Accountancy and Climate Change

We received the New Year with global climate change news. Beijing air pollution became the headline on various International Medias. According to the media, many residents have been forced to stay in their homes for days to avoid inhaling the poisonous air.

It was in 1979 where climate change came to the global agenda and the world started to think of how climate change might affect human beings. Thereafter, various global conferences and negotiations are going on and collective agreements have been signed by countries. The Kyoto protocol, the Marrakesh and Copenhagen accords and the Cancun agreements are the most important ones.

Air pollution, soil contamination and water pollution are the major consequences of the adverse reaction of human being against nature. This reaction is characterised by the emission of toxic gases and noxious chemicals into the environment.

Unless the critical issue of global warming hits every person on earth, it will be very difficult to prevent the world from heating up due to global warming in the near future.

The commitments to reduce emission of harmful gases and chemicals in to the environment is not just for the political leaders, engineers, lawyers, scientists, and environmentalists but also for the accountants.

Organisations are established under concern principle and consequently the entity will remain in business for the foreseeable future. When we are talking about establishing and leading an organisation, the most important thing is to have a corporate strategy. Making a stakeholder analysis is one of the main concerns in designing a corporate strategy. Accordingly, categorising stake holders as primary vs secondary, Internal vs External, active vs passive, Narrow vs wide, voluntary vs Involuntary, recognised vs unrecognised, known vs unknown and so on are determined by the purpose of stakeholder existence for the organisation and vice versa. Not only in the legal context but in terms of becoming a good corporate citizen, environment is undoubtedly a stakeholder for every organisation.

Successful environmental friendly decisions are dependent on the quality and completeness of information availability to decision-makers. Who is to provide that information for management decision making? It is the accountants. As a result decision-makers require precise management accounting information about the impact of their company’s processes, activities, services and products on the environment. This propagates the birth of environmental accounting in consort with the conventional accounting system. The other way round, increasing of environment problems, economic, social and technological developments are the bases for the birth of environmental accounting

Globally, poor environmental behaviour has a real adverse impact on the overall image of the business. This makes many countries implement mandatory laws that enforced investment decisions are subject to comply with environmental protection. Organisations need to have a proper management accounting system to produce a reliable environmental accounting report. To mitigate this many public interest companies are now required to produce a corporate social responsibility (CSR) report. CSR report shows company’s global citizenship for the community and environment in which it operates as well as its contribution for sustainable development. This makes environmental accounting become a vital instrument in the application of sustainable development.

Environmental accounting requires additional disclosure to cover environmental incidents. It creates better awareness of a firm’s overall financial position and performance and also informs stakeholders about the potential consequences associated with an environmental devastation.

In broad terms, environmental accounting reports produce narrative and numerical information on an organisation’s environmental impact or ‘footprint’ for the accounting period under review.

Before an accident occurs in the oil industry, for instance, environmental accountants could estimate the potential costs of a catastrophic leakage on the surrounding ecosystem and disclose this supplementary information in interim and annual reports. Such report might also make it more likely that quick, preventive action is taken before a disastrous event takes place.

In fact, reporting on environmental impacts is complicated, and is often frustrated by difficulties in measurement. The main difficulty associated with environmental costs is their identification and allocation. In conventional accounting systems environmental costs are attributable to general overhead accounts as a result they are ‘hidden’ from management. Thus, management is often unaware of the extent of environmental costs and cannot identify opportunities for cost savings. Environmental accounting attempts to make all relevant, significant costs visible so that they can be considered when making business decisions.

Similarly, there are management accounting techniques which are useful for the identification and allocation of environmental costs as. Input/output analysis, flow-cost accounting, activity-based costing (ABC) and life- cycle costing are the major ones. In general, environmental issues need to be managed before they can be reported on, and this requires changes to management accounting systems.

Working in a team with professionals having specialist knowledge on various disciplines makes the environmental cost assessment easy. There are experts in various scientific fields who can provide the necessary technical information for many serious environmental valuations and estimates. Accountants could become the leaders for a team of professionals necessary to incorporate and convert all of the available environmental data into a financial reporting system.

By Getaneh Shambel
Certified Accountant

Published on Jan 31,2017 [ Vol 17 ,No 874]



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