Running Head: Environmental Accounting 1

Environmental Accounting Reporting

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Reforms for Environmental Reporting Regulations
There is a need to reform the environmental reporting regulations in Spain in order to
implement the principles of best practice regulation of the resources sector so as to ensure
maintenance of environmental integrity within the private sector. First, in order to change how
companies carry out their environmental reporting, it is important to engage them in a dialogue
on the need for environmental reporting (Larrinaga et al, 2002, p.724). Environmental
accounting standards need to be put in place or agreed upon to guard against companies
conveying a misleading view of corporate environmental performance or legitimizing their
activities. For those companies that chose to go the voluntary environmental reporting way,
however, institutional reforms may also prove very effective in promoting environmental
accountability. Such reforms may infuse a sense of responsibility into their reporting.
Legislation needs to be in place in a bid to improve on environmental accounting reports
issued by companies. Legislation will also ensure the avoidance of differences that exist between
those companies that report and those that do not, stop companies from hiding information about
activities the companies engage in but have a negative impact on society and also to avoid
disclosing unaudited information (Larrinaga et al, 2002, p.724). With legislation in place,
environmental accounting reporting will shift from just being a voluntary exercise by companies
to a mandatory requirement. Legislation will encourage companies to be more reactive to
environmental issues as companies would be expected to have in place corporate governance that
would make environmental reporting an important part of its reports.
Unlike other European countries such as Denmark that have developed an eco-balanced
approach at environmental accounting reporting by requiring companies to submit their
environmental reports alongside their financial reports yearly , Spains regulations only require
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companies to include in their financial statements environmental accounting report making it
part of the financial accounting. If meaningful environmental accounting has to occur in Spain,
then regulations have to change and embrace the approach used by Denmark (Larrinaga et al,
2002, p.724).
Financial accounting can well be explained by the theory of the firm. The theory of the
firm can be used to understand various aspects of the firm which include but not limited to the
following aspects; the existence of the firm, the existence of prices for some items and not
others, and the importance of the demand for accounting information in an organization. The
firm theory of accounting postulates that, the firms business model is to transform inputs so as
to create new assets or services as outputs, we would expect that historical cost would generally
be the most useful basis of measurement. For instance, Where the firms business model is not
to transform inputs, but to buy and sell assets in the same market with the intention of profiting
from changes in market prices, we would expect that fair value would generally be the most
useful basis of measurement
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Uses of Company-issued Environmental Accounting Reports
Environmental accounting is an important approach at ensuring sustainable development
as it is an avenue that provides information that assists in ensuring that the equilibrium between
the environment and economy is maintained (Bennet, 2001, 2007, p.168). Considering the
deteriorating environmental conditions that have led to global warming business managers are
required to evaluate the ecological environment and make it an important factor when making
decisions related to the operational activities of their companies.

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https://www.icaew.com/en/technical/financial-reporting/information-for-better-markets/ifbm-reports/business-
models-in-accounting-the-theory-of-the-firm-and-financial-reporting
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The physical flow and monetary information in environmental accounting reports helps
companies decision makers make decisions that affect financial performance of the organization
and the environment. This is especially helpful for those organizations that seek to minimize
general costs, especially environmental costs which can go a long way in increasing the profit
margins or even lower product prices that can increase a companys market share (Patrut, 2006,
p.180).
Environmental accounting reports help companies to minimize or entirely eliminate
activities that damage the environment as well as designing and packaging their products in a
way that they will not harm the environment. It presents facts about a companys production and
supply processes from an environmental perspective and the responsibility of the company by
giving support to the process of decision making on the companys action plan on protecting the
environment. It is therefore a way of ensuring that a company discharges its accountabilities to
the society and future generations as pollution and the use of resources does affect future
generations.
Environmental reporting also helps companies to demonstrate their responsive nature to
issues that threaten perception of their ethical standards and competence. They are able to
respond to specific concerns and challenges and assure the stakeholders that their concerns are
being addressed or dealt with (Karim et al, 2004, p.76). For instance, in an event of an
environmental error, such as the oil spill that affected British Petroleum recently, stakeholders
would demand or seek reassurance from the company concerned that it lessons have been learnt
from the incident before continuing their engagement. Such a company can only manage the
societys perception of its legitimacy by using environmental reporting to address such concerns.
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Environmental accounting reports encourage companies to put in place measures that
enhance their internal efficiency of operations as a range of technical measurement systems to
collect and process the information that forms the environmental reports have to be established.
This helps the companies to reduce wastage in the production processes and also save on costs
and increase on operational efficiency due to the system and the knowledge they generate. These
reports generate valuable information on the companys activity, analyses costs and benefits
generated by the impact of the activity on the environment, develops practices and policies in
regard to pollution control and also gives alternatives search as recycling.
Environmental management accounting reports can also help governments to the data
generated directly in policy design and decision-making on environmental matters. For instance,
information on industrial use of raw material, energy use and waste volumes flow can go a long
way in helping the government to measure how successful industry focused environmental
protection policies are working.
Policy Objectives of Environmental Regulation
Environmental regulation aims at putting in place policies that relate to general and
specific environmental or health related issues into legally defined rights and obligations and to
ensure that such rights and obligations are observed.
Environmental regulation policy aims at providing useful information concerning the
environmental initiatives of corporations and industries as part of their corporate social
responsibility. Through provision of this information, organizations stakeholders and the society
at large are able to look at how these organizations have put ideas and measures towards
environmental issues that are likely to affect the society as a result of its operations. In the same
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breath the organizations too can get to understand what the stakeholders and the society expects
from them.
Another policy objective of environmental regulation is to ensure that companies include
in their annual financial reports information on how their corporate activities affect the
environment and how they have integrated environmental preservation at the planning level in
their companies. Activities of companies cause considerable environmental effects through their
operations and therefore, policies need to be in place to ensure that companies fulfill their
obligation of being accountable by reporting to the public information of how their activities
impact on the environment, what mechanisms have been put in place to mitigate those effects or
environmental conservation endeavors they have taken (Markandya, 2005, p.97).
Policy objectives aim at improving the environment and at the same time strengthen the
competitive advantage of companies as the risk management and environmental information
resulting from environmental reporting set out in the policies enable stakeholder to make sound
decisions on where to invest.
Another policy objective of environmental regulation is to enhance a sustainable
environment for future generation. Currently, global warming, depletion of the ozone layer and
depletion of non-renewable energy sources are major environmental threats that threaten
environmental sustainability. Without environmental regulation, future generations are going to
be faced with various environmental issues. Hence, environmental policies are aimed at
enhancing environmental sustainability. The essence of environmental sustainability is to ensure
that, current environmental resources are effectively utilized without compromising the ability of
future generations to use the same resources. For instance, environment policy objectives are
aimed at reducing wastes, reducing the depletion of natural resources, conforming to various
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regulations and environmental statutes, minimizing environmental pollution, and promoting
healthy and safety awareness among the general public.
As postulated by the Government of India (2006), there are various objectives of the
national environment policy. They include but not limited to the following:
Conservation of critical environmental resources- To protect and conserve critical
ecological systems and resources, and invaluable natural and man-made heritage, which
are essential for life-support, livelihoods, economic growth, and a broad conception of
human well-being (Government of India, 2006, p. 8).
Promotion of livelihood for the poor through intra-generational equity- To ensure
equitable access to environmental resources and quality for all sections of society, and in
particular, to ensure that poor communities, which are most dependent on environmental
resources for their livelihoods, are assured secure access to these resources (Government
of India, 2006, p. 8).
Integrating environment aspects with social and economic development
Promotion of effective environmental governance- To apply the principles of good
governance (transparency, rationality, accountability, reduction in time and costs,
participation, and regulatory independence) to the management and regulation of use of
environmental resources (Government of India, 2006, p. 8).
Enhancing resources for the conservation of the environment- To ensure higher resource
flows, comprising finance, technology, management skills, traditional knowledge, and
social capital, for environmental conservation through mutually beneficial multi-
stakeholder partnerships between local communities, public agencies, the academic and
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research community, investors, and multilateral and bilateral development partners
(Government of India, 2006, p. 8).
From the above analysis, it is quite evident that, the main aim of any environmental
policy is to enhance sustainable environment for the well being of the current and future
generations. Also, environment policy objective is aimed at protecting the vulnerable and
scarce environmental resources as well as reducing the level of pollution in a country.
Real World Outcomes Brought about by Mandatory Environmental Reporting.
Mandatory environmental reporting results in an increased community concern in relation
to the environment. People begin to see environmental degradation clearly and as a result put
pressure on the players in the industry to put in place measures to combat the same. It induces a
social change in the people and awakens a social awareness in them that that they too need to
play a role in environmental preservation.
Environmental reporting plays a big role at improving a business or companys image in
the public eye and improves the relationship between the two. When a company pledges to
undertake environmental activities by reporting its activities and environmental targets in its
annual environmental accounting report, it endears itself to the public for its positive initiatives
(Gray, 1993, p.86).
Mandatory environmental reporting also helps in establishing, formulating or revising
environmental policies, objectives and action plans of organizations. When organizations
disclose environmental reports, it is generally expected that they will improve the content and
quality of their environmental initiatives voluntarily because it is in their interest to enrich the
contents of their environmental reporting.
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Internally, mandatory environmental reporting will help an organization improve on its
internal collecting system which will in turn afford the organization an opportunity to establish
policies, targets, objectives and action plans for carrying out its environmental activities.
Mandatory environmental reporting can also motivate employees and the management of
an organization and encourage their environmental activities. Many employees may not be aware
of their companys initiatives of environmental conservation thus the reporting can be used as a
chance to train the employees so as to increase their knowledge and consciousness on the
companys activities that are aimed at conserving the environment.
Mandatory environmental reporting has enabled various government agencies and
relevant stakeholders to undertake monitoring and evaluation initiatives in order to determine the
performance of various environmental initiatives. Monitoring and evaluation can be used to
determine the level of performance, effectiveness and efficiency of various environment
management initiatives. This will subsequently lead to rectifying any mistakes and shortcomings
in the environment management initiatives.
Gaps between Policy Objectives and Policy Outcomes
The policy objective of environmental accounting is to give companies or organizations
to discharge their corporate responsibilities in regard to environmental matters. However, the
absence of environmental standards gives companies the leeway to rely on voluntary reporting
and as a result they engage in selective reporting in most cases only reporting information that
makes them look good while hiding any bad information. In most cases companies use
voluntary reported to legitimize their corporate activities or they falsify their corporate
environmental performance. Other companies, in the absence of environmental standards, fail to
make any environmental reporting (El Serafy, 1996, p.145).
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Another gap that the authors have identified is in the fact that many companies in the
industry limit their environmental initiatives to containing pollution as opposed to the efficiency
that would be brought about by initiatives that are geared towards energy saving. The authors
disagree with such initiatives as they regard them as stopgap measures that cannot address the
issue of environmental degradation fully. The authors want the companies to invest in
sustainable and lasting environmental initiatives and stop creating problems that result in
increasing pollution. The authors seem to believe that the companies should plan well in advance
to deviate from engaging in processes that cause unnecessary pollution by planning well in
advance ways of avoiding environmental degradation. The companies thus have to disclose in
their environmental accounting reports expenses in energy saving and efficiency.
While the authors line of argument seems rational, not many companies would welcome
such a line of thought. This is because many companies like shortcuts and would therefore steer
away from injecting too much of their resources in pollution control. They seem to think that if
they were to put in place such mechanism, it would be an admission that their activities harm the
environment which would cast them in bad light. They therefore avoid including anything in the
environmental accounting report that is likely to make them appear bad.
Another gap that exists between environmental policy objectives and policy outcomes is
the availability of resources to effectively implement the policy objectives. Most of the policy
objectives are aimed at promotion of sustainable environment. However, the outcomes from such
environmental policy objectives are largely hampered by the available resources that are required
to implement the objectives. For instance, a company that has enough resources is likely to have
a reduced gap between the environmental policy objectives and the expected policy outcomes.
On the other hand, companies that have fewer resources are likely to have a bigger gap between
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the environmental objectives and policy outcomes. Also, another gap between policy objectives
and outcomes is the lack of monitoring and evaluation mechanisms to analyze the effectiveness
of the environmental policy objectives. Most organizations lack monitoring and evaluation
mechanisms that can be used to determine the effectiveness of the policy objectives (Keller,
2009).
Overcoming the Gap between Policy and Outcomes.
Environmental reporting standards need to be put in place to make environmental
accounting mandatory. Once a mechanism is in place that will compel players in the industry to
be environmentally accountable through mandatory reporting, cases of companies using
environmental reporting in their favour will not arise. One such mechanism would be to come up
with legislation to make environmental reporting mandatory. Legislation would go a long way
in improving environmental reporting as all companies would be required to account for their
environmental activities by law. Also, cases where companies hide information that they feel
have a bad impact on the society will be minimised as doing so would be breaking the law and
also cases where companies disclose unaudited environmental reports will end.
Companies need to start integrating sustainable considerations into their long term
strategies. Companies need to stop concentrating on environmental initiatives that only aim at
controlling pollution but instead embrace those that aim at prevention such as energy saving.
Companies need to engage in sustainable and lasting environmental initiatives by disclosing in
their environmental accounting reporting expenses in energy saving activities (Li, 2001, p.76).
Environmental sustainable initiatives should be infused into the corporations planning
right from capital budgeting and financial teams in such corporations should stop taking such
initiatives as external costs. When companies set aside a budget for environmental activities, it
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becomes easy for them to respond to environmental concerns that may arise from their activities.
While many company financial planners see such planning as burdening the company or as
unnecessary expenses, research has shown that companies which have adopted such insightful
practices are reaping benefits (Mehenna, 2004, p.122).
In order to achieve this, companies need to set goals by integrating environmental
considerations into their decision making by forecasting environmental benefits that are likely to
accrue from those initiatives. They also need to put internal mechanisms in place to promote the
value of sustainable environment and at the same time give support to public policies that seek to
conserve the environment.
Also, in order to overcome the gap between environmental objectives and environmental
policies, companies should adopt environmental objectives that are specific, measurable,
attainable, and realistic and time bound. Adopting such objectives criteria will enable the
organization to effectively match the available resources to the policy outcomes based on the
policy objectives. Also, there is dire need for organizations to give the process of policy
objective implementation a priority and assign the relevant resources towards effective
implementation of the policy objectives. Also, there is dire need for organizations to develop a
comprehensive and monitoring mechanism that will enable organizations to measure the
effectiveness of policy objectives (Knill, 2000).


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