What is environmental accounting?
Just as financial accounting tries to quantify factors that lead to costs and benefits to a business, so does environmental accounting tries to quantify environmental costs and benefits on the balance sheet.Financial accounting aims to lay out a company’s financial situation in the form of financial statements that have to respect accounting principles as established by the Canadian Institute of Chartered Accountants (CICA). Management accounting is intended to guide managers in carrying out the company’s mission with the greatest possible efficiency.
How is it different from financial or management accounting?
Environmental accounting cannot be disassociated from either financial or management accounting, but is specifically concerned with the environment.A good example is the “cost” of disposal of garbage. Regular accounting practices would only take into account any cost that is extraordinary (such as payment to haul away a particularly large amount of trash). Usually the cost of garbage disposal is buried in lease agreement or in the municipal tax bill.Environmental accounting would highlight the true cost of garbage disposal, such as the potential of environmental fine, percentage of taxes that dealing with the true cost of garbage disposal, and the purchase of pollution prevention systems.In short, environment accounting tries to measure the true cost of a company’s impact on the environment.Note that environment accounting still uses the monetary unit as a method of abstraction or system of measurement. Some people prefer ecological accounting.
What is ecological accounting and how is it different from environmental accounting?
Ecological accounting is similar that it too tries to measure a company’s impact on the environment, but the unit of measure is usually not monetary but physical (kilograms of wastes, tonnes of carbon emitted).
Why move to environmental accounting?
The general feeling among large corporations (like Exxon and General Electric) is that it’s better to do it before governments and other regulatory bodies force them to do so. Also overhead accounts could be hiding environments costs that, if isolated, could be reduced or even eliminated. For example, improved environment costing could lead to ancillary benefits such as better employee health. Lastly, no one can deny that is now a sizeable market for products produced by companies that can “prove” they are environmentally friendly.
Okay, that’s those guys. But why should I move to environmental accounting?
And the short answer to that is who audits your books?Environmental accounting can help you deal with not only with conventional costs such as raw materials, capital equipment, labor and utilities, but potentially hidden costs such as environmental regulatory compliance and contingent costs such as natural resources damages.But just as importantly, environmental can help you to grapple with image and relationship costs with external parties such as local communities and regulatory agencies. Especially for companies that send to purchase, rent or lease resources that belong to the “community” or communities, engaging in environmental accounting is almost mandatory to avoiding unpleasant surprises.
How can we move to an environment accounting management system?
The creation of a balance sheet that reflects environment assets and liabilities is a start. That’s where we can help. We can help identify within your organization those hidden environmental costs and bring them onto the balance sheet.
What would this new balance sheet look like?
As well as including traditional costs and benefits, there would extra scrutiny attached to the environment costs and benefits, and lastly, there might be some mention of externalities, or external costs and benefits.
What are externalities, or even more importantly, why should I care about external costs if I don’t have to pay for them?
External environmental costs are costs associated with the effects of the company’s activities on the environment but which are not included in the cost of its product or services. For example, acid rain in a lake or climatic change due to the use of fossil fuels are externalities, or costs absorbed by society as a whole.Integration of externalities into the environmental accounting system raises major difficulties, which may explain why this practice is not yet widespread. However, it is important to at least acknowledge externalities in company decision-making as in the long term, today’s externalities may become internal costs of business. A classic example is soil contamination by industrial manufacturing. Fifty years ago, environmental contamination of company property would have been considered an externality; today, the liabilities & regulatory issues are so great with environmental contamination, that even if the company goes bankrupt, the creditors may be on the hook for clean-up.