Chapter I
Introduction
1.1 Introduction
In recent years, the adverse environmental consequence of economic
progress has become a buzzword and a subject of great public concern
across the globe. In the past three decades, there has been a global
awakening regarding environmental issues. Countries all over the world
have become more concerned to reduce emissions of harmful gases and the
manufacturing processes that resulted in toxic substances. The adverse
impact of economic development is becoming a much more critical
economic, social and political problem. The role of inequality both
economic and social within the society and among societies and nations has
become the agenda for the study of the environment by social researchers,
particularly at the level of policy formulations.
In the era of liberalization and globalization, rapid industrialization is
escalating a tremendous pressure on environment, which has a great impact
on all living creatures on this earth. Due to environmental pollution
ecological balance has been seriously disturbed. The organizational response
to environmental conservation and protection and the role of accounting to
environmental management are of huge importance. Environmental
accounting is used to be considered as a distinct form of accounting and
experts have found its relevance in reducing the impact of day-to-day
business operations by way of public reporting. Organizations are
increasingly being encouraged to account for, and publicly disclose their
internal and external environmental (and social) costs and report on their
progress towards greater sustainability to their stakeholders.
1
On this background, the present study has been undertaken to assess the
status of environmental accounting and reporting practices of selected
companies operated in India. Before going to main area of study, in this
chapter discussions have been made on the concept of environment, its
importance and the relevance of the study.
1.2 Concept of Environment
Environment may be broadly understood to mean our surroundings. The
environment is something that makes up our surroundings and affects our
ability to live on the earth. It forms the origin of our subsistence. It
encompasses the air we breathe, the water that swathe most of the earth's
surface, plants and animals around us, and much more. The term
‘environment’ originates from the French word ‘environ’ or ‘environner’
means ‘around’, ‘round about’, ‘to surround’ or ‘to encompass’. The
dictionary meaning of the word ‘environment’ is a surroundings; external
conditions influencing the development or growth of people, animals and
plants; living or working conditions etc. ‘Environment’ refers to the sum
total of conditions which surround man at a given point in space and time.1
Environment is a set of external conditions including land, air, water,
animals and plants particularly those which affect and influence the lives and
activities of living things. In other words, environment is the representative
of physical components of the earth wherein man is the important factor
influencing the environment.2 The term environment generally refers to all
living and non-living things that occur naturally on earth or some region
thereof.
The concept of ‘environment’ is not of recent origin in India. The first
written document on ‘environment’ is ‘Rig-Veda’ which is the proud
possession of India and the oldest book of mankind. The Rig-Veda contains
2
hymns or verses. Most of the early hymns of the Rig-Veda are about nature
and its personifications in the form of devas, like Agni, Surya, Indra, Varun,
Vayu, etc. This creation shows the nature worshiping society of that period.
Though ecology is claimed to be a modern concept, the best tribute ever paid
to environment is found in Vedas. 63 mantras of Atharva Veda (12.1.1. to
12.1.63) pertain to Prithvi-sukta (Hymn to Earth), which glorifies Mother
Earth. Vedic sages regarded Earth as sacred and inviolable.
Environment creates favourable conditions for the existence and
development of living organism. ‘Environment’ includes water, air, land and
their inter-relationship with human beings other living creatures, plants,
micro-organism and property; ‘Environmental pollutant’ as any solid, liquid
or gaseous substance injurious to environment; and ‘Environmental
pollution’ as presence of any pollutant in the environment. 3 It is the sum
total of all biotic (living) and abiotic (non-living) factors that surrounded and
potentially influence an organism. 4‘Environment’ can be defined as the sum
of all social, economical, biological, physical or chemical factors which
constitute the surroundings of man, who is both creator and moulder of his
environment. 5
1.3 Types of Environment
The environment is of two types- natural environment and manmade
environment. The natural environment encompasses both the non-living
(abiotic) and living (biotic) components which occurs naturally on earth. In
the earlier days, environment referred to only natural environment consisted
of physical or abiotic aspect of planet earth such as land, air, water, gas etc.
and biotic component like plants, animals including man and his functions.
But with the advancement of time and progress of civilization, man extended
3
his environment through his social, economic and political function. This
type of environment is built environment or manmade environment, which
comprises the areas and components that are strongly influenced by man.
This type of environment consists of cultural elements viz, economic, social
and political. The physical or abiotic environment is further subdivided into
three broad groups on the basis of physical characteristics and state. Solid
earth represents the lithosphere and liquid water component represents
hydrosphere followed by gaseous component represents atmosphere. Thus
the three basic division of physical environment are termed as lithospheric
environment, hydrospheric environment and atmospheric environment. The
biotic environment may be subdivided into plants (flora) environment and
animals (fauna) environment including man as an important factor and micro
organism component. All the organisms work for creating social groups and
organization which is known as social environment wherein organisms work
for deriving materials from physical environment for their survival and
growth.
1.4 Environmental Impact
An environmental impact is an impact (favorable or adverse) made by the
organization on the environment in the sphere of natural, social and
economic aspect. Environmental impact refers to the biophysical, social and
other relevant effects on the environment by the economic activities carried
on by an organization. Environmental impact assessment can prevent, limit,
or require liability or insurance coverage based on its likely harms on the
environment.
Negative or adverse environmental impact may be the deterioration of the
environment through depletion of natural resources such as air, water, land,
destruction of ecosystem and the extinction of wildlife. Over the last few
4
decades, there has been very reckless use of environmental resources mainly
by the industrial organization causing adverse impact on environment and
extensive damage to the flora and fauna of the globe. In fact, the industrial
and business activities are directly or indirectly responsible for adverse
environmental impact such as soil erosion, land degradation, deforestation,
over exploitation of non-renewable natural resources, loss of bio-diversity,
pollution of water, air, marine, noise, light etc.
Global warming is one of the main results of modern civilized world. The
likely dangers of global warming are being increasingly studied by a large
group of global scientists, who are increasingly concerned about the
potential long term effects of global warming on natural environment. Rapid
industrial development is one of the major causes of global warming. The
major impacts of global warming on environment according to IPCC are:
Sea level is rising. During the 20th century, sea level rose 10-20 cm (4-8
inches) due to melting glacier ice and expansion of warmer seawater. In the
next 100 years, sea level may rise as much as 85 cm (33 inches). This is a
threat to people living near the coast, wetlands, and coral reefs.
Arctic sea ice is melting. The summer thickness of Arctic icebergs is about
half of what it was 50 years ago. This melting ice may someday cause
changes in the world’s ocean currents.
Sea-surface temperatures are warming. Some animals, such as corals,
cannot live in warmer seas. Over the past few decades, about a quarter of the
world’s coral reefs have died.
Heavier rainfall causes flooding in many regions as warmer temperatures
speed up the water cycle. In the last ten years, floods have caused more
damage than in the previous 30 years.
5
There have been changes in where we can farm: As climates warm, some
mid-latitude places, like Europe, are getting a longer growing season, while
some tropical places are becoming too hot and dry to grow crops.
The amount of drought may be increasing. Higher temperatures lead to a
high rate of evaporation and very dry conditions in some areas of the world.
Researchers are not sure if drought has increased as a result of current
warming.
Ecosystems are changing. As temperatures warm, species may migrate to
cooler places or die. Species that are in particularly danger include
endangered species, coral reefs, and polar animals such as penguins, polar
bears and seals.
Severe weather events may be more common and stronger. Some
researchers say that the number and strength of hurricanes, tornadoes, and
other events has increased over the last 15–20 years. However, scientists are
still looking into this.
Rapid and unplanned industrialization is one of the major sources of
environmental damage and destruction causing adverse impact on the human
health, animals and plants. Release of huge amount of effluents, hazardous
wastes and emission of various chemicals by the industrial units in the
environment has a huge impact on all living being. Gradually, the
environment is becoming much more crucial in respect to economic, social
and political spheres. Managers within organizations are coming under
increasing pressure not only to reduce costs, but also to minimize the
environmental impacts of their operations. This pressure is coming from a
broad group of stakeholders, including government, media, consumers,
investors, employees, finance providers, and non-government organizations.
To minimize the environmental impacts of an organization, individuals need
6
to be provided with information about the environmental costs associated
with their operations. In this background, accountant can play a very
important role for an effective environmental management. And thus, the
Environmental Accounting has been emerged.
1.5 Environmental Accounting
Businesses do not operate in a vacuum. They are subject to legal
requirements and industry practices; they require resources to manufacture
products and/or render services; they operate in an environment from which
they draw their resources and which may be affected by their activities; and
they operate in a community from which they draw their work force and
which may also be impacted by their activities. Corporate Environmental
Accounting is one of the tools that can be used by businesses to address
these challenges.
Environmental Accounting is comparatively a new entrant in the field of
accounting. Environmental Accounting evolved since the 1970s through the
efforts of individual countries and practitioners based on their own
frameworks and methodologies depending upon their environmental
priorities. In 1970s, Norway was the first country who constructed
environmental accounts and thereafter other countries slowly followed them.
Since the early 1990s, combined efforts have been started through the
United Nations Statistical Organization (UNSTAT), the European Union,
the OECD, The World Bank, country statistical offices and other
organizations for standardizing the frameworks and methodologies of
Environmental Accounting.
7
1.5-1 Concepts and Definition
Environmental Accounting is a term having a variety of meanings. In
simplest term Environmental Accounting is to denote the identification,
measurement and reporting of environment specific costs that arises from
actual or potential impact of company’s economic activities on the
environment. These costs comprise costs to clean up or remediate
contaminated sites and water bodies, environmental fines, penalties and
taxes, purchase of pollution prevention technologies and waste management
costs. Environmental Accounting is an emerging field of accounting. It can
be considered either a subset or superset of accounting proper, because it
aims to incorporate both economic and environmental information.
Environmental Accounting refers to identification of environmental cost and
benefit generated from various activities to reduce environmental effect that
may be caused by management activities of an enterprise and to provide
internal decision makers and stakeholders with information for their correct
decision by measurement and distribution of those identified environmental
cost and benefit. In other words, it is a process of identifying and measuring
the cost generated from various activities of preventing or treating
environmental effect caused by management activities of enterprises and
subsequent benefit.
An Environmental Accounting System is also described as composition of
environmentally differentiated conventional accounting and ecological
accounting. Impact of the natural environment on a company in monetary
terms
is
measured
in
environmentally
differentiated
conventional
accounting. On the other hand, Ecological Accounting measures the
environmental impact of economic activities of the company, but in physical
units (e.g. kilograms of waste produced, kilojoules of energy consumed).
8
Ecological Accounting is the type of Environmental Accounting involving
Natural Resource Accounting at local administration level.
Federation
des
Expert
Compatibles
Europeans
(1995)
defined
“environmental accounting concerns the treatment of environmental issues
within the financial statements and within environmental evaluations.” 6
Sefick, Soderstrom and Stinson (1997) defined “environmental accounting
is a course (or subject) that investigates how environmental issues affect
traditional accounting sub disciplines.” 7
Gray, Bebbington and Walter (1993) observed “environmental accounting
can be taken as covering all areas of accounting that may be affected by the
business response to environmental issues, including new areas of eco
accounting.” 8
Munipalle
(2005)
defined
“Environmental
accounting
involves
identification, measurement and allocation of environmental cost, integration
of these costs into business decisions and finally communicating the
information to the companies’ stakeholders.” 9
9
Environmental Accounting has been presented in the following figures.
Figure 1: Environmental Accounting
Source: “Introduction to the Environmental Accounting Guideline" Ministry of
Environment, Japan, 2002
Figure 2: Environmental Cost & Benefit
Source: “Introduction to the Environmental Accounting Guideline" Ministry of
Environment, Japan, 2002
10
Environmental Accounting can be classified into three disciplines. At macro
level it can be divided into two disciplines namely Global Environmental
Accounting and National Environmental Accounting. At micro level or firm
level it is Corporate Environmental Accounting.
Global Environmental Accounting is an accounting system that deals with
energetics, ecology and economics at a global scale. On the other hand,
National Environmental Accounting is a macroeconomic measure that looks
at the use of natural resources and the impacts of national policies on the
environment. It is also called Natural Resource Accounting where emphasis
is given to natural assets, deterioration in its quality… in order to get an
environmentally adjusted economic indicator such as environmental gross
national Income.10
Corporate Environmental Accounting focuses attention on the cost structure
and environmental performance of a company. At its simplest, Corporate
Environmental Accounting is a system of accounting which aims at making
environmentally related costs more transparent within the corporate
accounting and reporting system. Corporate Environmental Accounting
involves identification, measurement and allocation of environmental cost,
and the integration of these costs into business, identifying environmental
liabilities, if any, and finally communicating this information to the
companies’ stake holder as a part of general purpose financial statements.
System of Environmental Accounting has been presented in Figure 3 in next
page.
11
Figure 3: System of Environmental Accounting
Source: “Introduction to the Environmental Accounting Guideline" Ministry of
Environment, Japan, 2002
Corporate Environmental Accounting is again classified into Environmental
Management Accounting and Environmental Financial Accounting from the
view point of users need.
Environmental Management Accounting is used by companies to make
internal
business
strategy
decisions.
Environmental
Management
Accounting provides information for internal purpose for taking decisions
like product cost, product mix, and review of validity of environmental
facility investment. In other words, Environmental Management Accounting
is a system of accounting which provides information for internal decision
maker for improving environmental management as well as identifies cost
reduction elements through indication of those measured environment
related costs hidden in other cost elements.
12
On the other hand, Environmental Financial Accounting provides financial
information on performance of corporate environmental management to
shareholder and investors, creditors, government, consumers, local
communities
and environmental
institutes. Financial
Environmental
Accounting emphasizes the analysis and reporting component of internal
costs and liabilities related to environmental matters. Financial Accounting
and its environmental requirements have been standardized to provide
consistent and comparable information to investors, regulators and other
stakeholders.
The details of classification of Environmental Accounting have been
presented in Figure 4 in next page.
13
Approaches and Classification of Environmental Accounting
Figure 4
Source: Mohamed A Raouf A hamid, (2002)
Theoretical Framework for Environmental AccountingApplication on the Egyptian
Petroleum Sector
Mohamed A Raouf A hamid, The Egyptian Forum on Environment & Sustainable Development
(EFESD) Cairo, Egypt
14
1.5-1.1 Environmental Cost Accounting (ECA)
Environmental accounting is now on an expansion path. An advanced step
of
development
of
environmental
accounting
is
development
of
Environmental Cost Accounting (ECA). Environmental Cost Accounting
directly places a cost on every environmental aspect, and determines the cost
of all types of related action such as pollution prevention, environmental
design and environmental management etc. Environmental cost accounting
is a term used to refer to the addition of environmental cost information into
existing cost accounting procedures and/or recognizing embedded
environmental costs and allocating them to appropriate products or
processes. Conventional cost accounting systems do not track costs closely.
Costs which are easily identifiable, such as labour or raw materials costs
tracked and allocated to particular product or process lines. But costs like
administration, environment, health and safety costs, are considered to be
indirect or overhead costs and are allocated broadly across product and
process lines. Treatment of cost as overhead generally confiscates cost
responsibility from any one particular product line or manager. If no one is
responsible for a cost then it is likely to be ignored, or may increase as a
result of efforts to reduce other costs. But Environmental Cost Accounting
deals with environmental costs in order to reach the full cost accounting.
1.5-1.2 Full Cost Accounting
Full Cost Accounting allows companies to recognize environmental costs as
specific costs related to a product or process, and not as overhead in a
facility as with traditional accounting systems. Full Cost Environmental
Accounting is a term which refers to the identification, evaluation and
allocation of conventional and environmental costs including external social
cost in an organization. The term full cost accounting may be used to refer
15
to either the full private (or bottom line) costs to an enterprise of an activity,
or more correctly, the full social costs to society of the activity including
externalities (such as health impacts resulting from ozone depletion).
Externalities are costs not borne by the responsible entity, for example, the
ecological impacts of climate change resulting from automobile emissions
are not included in the price consumers pay for petroleum.11
A full environmental cost can be distinguished between internal costs/
private cost (those borne by the organization) and external costs/social cost
(those passed on to society). Internal environmental costs to the firm are
composed of direct costs, indirect costs, and contingent costs. External costs
are the costs of environmental damage external to the firm on which firm
shows less interest unless the external costs lead to liabilities for the firm.
Contingent or intangible environmental costs are costs that may arise in the
future to impact the operations of the firm. Contingent costs can fall into
both internal and external cost categories. Accounting framework of
environmental cost has been shown in the Figure 5, Figure 6, and Figure 7.
Figure 5: Typical accounting framework: dark shaded area shows direct private costs
allocated to products or activities, light shaded are shows indirect private costs (including
some environmental costs) allocated to overhead accounts. Unshaded area shows
social costs resulting from corporate activities but not charged to the company.
Source: Adapted from: Carnegie Mellon University
Pittsburgh. Full Cost Accounting. Prepared by Noellette Conway-Schempf.
16
Figure 6: Modified full cost accounting framework: dark shaded area denotes all
private costs allocated to products or activities. Unshaded area shows social
costs resulting from corporate activities but not charged to the company.
Source: Adapted from: Carnegie Mellon University
Pittsburgh. Full Cost Accounting. Prepared by Noellette Conway-Schempf.
Figure 7: Full social accounting framework: dark shaded area denotes all costs
(both private and social) allocated to products or activities.
Source: Adapted from: Carnegie Mellon University
Pittsburgh. Full Cost Accounting. Prepared by Noellette Conway-Schempf.
The distinction between internal and external environmental costs is
illustrated in Table-1in next page.
17
Table-1
Internal and External Environmental Costs
18
1.5-2 Need for Environmental Accounting and Reporting
Conventional accounting fails to include environment related cots into
account and thereby provides inappropriate information for decision making.
The limitations of this conventional method are:
Firstly, this method fails to identify location and size of environmental cost
generated from corporate activities as this cost is treated as indirect cost. In
conventional accounting environmental cost is not properly measured and
subsequently the decisions taken by the management on the basis of this
information is not appropriate one. Environmental costs and benefits may be
over looked or hidden in overhead accounts. Product pricing is also made
on the basis of this distorted information.
Secondly, conventional accounting rules involve a serious risk of not
internalizing external cost for instance air, water, or soil pollutions by
production activities are not reflected in production cost. However,
environmental externality of an enterprise is ultimately converted into future
environmental liability and risk due to the stringent international and
domestic environmental regulations.
Thirdly, conventional accounting system fails to satisfy the different
stakeholders need for information on environmental activity and
performance of an enterprise.
Considering the above limitations environmental issues need to be integrated
into corporate accounting for better results. Accounting for environmental
costs and benefits ensures the attainment of environmental sustainability
objective and at the same time it can also support the more efficient use of
resources and boost productivity as well as bottom line profitability.
Environmental accounting is a management tool that integrates the financial
19
implications of environmental issues in the financial management systems of
organizations to enhance more effective decision-making in order to
promote environmental and economic sustainability. Environmental
accounting is one of the core tools of environmental management. It is an
efficient tool for improvement of economic and environmental performance
of an enterprise.
It helps in improving efficient communication and
relationship with various stakeholders. The need for environmental
accounting can be discussed as follows:
• Environmental accounting supplies useful environment related information
for different internal and external stakeholders for their decision making
purpose. A better project appraisal and investment analysis is possible by
inclusion of potential environmental costs in conventional accounts.
•A better management of environmental cost is possible.
• Significant reduction or elimination of environmental costs is Possible
through environmental thinking. Reduction of costs is also possible through
energy and resource conservation by adopting proper accounting method.
• Enterprises may be able to exploit a competitive advantage as customers
may prefer environmentally friendly products and services. Competitive
advantage may be also enjoyed by minimizing environmental impacts
through improved design of products, packages, and processes.
• It helps management for better strategic decision making like continuing or
abandoning a particular product or process.
20
Figure 8
Source: Guidelines for Environmental Cost Accounting 2003 Ministry of Environment,
Japan
21
• Proper identification and allocation of environmental costs ensure more
accurate costing and pricing of products and investment decisions are based
on true costs and benefits.
• It may support the development and improvement of the overall
environmental management system of an enterprise.
• It is also possible to generate revenue which may offset environmental
costs (e.g. transfer of pollution allowances) if environmental accounting is
followed.
• Environmental accounting is an effective method of enhancing corporate
sustainability.
1.5-3 Guidelines for Environmental Accounting and Reporting
The above discussion clearly reveals the paramount importance of
environmental accounting and reporting in the present business world. But,
the organizations are facing problems in implementing environmental
accounting and reporting due to the absence of a common framework.
Therefore, a guideline for developing a common framework became
necessary for both the provider and receiver of the information relating to
environmental accounting and reporting.
In 1993, UN Statistical commission adopted a revised system of national
accounts for member countries. In December 1993, the UN statistical office,
which was working on the project in collaboration with Carsten Stahmer,
issued a handbook on integrated environmental and economic accounting,
providing detailed guidelines under the title, ‘The Handbook of Integrated
Environmental Economic Accounting’. This has been subsequently named
22
System of Integrated Environmental and Economic Accounting (SEEA).12
This handbook was the outcome of the discussion on environmentaleconomic accounting in international workshops organized by UNEP and
the World Bank. This discussion on concepts and methods of environmentaleconomic accounting did not able to come any final conclusion and the
handbook was issued as an interim report.
In 1997, the Statistical Commission requested the London Group on
Environmental Accounting to undertake a revision of SEEA. In 2003, the
United Nations, the European Commission, the International Monetary Fund
(IMF), the Organisation for Economic Cooperation and Development
(OECD) and the World Bank issued, on the recommendation of the
Statistical Commission, the final draft of Integrated Environmental and
Economic Accounting 2003 (SEEA-2003). It was recognized in the report
that although the substantial development in the area of environmental
accounting had been presented in the revised SEEA, still there had been a
wide scope of methodological and practical work in this field. The London
Group opined that sharing country experience would continue to be a
valuable way to advance theory and practice of environmental accounting.
In March 1999, The Japan Environment Agency announced "A Draft
Guideline for Measuring and Announcing Environmental Cost." By
announcing this guideline proposal, the Agency expected promotion of
introduction of environmental accounting in enterprises. A wide range of
opinions were given from concerned parties regarding this proposal and the
Agency decided to review and revise the guideline proposal within 1999 by
reflecting these opinions.
23
In 2001, UNSD and UNEP published the Handbook of National Accounting:
Integrated Environmental and Economic Accounting - An Operational
Manual. This handbook reflected the on-going discussion on environmental
accounting since the publication of the SEEA in 1993 and the experiences in
developed and developing countries. It provides a step-by-step guidance on
how to implement the more practical modules of the SEEA and elaborates
the uses of integrated environmental and economic accounting in policymaking.
In 2002 (first published in 1998), UNCTAD made a revise guidance manual
with the help of ISAR, CICA, ACCA and World Bank on ‘Accounting and
Financial Reporting for Environmental Cost and Liabilities’ to inform or
give guidance on environmental accounting issues and identify best practices
that may be considered by national standard setters in the development of
their own accounting standards, rules and regulations.
In 2002, The GRI issued Sustainability Reporting Guidelines which was
intended to serve as a generally accepted framework for reporting on an
organization’s economic, environmental, and social performance.
In March, 2002 Japan Environment Agency issued “Guideline for
Introduction of an Environmental Accounting System" which was the
world's first attempt at the practical guideline for introducing environmental
accounting.
In 2004, UNCTAD and ISAR published ‘A Manual for the Preparers and
Users of Eco-efficiency Indicator’ with the objective of describing the
method that enterprises can use to provide environmental performance as
well as financial performance in systematic and consistent manner. The
manual helped enterprises to give information on their Eco-efficiency
24
Performance for the five generic environmental issues namely water use,
energy use, global worming contributions, ozone depleting substances and
waste.
In 2005, Ministry of Environment, Japan issued “Environmental Accounting
Guidelines, 2005” with the objective of supporting the introduction and
implementation of environmental accounting at companies and other
organizations. The Guidelines are also intended to insure that the
information disclosed take into consideration the needs of the various
stakeholders.
In India, Corporate Governance Code (2007) mandates listed companies to
disclose environmental and social information in the Director’s Report or the
Management Discussion and Analysis section in the annual reports.13 India’s
National Environment Policy (2006) has recommended the use of
standardized environmental accounting practices and norms in preparation
of statutory financial statements for large industrial enterprises.14 India’s
Ministry of Corporate Affairs issued Voluntary Guidelines for Corporate
Social Responsibility (2009). Guidelines State that companies should engage
with all stakeholders, including shareholders, employees, customers,
supplies, project affected people, and society at large, to inform them of
inherent risks as well as strategies to mitigate them.
As for environmental issues in accounting, some accountancy bodies are
also engaged in the development of accounting standards or guidelines. A
list of guidelines/standards developed by different organization is given in
the following Table-2.
25
Table-2
List of guidelines/standards developed by different organizations
Issuing
Standards/Guidelines
Organization
CGA-Canada
Accounting Standards or Guidance on Asset Retirement
Obligations
JICPA
Environmental Accounting Guidelines/Environmental
Reporting Guidelines
JICPA
Guidelines/standards regarding accounting practices for emission
trading
AICPA
Enhanced business reporting of key strategic and performance
Indicators
ICAA and
CPA
Australia
The social responsibility of Corporations Corporate responsibility:
ICAA
Guidelines relating to Broad Based Business Reporting and enhancing
Managing risk and creating value
not for profit reporting
ICAEW
“Environmental issues in annual financial reporting”
MIA
Sustainable Forest Management Concession Arrangements
AICPA
Guidelines on topics related risk management, financial and
non-financial performance measurement and long-term value
creation
Auditing Standards Board, Statement of Position (SOP)；Attest
Engagements on GHG Emissions Information
JICPA
Guidelines regarding assurance engagements for CSR reports
ICAI
A discussion paper on Accounting for Carbon Credits
CPA
Australia
Training materials on the rationale of the ETSs and the emergence of
sustainability reporting
CPA
Australia
Integration of Accounting with Product Life-Cycle Analysis for
Sustainability-Based Decision Making
Source: Main Survey Report on the CAPA Environmental
Accounting/CSR Survey, CAPA, 2009
26
1.6 Rationale of the Study
It is now well accepted that the industrial sector is one of the key agents of
environmental pollution. The process of rapid industrialization enables rapid
progress of civilization but at the same time it has significantly contributed
to the accelerated rate of environmental damage. Business firms operate in
the overall environment. They consume resources from environment and
most of them pollute environment owing to very nature of their operations in
which they involved. In other words, industry is considered as both the
“users” and “polluters” of the environment. But as the responsible corporate
member of the society the business houses have to balance this for the best
of community at large and should adopt policies that are eco-friendly. The
business enterprises should be socially and morally responsible and must
recognize its obligation for the larger benefits of the society. A corporate
entity is likely to contribute positively to the safeguard of the environment as
well as society. The failure of such environmental responsibility amounts to
the infringement of social obligation and deserves condemnation and
penalty. And thus, environmental responsibility remains accountable to all
actual and potential stakeholders. To manage and control the environmental
effects properly the environmental information are of paramount importance.
In order to get the confidence of society, an organization itself needs to
consider environmental matters in relation to its business operation and
consequently needs to disclose useful environmental information to improve
its environmental communication with different stakeholders from the
viewpoint of accountability and reliability. It becomes inevitable for the
organization to take the responsibility to convey environmental information
to different stakeholders through environmental accounting and reporting.
Business enterprises can disclose this information in their annual reports for
27
various stakeholders. Actually such disclosure reflects the environmental
performances of the business enterprises. For this, it requires environmental
accounting. Environmental accounting is primarily designed in recording,
measuring and reporting of the environmental impact on the organization
itself and society in general.
Against this backdrop, the present research study is intended to be concerned
with the evaluation of environmental accounting and reporting performances
of selected companies operated in India and to suggest the appropriate
measures for improving the system. In other words, the study will endeavor
to make an appraisal of the performance of the Indian companies in the light
of environmental accounting and reporting.
1.7 Objectives of the Study
A pilot study has been conducted on the selected twenty companies listed in
India to assess the rationality and feasibility of the present research work. The
study is based on the published annual reports of the sample companies for
the year ended 31st March, 2005. The study has revealed that all the sample
companies has disclosed quantitative information in Directors’ Report with
respect to conservation of energy to comply with the provision of section
217(1)(e) of the Companies Act, 1956, as amended in 1988. It is also revealed
that seven (35%) companies have voluntarily disclosed certain qualitative
information in addition to minimum legal requirements. Out of twenty sample
companies only one company has reported about their Environment audit.
And only one company has conducted energy audit. Some companies have
also carried on various social welfare activities besides their legal
requirements.
28
The findings of the pilot study are highly interesting and motivated me to
make further research work to reveal the real state of the nature of accounting
and reporting practices followed by different industries operated in India.
Accordingly, the present study has been undertaken.
The objectives of the study are to:
(i) examine the needs and importance of environmental accounting
and reporting practices in India;
(ii) study and analyze the different existing concepts, theories, models
and legal framework of environmental accounting and reporting practices
followed in India and abroad;
(iii) assess the nature and status of corporate environmental
accounting and reporting practices of the selected companies in India ;
(iv) develop the Environmental Disclosure Index(EDI) of selected
Indian companies on the basis of the accounting and reporting performance of
sample companies;
(v) assess whether there is any correlation between the size of the
selected companies and Environmental Disclosure Index(EDI)
(vi) suggest the appropriate measures for improving the existing
accounting and reporting practices in India.
1.8 Scope of the Study
The study has been undertaken in respect of selected companies operated in
India. The sample unit for conducting the present research study comprises
100 listed companies (falling under either BSE or NSE or both) chosen from
10 major polluting industries operated in India. The study period has been
covered for a period of 14 years starting from the year 1996-1997 and
ending to the year 2009-2010. It is expected that the study will help to
29
improve and rationalize the existing status of environmental accounting and
reporting practices of Indian companies.
1.9 Limitations of the Study
It is not claimed that the present study is all pervasive in all respect
and free from any limitation. Like any other empirical study which
particularly is conducted in developing countries like India is also not free
from limitations. Some of the important limitations are as follows:
(i)
The study has been restricted to the in-depth study of the selected 100
companies falling under major 10 polluting industries operated in India.
(ii)
The study does not make an attempt to evaluate various models of
performance evaluation of the environmental accounting and reporting
practices. Performance evaluation of the status of environmental accounting
and reporting practices has been made on the basis of only three key areas
concerning environmental issues.
(iii)
All the data for the present study are secondary data which have been
collected from the published annual reports of the companies under study.
1.10 Scheme of the Work The entire study has been sought to be presented
in five chapters including the present one i.e. Chapter 1. For the purpose of
compactness in presentation, the chapterisation has been made on the basis
of different characteristic features. Chapterisation has actually been made in
the manner as follows:
Chapter I –This chapter deals with introduction which has already been
discussed. It includes concept of environment, types of environment,
environmental impact, concept of environmental accounting and reporting,
30
the rationale of the study, objectives of the study, scope of the study, and
limitations of the study.
Chapter II – It includes the review of the literatures of the proposed study.
For the benefit of discussion the existing literatures will be reviewed into
two perspectives - 1. Literature Review: Global Perspective and 2. Literature
Review: Indian Perspective.
Chapter III – It deals with the methodology of the study in details.
Chapter IV – It analyses and interprets the performance of selected Indian
companies regarding environmental accounting and reporting practices on
the basis of the selected parameters as discussed in Chapter III.
Chapter V – It primarily contains findings of the study with suggestions and
recommendations together with the summary of the study and a brief
conclusion.
References:
1. Sharma, J.P. (2008), “Environment and Ecology”, 1st Ed. University
Science Press, New Delhi, pp. 4.
2. ibid. pp. 4.
3. Agarwal, S. K., Tiwari, S. and Dubey, P.S. (1996), “Biodiversity and
Environment”, 1st Ed. A.P.H. Publishing Corporation, New Delhi.
4. Sharma, J.P. (2008), “Environment and Ecology”, 1st Ed. University
Science Press, New Delhi, pp. 4.
5. ibid. pp. 4.
6. Federation
des
Experts
Compatibles
Europeans
(1995),
“Environmental Accounting, Reporting and Auditing: Survey of
31
Current Activities and Developments within the Accounting
Professionals”,
‘Environmental
Bruxels,
Adopted
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and
from
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for
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Sustainable
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for
Sustainable
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The
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8. Gray, R.H., Bebbington, K.J. and Walter, D. (1993), “Accounting for
the Environment”, Paul Chapman Publishing, London. Adopted from
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Sustainable Development”, The Management Accountant, Vol.41,
No. 6, June, pp.436-442.
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at
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apc.org/eco/evievw/lefref2, Adopted from A hamid, R. Md. (2002),
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32
11.Conway-Schemf, N. “Full Cost Accounting-a course Module on
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Accounting
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Mellon
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Approach”,
The Management Accountant, Vol. 40, No. 6, June, pp.
448-451.
13.Government of India, (2007), “Guidelines on Corporate Governance
for Central Public Sector Enterprises” pp.39, http://www.acgaasia.org/public/files/guidelines_CG_Public_Sector_Enterprises_June_
2007.pdf
14.Government of India(2006), “National Environmental Policy (NEP)”
pp.21, http://hppcb.nic.in/NEP2006.pdf
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33
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1. www. unstat.un.org/unsd/envaccounting
2. www.defra.gov.uk
3. www.emanu-eu.net
4. www.emawebsite.org
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11.www.ussee.org
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