Schaltegger & Burritt (2000) Chapter Five

 Accounting functions to provide;

relevant,
reliable
& accurate information
for decision making of managers, investors &
other stakeholders

 Yet reality is complex

 Accounting systems are based on conventions
about how to reflect something;
A transaction
An internal transformation
An external event

 The
convention of using money & and
monetary calculation- a great simplifier of
complex affair
 Extreme Criticism;
All the conventions & information collected by
today’s accounting systems mirror only what
business & political leaders currently
consider to be important for the economy &
society from their own perspective
 As society changes(distribution of power), new
information & new stakeholders become
important

 Accounting systems under additional pressure to

change, expand or adapt to provide the
information that the most powerful stakeholders
wish to be reported

 Pressure grows for economic activities to be

reflected through more appropriate convention-
growing concern over co environmental impacts,
env twist to conventional acctg provides new
hallmark
 Fundamental outlook of conventional
accounting practice: focus on the accounting
rather than the ecological entity

 Contemporary accounting practice is based

on the believe that humans are distinct from
nature and able to manage nature in a
rationale manner
 Problem exists when one tries to account for
environmental damage because in
conventional accounting we
-have to attached significance to events
happening within an entity
-ignore events that take place outside the
accounting entity
e.g. externalities: environmental impacts
occur outside the transactional boundaries of
a company
 Material xyz used in production have adverse
impact to the environment. This will not be
directly shown in the co.’s account

 But
customers may sue or boycott the
company (punish)
 Potentialliabilities may lead to
internalization of the costs of environmental
impact

 Society:
imposition of environmental taxes
and regulation of pollution control devices

 But,it may take sometime before some

environmental impacts are recognized and
the associated liabilities are recognized
 Conventional accounting systems do not
provide information on how much the
environment is harmed, no matter how high
the social costs and no matter whether the
damage is irreversible or whether carrying
capacity is exceeded.
-Natural & environmental resources are not
included in balance sheet
-Depreciation of natural capital is not
internalised
-Environmental damages are not considered,
unless reflected in fines, penalties, licenses
and enforced clean-up costs
 Accountinghas a dominant function in
information systems. Why?
 Accounting has a dominant function in
information systems because
-it quantifies & simplifies a complex reality

BUT accounting can also be used to downplay

ecological impacts hence adverse ecological
impacts arise as a result of the use of
conventional accounting information

 Impactsof current accounting practices on

the environment can be direct or indirect
DIRECT EFFECTS
 Exclusion of externalities results in
misleading accounting information being
used by managers for financial and strategic
decision making.
 Internal costs appear too low because some
costs are passed on to external parties & not
included in the decision making.
 Result: managers favor product & processes
with the lowest internal costs- not the ones
with the lowest total costs to society
INDIRECT EFFECTS
 Connected with mental framework used
when viewing the world

 Measure income and financial wealth but do

not show who received the money spent by a
company, the region where the suppliers are
situated, whether the money is spent with
the needs for future generations in mind.
 For accounting, no upper limit to financial
resources exists– no value is put on priceless
environmental goods- ‘carrying capacity’
 No interconnectedness & interaction of
substances
 The interdependence of time is also ignored
e.g. expenditures on pollution abatement
activities have negative impact on current
economic performances, cause other
problems in financial analyses
 How to calculate relevant income figure,
how income figure needs to be adjusted for
capital maintenance, what is the correct
earnings per share might be
 Concept of shareholder value based on free
cash flow
 Maintaining liquidity

 Practical
concept for actual improvement is
necessary to overcome the environmental
problems

 Should build on the strengths of accounting

 Conventional accounting should address the
need between serviceable and useless
information requirements, facilitate
integration of relevant financial and
biophysical data in decision making

 Double book entry keeping- enables people

and companies to live beyond their means at
the expense of the natural environment and
future generation

A masculine discipline used to control and

suppress others
 i. Resignation and loyalty: accept or ignore. No
improvements are possible.

 Voice: suggestions have led to changes in

existing practices and systems & contributed to a
gradual improvement in accounting practice.
Can be incremental or radical. Requires
initiatives & readiness of those involved.

 Exit- withdraw of financial resources, reduction

in demand for share & lower share price. Create
own system. Regulatory systems.
 Challenge-
High costs- radical change in accounting
systems
Preferred alternatives not specified by the
critiques
 Eliminate weaknesses rather than destroy,
build progress from existing strength
 Providesystematic sets of financial
information about a company to
stakeholders. Quantification add precision to
reasoning about the world. Quantification
permits a basis for comparing alternative
courses of action. A powerful instrument
when a society seeks to examine alternatives
available to overcome poverty, fiscal deficits
or environmental degradation.
 Represent to outsiders the financial position
at a stated date & changes in its financial
position over a specified period of time,
given the transactions, physical
transformation & external events.
A= L + SE
Challenge for EA is to incorporate into the
accounting process and associated
statements the financial aspects of company
activities that have an impact on the
environment.
 The substantial existence of the profession
(no. of people employed, & turnover of
accountancy firms). Can have a flow on
effect throughout the world since it is an
‘international language’.

Conclude- accounting is a necessary &

important part of a pragmatic approach to
the recognition & resolution of
environmental problems by business.
 Provision
of base information for considering
the actual & potential economic
consequences of environmental issues

 Provision
of information that can facilitate
adaptation by business in the face of
imposition of new environmental regulations,
and new economic instruments, designed to
influence environmental outcomes
 Facilitation
of a management philosophy
designed to make transparent and encourage
economically advantageous measures of
environmental protection

 Improved responsiveness to environmental

issues raised by stakeholders
 Environmentally differentiated
conventional accounting

Environmental
Environmental Environmental issues in other
issues in MA issues in FA accounting
systems
 Conventional accounting uses the accrual
convention. What is the accrual convention?
What is the main benefit of accrual
accounting? How might accrual accounting
help with the management of environmental
issues?
 (answer: define accrual accounting, discuss
how it provides avenues for the incorporation
of the financial aspects of environmental
related company activities in the accounting
process and associated statements)
 Conventional accounting may communicate
incomplete signals to business, consumers,
regulators and bankers. Explain the three
main environmental criticisms of the
conventions behind conventional accounting.
Also, discuss on the view that conventional
accounting can have adverse direct and
indirect effects on the environment.
3 main env criticisms
 Direct effect and indirect effect

 1. Focus on the accounting rather than the

ecological entity.
 Focus on the events within the entity, ignore the events that
take place outside the entity
 Corporate environmental impacts that happen outside the
transactional boundaries of the company are treated as
externalities
 E.g. Use material A that harms the environment- Not shown in
the accounts
 No information on how much environment has been harmed.
Not shown in balance sheet (resources), depreciation of
natural capital not internalized, environmental damages not
considered (unless fines, penalties, enforced clean-up costs)
 2. No upper limit to financial resources
exists.
 Does not consider that the natural environment has such a limit
i.e. carrying capacity, because there is no upper limit to financial
resources.

 Nature is based on interconnectedness and interaction of all

substances while accounting divide, separate and count
everything independently and aggregate all information at the
end of accounting period.
 3. The interdependence of time is ignored

Outlays that may produce future ecological

benefits (pollution abatement expenditures)
reflect negatively on current economic
performance
 Directeffects
Exclusion of externalities
Lower internal costs

 Indirecteffects
Connected with mental framework used when
viewing the world
Who received the money
The regions where the suppliers are situated
Money is spent for future generations
 How does environmental accounting attempt
to address the abovementioned issue of
incomplete signals ?

 Environmental accounting is a sub-area of

accounting that specializes in environmental
issues (Baumann and Cowell, 1999; Gray and
Bebbington, 2001).

 Itis the part of accounting that gives

discrete recognition to the environmental
impact relating to business activities (Burritt
and Schaltegger, 2002).
Provides incremental changes in accounting
practices by (give example)
 Include environmental performance in the cost
management information system of the
organization
 Eliminate conflicting elements of the accounting
systems (e.g. investment appraisal)
 Plan for financial implications of the
environmental agenda (e.g. capital expenditure
projections)
 Introduce environmental performance to
external reporting
 Develop new accounting and information system
 CSR framework