist regulation,has been unsuccessful through the historyof environmental protection since the 1970s(Mathews, 1997). Further, the cost of responseto increasing regulation provides a realincentive to adopt a proactive approach to theenvironment.

The proactive approach is not only morecost-effective, but it also opens new businessavenues; see Table 1. For new business, world-wide and in green markets (eco-labeling

and recycling), opportunities are open to acompany that is expressly environmental, notnecessarily an extreme green company.

From new avenues, cost savings areachieved through energy conservation andwaste minimization. These savings, whichincrease profitability, are generated by produc-tion and engineering disciplines. For example,the contribution from strategic managementspecialists and the technical expertise requiredto address product problems of recycling andre-engineering will be jointly necessary in thedevelopment of strategies of reducing impactson the environment. In both approaches,the companys competitive advantage isimproved.

The interdisciplinary approach toenvironmental accounting

An inescapable feature of environmentalaccounting is the need for multiple disciplines.

Inescapability is found in several dimensionsof environmental accounting (Grinnell andHunt, 2000).

First is the need to position environmentalpolicy in the overall business policy andstrategy.

Second are the disciplines involved inproducing environmental accounts andtheir reporting.



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Environmental management is based on management

accounting with activity-based costing as a mainanalytical approach to determining environmentalcosts and to quantify cost savings due to environ-mental performance.

Environmental effects are established by settinghypotheses for whether or not to adopt proactivepractices: pollution prevention and accounting forenvironmental costs-to-causes.

Environmental policy can be compared between theUS and Europe. Environmental management is foundto be involved in the same activities with a substan-tial difference in regulatory enforcement: the US usesliabilities and penalties while the European Union

does not. Equivalence is shown by the prominent roleof environmental management in European businessorganizations and business strategies. European com-panies are adopting ISO 14001 standards at a fasterrate than US companies.

As noted in the body of the paper, the InternationalStandards Organisation develops standards for useindependently or for use within an EMS by anorganization.

Box 1. Environmental accounting practice in Europe(Bartolomeo et al., 2000). Environmental managementaccounting practice in Europe is compared with practicein the United States.

ECA is a tool, part of a process for treating theenvironment as integrated with (i) businessstrategy and (ii) decision-making (Lally, 1998).

INTEGRATING ENVIRONMENTAL

POLICY IN BUSINESS STRATEGY

Development and implementation of newbusiness strategies for meeting environmental

challenges will be a central issue for companiesin the years ahead. Accounting for environ-mental costs, and associated accounting edu-cation, will play critical supporting roles.

The adoption of environmental policy as acomponent of business policy is currently con-sidered voluntary (Gallhofer and Haslam,1997). The term adoption implies that busi-ness policy was without express concern forthe environment, and since the mid-1990s

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Third is the audit requirement to assurecompliance with environmental regulationand appropriate reporting by environmentalaccounting.

Fourth is education of students, future prac-titioners, to provide technical and legalbases in academic preparation and to avoiddiscipline insularity.

Possible reasons for multiple disciplinesgiven by Mathews (1997) include organiza-tional legitimacy and the need to influence thecapital markets. There are other motivatingfactors, whose relative importance of anyparticular influence is not known in general.

The contribution of other disciplines must berecognized. Accounting research will need to be interdisciplinary in nature. Developmentwill provide challenges and opportunitiesdifferent from those of the past, but, also, will

lead to a much richer set of data, or morecomprehensive set of models for the solutionof problems of environmental disclosures(Bebbington, 1997).

Producing environmental accounts

A concise way to view the disciplines involvedin producing environmental accounts is to

consider users of the accounting reports. Anarray of goals for users is aligned as follows(Bebbington, 1997):

to assure compliance with regulations; to increase efficiency of resource use energy

and material, and to decrease waste; to reduce or minimize damage to the

environment over the life-cycle of products

and processes and to continually improve environmental

performance in the above areas.

These goals are direct goals for operationalmanagers, and are integrated goals for generalmanagement and for environmental managers;see Figure 1.

Training environmental auditors

Environmental auditing is a determinativefunction (Medley, 1997). Credibility of the envi-ronmental audit is crucial. From a disciplinepoint of view, environmental scientists initiallyperformed the audit. That audit was todetermine compliance with regulation. It hassince advanced to determine compliance withmanagements environmental controls, notedabove to be higher requirements thanstatutory.



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

Program Target

Government directedCommon sense initiatives Pollution controlTransportation partners Use of vehiclesGreen Lights Program Energy efficiencyWaste Wise Program RecyclingClimate Wise Program Emissions control

Corporate sponsoredProactive environmental policies EMS, ISO 14001Environmental accounting and auditing PerformanceEnvironmental life-cycle and supply chain management Products and suppliersIntegrated environmental program EMS and full-cost accounting

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A discipline development is to train envi-ronmental auditors separately from financialauditors (Medley, 1997). This developmentagain places impetus on standards inenvironmental accounting; these are reliable

measures of environmental impact, assets andliabilities. The audit is thereby based on reli-able environmental representation in theaccounting record and performance. Theenvironmental scientists have reduced theirknowledge into the accounting records, alongwith non-environmental accounts (financialaccounts), to the performance analysis. In thisway, accountants are offered environmentalopportunity and are prepared to deal withthose demands.

It is recognized that the enabling potential ofenvironmental accounting arises from itsengagement with practice (Bebbington, 1997).There are clear examples of business andenvironmental accounting having beneficialimpacts on the environment within businessactivity. These areas, and users, identify datagathered for accounting purposes. Specificallyregarding environmental accounting, quantify-ing environmental costs is a target withinaccounting. The extent of disciplines needed isseen from generating environmental cost andcost savings within complex, interdependentprocesses and facility locations.

The weight of non-accounting disciplinesis shown in education of accountants on env-ironmental activities (Gibson, 1997). The multi-discipline approach is useful as it involvespotential users in the same education effort.The operational managers are shown the needfor data and the nature of environmental

reports. General management is shownpotential for improvement in environmentalperformance.

Educating environmental managers repre-senting the multiple disciplines is importantfor base line reasons (Wycherley, 1997). Oper-ational managers consider that accountingsystems are created for financial purposes andnot for the operational needs in their manag-ing and controlling environmental impacts of

products and processes. (See below Environ-mental management.)

INTEGRATING THE

ENVIRONMENTAL DEPARTMENT

WITH BUSINESS FUNCTIONS

An objective of integration of the environmen-tal management department with operationalfunctions is to enhance environmental perfor-mance of the organization (Fryxell and Vryza,1999). So the levels and the mechanisms ofintegration, to achieve improved environmen-tal performance, are of organizational interest.

One level of integration is aimed at involv-

ing environmental considerations in every daydecisions. That integration is based at the levelof adopting a corporate culture into environ-mental awareness. This crucial approach putsthe impetus for considering environmentalimpacts into business strategy and decisions.

The other level of integration is organiza-tional, deciding which business functions areto be integrated. As functions have a conven-tional purpose in the hierarchy of the organi-zation, integration takes the form of

coordination. Organization theorists identifysuch mechanisms as conventional and asnon-conventional. Non-conventional is in thecontext where the environment exertsdirect influences on the organization throughregulations, international standards andshareholders.

The two sets of integration mechanisms arethe following (Fryxell and Vryza, 1999):

conventional non-conventional

department schemes cross-departmentalrelationscentral decision-making management

informationsystems

written policies and ad hoc groupprocedures mechanisms

formal planning integrator rolesoutput and behavior socialization

control



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It is recognized that conventional mechanismsexist, and are displaced by non-conventionalones to cope with time-oriented changes; thesechanges are in the environment or are requiredenvironmental performance.

Environmental management

From these needs and mechanisms, the func-tion of an environmental management depart-ment is to facilitate integrative development.To achieve this integration, the departmentis responsible for the following (Wycherley,1997):

scanning and monitoring the changing

environmental context of the business; identifying critical information; requiring change to environmental practice

and performance; validating and channeling the information

to ensure compliance with regulatorymandates.

Note that these functions may constitute bothdirect influences and contextual change.

Each function represents a discipline spe-cialization, and hence makes a unique contri-

bution to environmental performance (Fryxelland Vryza, 1999). Resolution of differences isthe clearest for technical functions (productionand legal), and is most complex for non-technical functions (marketing and publicrelations). The long-run environmental goal brings a balanced, optimal level among thefunctions.

The environmental management system

A useful vehicle for integration is the environ-mental management system (EMS), with ISO14001 standards; see Box 2. The EMS integratesfunctions through each functions interfacingwith input and output of that system.

The means toward activating an EMS arefound in outcomes from the EMS:

reduction of emissions and waste, product design for the environment

energy efficiency and conservation and opportunities to enhance environmental

impacts.The EMS provides control and coordination bythe environmental management department.The reason is to cover gaps due to functionaldifferences in departmental roles (Fryxell andVryza, 1999):

(i) bridge differences in basic values, due tospecialized training;

(ii) communicate, avoiding technical jargon;



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Box 2. A business environmental management system(Sutherland, 2002).

Goal: Shaping environmental successSetting and attaining goals for sustainable

future responsibility shared by all sectors:

government, industry, environmentalgroups and citizens

Goals for 2010Fully implement globally environmental

policyPromote environmental ethicsImplement principles of sustainable

development and eco-efficiency intobusiness strategies

Guiding principles and environmental codeCommunity awareness and emergency

response

Process safety codeEmployee health and safety codeProduct stewardship codeDistribution codePollution prevention code

Business principlesCompany values

Re: people, customers, products andservices, conduct code and guiding

Principles

Auditing performance managementAuditing program

Business standardsGovernment regulationIndustry initiative

Environmental health and safety auditingplanFrequency and level

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(iii) recognize separations in organization andlocation;

(iv) resolve expectations on rewards andconflicts on reward criteria.

These differences are viewed as conflicts. In theconflict situation, integration is viewed as aresolution by alignment of the organizationwith the firms environmental goal.

The corporate EMS is identified as based insurpassing environmental obligation underregulation. The EMS is said to provide specifictools (including life cycle accounting andenvironmental cost accounting), and, also,general practices to evaluate environmentalperformance. Environmental auditing is a

main evaluation mean.Rondinelli and Vastag (2000) suggestthat a voluntary, above-regulatory-standardapproach is needed to advance national envi-ronmental policy. Interdependent principles ofeconomic viability, energy conservation andenvironmental quality constitute a compre-hensive environmental policy, and are given asthe needed impetus. Basing the EMS on ISO14001 standards puts the corporation in globalmarkets and provides a competitive advantage

(Owen and Lehman, 2000).

The corporate environmental policy

Rondinelli and Vastag (2000) make the case fora corporate environmental managementpolicy. After reviewing the present status of USenvironmental regulation, as command andcontrol, Rondinelli and Vastag show that theproactive approach to environmental manage-ment consists of

life-cycle analysis of products and processes, environmental policies of companies in the

supply chain, recycle, remanufacture and redesign of

products, monitoring and auditing environmental

performance and accounting for environmental costs and

savings.

Environmental management should be partof every corporate business strategy. Not onlyare there specific environmental effects instrategies and plans, but there are also envi-ronmental programs to reduce and prevent

environmental impact.

Corporate environmental policy and theenvironmental management system

Benefits of an EMS, utilizing ISO 14000 (seeTable 1), provide a competitive advantage on aworldwide basis. Competitive advantage isover companies that do not have a high levelof environment performance from such anEMS.

From this integrative view of an EMS, majorcomponents of an EMS are described as anoperational approach to its implementation(Rondinelli and Vastag, 2000):

a senior management commitment to anenvironmental policy;

a planning process that identifies allenvironmental aspects of operations, setsobjectives for environmental improvementand outlines effective environmental

management programs; a structure of responsibility for environmen-

tal management, training, awareness andcompetence, documentation and com-munication, procedures for control ofenvironmental impacts and preparationfor emergency preparedness and response;

a system for monitoring and measurement,for reporting non-conformance and fortaking preventative and corrective actionsand

a management review process, to assess theeffectiveness and adequacy of the EMS.

The design of the EMS is to provide assuranceof continuous improvement of performance.

Development of environmental standards

A main premise of the EMS is use of standardsof an international nature (ISO 14000); see



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Box 3. This use of internationally based stan-dards provides a comparison to ascertainwhether companies are complying withexpected environmental performance.

There are dual problems with this approach.

One is the assumption that the companyis using the standards to go above legal

compliance with their environmental per-formance. The other potential problem isresponding to inquiries based on theseenhanced measures of environmental per-formance by government agencies, financial

institutions and shareholders.

Role of environmental manager

The environmental manager is a centralfocus of environmental management in thecompany. Key roles of this managementfunction are (Wycherley, 1997) to

assess, review and monitor the environmen-tal performance of the company,

monitor legal requirements, implement and manage the EMS and promote better environmental awareness in

the company.

The function has a wide range of responsibili-ties. The more direct are

at the base level, systems to ensurecompliance with environmental standards(regulatory and EMS),

at an on-going level, increasing efficiency inuse of resources and reduce waste, and at an overall level, avoiding risks of damage

to the environment.

An integrative view of these responsibilitiesincludes involvement in new product andprocess development, capital project autho-rization and an environmental stance withshareholders, consumers and employees.

From this pivotal location in the organiza-

tion, the environmental managers view ofenvironmental accounting is somewhat deter-minative of effect. Environmental managersview environmental accounting as providingthe financial data with the technicalfunctionalimprovements required by the role of the envi-ronmental manager. Areas of conflict are iden-tified as accountants concern over their owncosts to the detriment of needs in measuringperformance.



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Box 3. ISO development of environmental standards(Lally, 1998).

The international environmental management stan-dards are set in the ISO 14000 process. The resultingstandards are voluntary for a company and are higherstandards of performance than from regulation. Thestandard-setting process was set as part of the Global

Environmental Initiative in 1992 in connection withthe UN Conference on Environment and Develop-ment.

Key advantages of ISO 14000 are

(i) to set environmental performance standardsabove regulation and

(ii) to set the company as environmentally alert.

The first advantage moves the company above anincreasingly complex set of regulations, yet in fullcompliance. The second advantage puts the companyinto an internationally competitive position inmarkets. Both are achieved by incentives to adopt pol-lution prevention practices.

The following are components of the ISO 14000standard-setting process:

ISO 14001 the basic framework of an EMS; imple-ments corporate environmental policy

ISO 14004 a checklist to implement ISO 14001 andmethod to assess environmental impacts

ISO 14031 setting objectives and targets of EMS ISO 14010 guidelines for environmental auditing ISO 14011 guidance for audit procedures ISO 14012 qualification criteria for environmental

auditors

ISO 14020 standards on environmental labeling ISO 14040 guidance for assessment of product

life-cycle environmental impact

Environmental cost accounting (ECA) is the integrat-ing feature of an EMS. All elements of environmentalmeasures are brought together in the ECA calculation.By recognizing the complete set of environmentalcosts, the company can be both environmentallyresponsible (for example, Responsible Care program)and cost-effective in recouping its costs.

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A survey of environmental managers(Wycherley, 1997) shows that environmentalaccounting is considered primarily for provid-ing measures of key environmental data. Thesecosts are used in measuring use and waste, and

also as criteria in capital investment projectsand targets for efficiency setting. These costsare also used in management control systemsto improve operational efficiency, and in EMSto monitor environmental policy.

BUSINESS USES OF

ENVIRONMENTAL

ACCOUNTING COSTS

A broad view of environmental accounting,and the EMS, includes application oftechniques and procedures to support man-agement decision making, performance mea-surement, recognition and reporting ofliabilities and contingencies, capital marketreactions to accounting disclosures and taxes(Bebbington, 1997). Tax implications include

specific environmental taxes, appropriate treatment of environmental

expenditures, pollution allowances as tradable permits

and general Federal income tax issues.

An example is Superfund surcharge taxes forEPA environmental cleanup.

A construction industry illustration

An illustration of environmental accountingand environmental cost determination showshow costs of environmental errors (CEEs) aretreated (Gulch, 2000). In an accounting context,this is an illustration of managerial accountingapplied to environmental impacts. Managerialaccounting and CEE both provide the fullrange of accounting treatment; see theintroduction.

CEE is designed to determine

(i) the financial burden of environmentalregulation,

(ii) the impacts on environment and societyand

(iii) the costs of measuring environmental

impacts.

CEE is for internal use as managerial account-ing providing a business perspective.

From a control perspective, four types ofenvironmental cost need to be recognized:prevention, internal failures, external failuresand appraisal. These costs reflect

costs for prevention or correction of envi-ronmental impact in facility construction oruse of facility,

prevention costs related to correction ofdefects and

cost of end-of-the-pipe control, preventingrepetitive error.

CEE is applicable due to complexity of regula-tion in the construction industry as reflected by multiple environmental standards andambiguous formulation of standards. This islikely due to poor knowledge in the content ofenvironmental and other standards in multiple

materials.CEE is indeed a managerial tool with real

project uses in the construction industry(Gulch, 2000). The overall effects on the firminclude legitimacy, responsibility allocation,creating consensus, facilitation of communica-tion and keeping score. Probably the most sig-nificant use is relating costs to causes of errors,more specifically, environmental costs to errors.

ENVIRONMENTAL POLICY VERSUS

ENVIRONMENTAL REGULATION

There is a growing understanding that envi-ronmental policy must fit within thecompanys business strategy (Gallhofer andHaslam, 1997). Companies do adopt an envi-ronmental policy. The question is whether avoluntary policy should forestall regulation



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(interventionist regulation). As environmentalpolicy and environmental performance areexpected to be above legal regulation, thereis interest to change from regulatory policy tovoluntarism; see Figure 1.

An intermittent ground is to avoid regula-tion of environmental accounting. Environ-mental accounting is parallel to financial(business) accounting: an environmental planis developed and budget control establishedto the plan. Following environmental perfor-mance based on the plan, an environmentalaudit for the environmental impact is per-formed. By imposing standards on environ-mental accounting and environmentalauditing, the company is left to set standards

for performance without regulatory interven-tion (Reynolds and Reynolds, 2001).

Bebbington (1997) recognizes the realism ofactuating impacts on society. The businessorganization has impact through capital,ownership and societal uses of products andservices, with impact on the environment:resources, sinks and habitat. Environmentalaccounting translates into how environmentalmanagement practice adapts to beneficialimpact on the environment. From environ-mental accounting comes accountability foreffects on and uses of the environment.

So then, environmental accounting is theenabling vehicle to form a common basis forusers of the environment:

internal (capital, ownership, consumers)and

external (socialpolitical) controls.

The effective vehicle is environmental report-

ing (Dorweiler and Yakhou, 2002). Reportingportrays accountability to outside interests.These interests may require openness andtransparency regarding the environment, andrequire change in the organization, changes inbusiness products and processes and change inorganization structure. While such changes areearly in developing, a projection is for changeto occur in other business areas (Bebbington,1997; Reynolds and Reynolds, 2001).

EDUCATION FOR THE

MULTIDISCIPLINE TEAM

Courses provide environmental educationacross the interdisciplinary range (Gibson,

1997): economics and commerce, environmen-tal sciences, environmental law and environ-mental accounting.

Business strategy requires environmentalplanning with measurement and environmen-tal management issues included. This strategicapproach requires understanding of environ-mental law and regulations and integrateddecision-making. Consideration of several business areas, financial results and taxeffects presents complete effects on a business.

An extended view of accounting andenvironmental accounting is shared with alldisciplines (Grinnell and Hunt, 2000). Theobjectives of this education are

(i) environmental protection and(ii) sustainable use of resources.

The issues affect disciplines in the operatingsphere and in financial effects. Addressingthese issues only on the accounting sphere rec-

ognizes the contribution of accounting toachieve business goals of profitability andsurvivability.

Several areas have identified shortcomingsin accounting education related to environ-mental accounting (Gibson, 1997). The range of broad education should be viewed function-ally, making the environmental accountant amember of the business team. This businessrange starts with profit and profitability andcovers environmental impact and sustainable

use of resources.

CONCLUSION

A contextual view of the need for integrationof an environmental policy with businesspolicy, and for a multidisciplinary team, isgiven from a business perspective:

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the role of accounting in supportingboth corporate environmental strategy andcorporate business strategy and

the several accounting sub-disciplinesrelated to environmental issues.

Emphasis on the multi-discipline team is tosupport a top-level strategy and to achievethe benefits from directing a company in anenvironmentally sound manner.

REFERENCES

Bartolomeo M et al. 2000. Environmental managementaccounting in Europe: current practice and futurepotential. The European Accounting Review 9(1): 3152.

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BIOGRAPHY

Dr. Mehenna Yakhou, (corresponding author)is Professor of Accounting at the J. WhitneyBunting School of Business, Georgia Collegeand State University, and can be contacted at

Campus Box 15, Milledgeville, GA 31061-0490,USA.Tel.: +1 478-445-2582Fax: +1 478-445-3199E-mail: [email protected]

Vernon P. Dorweiler (Professor Emeritus) is based at Michigan Technological University,Houghton, MI 49931, USA.

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