Environmental Accounting and Auditing

AWS International Journal of Philosophical Accounting Research ISSN 1597-2550, Vol. 1, No. 1, 2024. Environmental Accounting and Auditing Issues Ayapere Pere (Ph.D Accounting, FIMC, CNA) Research Fellow of Accounting in Business Management, Ayapiro Worldwide Services (AWS), Yenagoa, Nigeria, Email: scholarayapere@gmail.com Abstract The alarming rate of environmental degradation due to economic activities causing emissions of greenhouse gases have raised a serious concern about depletion of ozone layer. Thus, humans earth wide experience global warming and other forms of natural disasters due to enhanced greenhouse effect. Therefore, it becomes a focal point to consider a country’s environmental accounts regarding use of natural resources, environmental expenditures, and emissions flows, which are components of economic activities of production and consumption. This article highlights four types of environmental accounts that require public and corporate governance attention for proper utilization and control of economic activities as well as net zero transition. These accounts involves natural resource assets; pollution and material physical flow; monetary and hybrid; and environmental-adjusted macroeconomic aggregates. However, contribution of environmental auditing counts on measures of effectiveness of management processes and consequently the effectiveness of the systems concerning environmental matters. Therefore, it was concluded that while we derive benefits from technological inventions of converting natural resources to useful economic products, the need for net zero transition has equal importance to reduce the hazards of environmental degradation. Key words: Environmental accounts; Natural resource assets accounts; Material physical flows accounts; Monetary and hybrid accounts; Environment audit issues; Environmental protection and management 2 1. INRODUCTION Environmental accounting provides a framework for organizing information on the status, use, and value of natural resources. Among other things, environmental assets include fisheries and forest accounts, as well as expenditures on environmental protection and resource management. The latest categorization of environmental accounts by the international community includes four types of accounts. They are natural resource asset accounts, pollution and material physical flow accounts, monetary and hybrid accounts, and environmentally-adjusted macroeconomic aggregates. Importantly, environmental accounting provides a way to link environmental data with the economic data contained in a country’s System of National Accounts. Hence, information contained in a country’s environmental accounts regarding natural resource use, environmental expenditures, and emissions flows are components of the economic activity of production and consumption within a country and the world-at-large (INTOSAI, 2010). 2. Types of Environmental Accounts There are four categories of environmental accounts described below 2.1. Natural resource asset accounts These accounts primarily focus on stocks of natural resources, which contain data on opening stocks, closing stocks, and changes to stocks. There two types of changes to stocks. (1) Changes due to economic activity (e.g., mining minerals), and (2) changes due to natural processes (e.g., births and deaths of trees in a forest account). o Physical asset accounts track the physical amount of a resource. These accounts provide indicators of ecological sustainability and can be used to show the effects of policy on resource stocks. Thus, they can help managers monitor resources more effectively. An example of a physical asset account is a land account that tracks the conversion of agricultural land to urban settlements. o Monetary asset accounts establish a monetary value for the total national wealth of a resource. These accounts can be used in conjunction with national economic accounts to determine a country’s total wealth, the diversity of a country’s assets, how the ownership of assets is distributed, and how vulnerable assets are to price fluctuations—which is particularly important in economies that depend heavily upon unprocessed goods. An example of a monetary asset account is a forest account that tracks the value of native forests. 2.2. Pollution and material physical flow accounts Pollution and material physical flow accounts provide information at the industry level about the quantity of resources — energy, water, and materials that are used in economic activities, and quantity of residuals — solid waste, air emissions, and wastewater generated by these activities. In addition, these accounts often include data on pollution and material flows in relation to other countries, such as cross-boundary pollution and exports of goods. 3 Pollution and material physical flow accounts can take several forms, but they are generally organized to show the origin (supply) and destination (use) of materials and pollution. More detailed accounts also show how inputs are transformed into other products, pollution, and waste, and they provide information on the net material accumulation to either the economy or environment (i.e., the difference between the total inputs and the total outputs of each activity). Examples of pollution and material physical flow accounts include time series accounts for carbon dioxide emissions and energy use. These are accounts specifically for tracking trends in carbon dioxide emissions and energy use over time. 2.3. Monetary and hybrid accounts These accounts separate data from countries’ conventional accounts to focus on expenditures and taxes related to protecting and managing the environment, as well as the economic contribution of environmental services industries. Examples of monetary and hybrid accounts include fees collected by government for resource use, such as levies on minerals, forestry, or fisheries, and funds spent on water treatment and solid waste management. 2.4. Environmentally-adjusted macroeconomic aggregates The use of the other types of environmental accounts to adjust product and income accounts in order to assess overall environmental health and economic progress. Examples of environmentally adjusted macroeconomic aggregates include environmentally adjusted GDP and Net Domestic Product (NDP). Environmentallyadjusted macroeconomic aggregates can help assess overall environmental health and economic progress by correcting the GDP to include the monetary value of declines in resource stocks from environmental extraction and depletion. Similarly, these adjusted aggregates can also correct the GDP or NDP to include the cost of environmental degradation from economic activities that create pollution. 3. ENVIRONMENTAL AUDITING ISSUES International Chamber of Commerce (1989) first attempted to define environmental auditing as “a management tool comprising a systematic, documented periodic and objective evaluation of how well environmental organization, management and equipment are performing with the aim of helping to safeguard the environment” The definition’s key-word is “management”. The nature of the environmental audit is determined by management policy. Furthermore, the evaluation process must be systematic and documented. In this context, Canadian Institute of Chartered Accountants (1992) demonstrated that a variety of services is defined as environmental auditing. The emphasis in management is also apparent in the draft British standard on environmental management systems. This defines environmental audit as “a systematic evaluation to determine whether or not environmental performance complies with planned arrangements, and whether or not these arrangements are implemented effectively, and are suitable to fulfill the organization’s environmental policy”. In this sense, environmental auditing is defined as a management tool which on the one hand gives advice on future action on the other hand sets appropriate procedures that 4 provide feedback on progress (Wade, 1995). More recently, environmental auditing (EA) was defined as the process of measuring the actual and potential environmental impacts of public and private sectors within the business industry. 4. Types of audits related with environmental issues Environmental audit is categorized into internal and external environmental auditing. Via an extended literature review three types of audits are strongly related with environmental issues (INTOSAI Working Group, 2000): They are as follows: o Financial statements o Compliance audit o Performance audit Environmental issues which may affect the financial statements are: o Expenses relevant with the environment protection o The conservation of renewable resources o The compliance with the environmental legislation. Compliance auditing with regard to environmental issues provide assurance that business is functioning in accordance with environmental regulations and laws (INTOSAI Working Group, 2004). Performance audit may include environmental programs that are performed in an economical, effective and efficient way. Performance audits measures the environmental performance of the organization and attempts to identify the chances for improvement. In this context performance audit could be a basis for defining objectives and measures which should be attained in the future. In connection with the above discrimination of audit, according to other researchers twelve audit types are correlated with environmental auditing (Business International, 1990; Lewis and Moriyama, 1990; Hillary, 1998). These audit types are: o Associate audit o Compliance audit o EMS audit o Corporate audit o Activity audit o Issues audit o Process safety audit o Energy audit o Health and Safety audit o Waste audit o Site audit o Supplier /Customer/Contractor audit 5 Other discrimination is stated according to Stanwick and Stanwick (2001). In this context environmental audit types are: o compliance audits, o pollution prevention audits, o transactional audits, o product audits, and o environmental liability accrual audits. Compliance audits determine whether or not activities are in accordance with the legal constraints imposed by regulations. They are detailed site specific assessments of past, current and planned operations (Sawyer et. al, 2005). 5. Contribution of environmental auditing Environmental auditing measures the effectiveness of management processes and consequently the effectiveness of the systems concerning the environmental matters. In this context, Campbell and Byington (1995) claimed that environmental auditing assists in: o reduction of fines for regulatory incompliance o early identification of problems o cost saving from waste o enhancing the reputation for environmental responsibility. Environmental auditing assists the business economically by exposing inefficient employees and departments. Moreover, it is found that the insertion of environmental audits within current management systems will increase the manager’s attention to both environmental and traditional tasks (Sinclair-Desgagne and Gabel, 1997). Environmental audits also allow benchmark measurements of the company’s commitment to the environment. The benchmark-based data could be used internally for aiding in top level decision making (Stanwick and Stanwick, 2001). An environmental audit may also allow a company to present a positive image to its external stakeholders by providing evidence of its commitment to the environment (Zutshi and Sohal, 2003). Apart from stakeholders, nowadays, the amount of environmental legislation that businesses and other organizations have to comply with is being increased. In this sense environmental audits ensure that a company is complying with all relevant government regulations and reducing the potential legal liability of the company’s managers (Watson, 2004). Summary Environmental accounting is a framework for organizing information on the status, use, and value of natural resources. Hence, information contained in a country’s environmental accounts regarding use of natural resources, environmental expenditures, and emissions flows are components of the economic activities of production and consumption within a country and the world-at-large. In this article, four types of environmental accounts were considered that require public and corporate governance attention for proper utilization and control of economic activities as well as net zero 6 transition. These accounts include natural resource assets accounts; pollution and material physical flow accounts; monetary and hybrid accounts; and environmental-adjusted macroeconomic aggregates. Environmental auditing is recognized as a management tool comprising a systematic, documented periodic and objective evaluation of how well environmental organization, management and equipment are performing with the aim of helping to safeguard the environment”. However, contribution of environmental auditing counts on measures of effectiveness of management processes and consequently the effectiveness of the systems concerning environmental matters. Therefore, it was concluded that while we derive benefits from technological inventions of converting natural resources to useful economic products, the need for net zero transition has equal important to reduce the hazards of climatic change. Conclusion This article expatiate the fundamental requirement of adding to existing knowledge in form of reflective importance of achieving a balance between the carbon emitted into the atmosphere and the removal of carbon from it. Those charge with governance must be committed to reduce emission of greenhouse gases. Therefore, it was concluded that while we derive benefits from technological inventions of converting natural resources to useful economic products, the need for net zero transition has equal importance to reduce the hazards of environmental degradation. REFERENCES Business International (1990). Managing the environment: the greening of European business, London: Business International. Canadian Institute of Chartered Accountants (1992). Environmental auditing and the role of the accounting profession, Toronto. Hillary Ruth (1998) “Environmental Auditing: Concepts, Methods and developments”, International Journal of Auditing, John Wiley & Sons Ltd, 2, pp.71-85. International Auditing Practice Committee (1995) “The Audit Profession and the Environment”, International Federation of Accountants, New York. 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