Open Journal of Accounting, 2013, 2, 4-7

http://dx.doi.org/10.4236/ojacct.2013.21002 Published Online January 2013 (http://www.scirp.org/journal/ojacct)

Green Accounting: Cost Measures

Krishna Moorthy, Peter Yacob
Faculty of Business Finance, University Tunku Abdul Rahman, Kampar, Perak, Malaysia
Email: [email protected], [email protected]

Received October 31, 2012; revised December 3, 2012; accepted December 15, 2012

ABSTRACT
In the past, environmental issues were often ignored by both, large companies and small medium enterprises. However,
accounting for the environment or the acronym “Green accounting” is receiving increased attention in the recent times.
Many companies, particularly small medium enterprises (SMEs) are now interested in being “green”, as many investors
place a high value on environmental responsibility. Many environmental costs can be significantly reduced or elimi-
nated as a result of business decisions, ranging from operational and housekeeping changes, to investment in greener
process technology to redesign processes or products. Industry and the green movement are tilting towards consensus
on the pivotal concept of sustainable development. Better natural resource and green accounts would provide valuable
insights into the interaction between the environment and the economy. However, implementing green accounting in
organization such as SMEs in Malaysia, results in resistance or ignored due to some reasons such as lack of awareness,
lack of ethical education, etc. This paper highlights the issues surrounding the firms green accounting in financial re-
porting. The key goal of this paper is to outline a set of green accounting measures that are to be addressed in environ-
mental management accounting system of a firm.

Keywords: Green Accounting; Environmental Accounting; Green Costs; SMEs in Malaysia

1. Introduction counting systems and practices; while this may include

reporting and auditing in some companies, green ac-
Green accounting is related to environmental information counting typically may involve to the life cycle costing,
and environmental eco-auditing systems [1] and has been full cost accounting, benefits assessment and strategic
defined as ‘the identification, tracking, analysis, and re- planning for environmental management”. Furthermore,
porting of the materials and cost information associated the United Nations Division for Sustainable Develop-
with the environmental aspects of an organization [2]. ment [4] emphasizes that green accounting systems gen-
Green accounting is relatively new and a developing erate information for internal decision making, where
field. However, in Malaysia the green accounting is con- such information can be either physical or monetary in
sidered at an infant stage because, the implementation of focus. Indeed, the United States Environment Protection
green accounting in organizations such as SMEs in Ma- Agency deems that “an important function of green ac-
laysia, results in resistance or ignored due to some rea- counting is to bring environmental costs to the attention
sons such as lack of awareness, lack of green and ethical of corporate stakeholders who may be able and moti-
education and so on. The green accounting deals with vated to identify ways of reducing or avoiding those
accounting and management issues relating to environ- costs while at the same time improving environmental
mental and social impacts, regulations and restrictions, quality”. In fact, the green accounting systems have the
safety, environmentally sound, and economically viable dual purposes of managing and improving the financial
energy production and supply [3]. The foremost role of environmental performance of an entity. It can also con-
green accounting is to tackle the social environmental sider how organizational operations impact environ-
problems and may have impact on attaining sustainable mental systems and issues [5].
development and environment in any country and influ- In summary, it is known that businesses are formed to
ences the company’s behavior in confronting social and deliver services or produce products in order to earn a
environmental responsibility issues. profit. In the 21st century, accounting goes beyond the
The International Federation of Accountants discusses bottom line of black or red and it includes “green”, too.
green accounting as “the management of environmental With the growing green consumer awareness, companies
and economic performance through the development and are more than ever expected to align its business strate-
implementation of appropriate environment related ac- gies with environmental initiatives. Environmentally

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 K. MOORTHY, P. YACOB 5

conscious companies have already discovered that they chemical companies often do not provide adequate in-
can generate business strategies to help them reduce their formation on their environmental costs. This results in
carbon footprint, minimize their environmental impact, ill-informed and often costly management decisions. How-
make the best use of natural resources, become more ever, by incorporating environmental accounting proce-
energy efficient, reduce costs, and exhibit social respon- dures, industrial firms, regardless of size, can increase
sibility all at the same time [6]. profits, use materials more efficiently, and protect the
environment.
2. Literature Review In fact, Lintott [12] argued that the green accounting
evaluates a general measure of welfare that leads to
Amran and Devi [3] described that green accounting lit-
costly management decisions. Problems of monetary
erature has paid little attention to either organizational
valuation are likely to lead accounting procedures. In-
influences on a company’s practices or has a company’s
practices influenced its organization. Dinah Shelton [7] dustrial firms, regardless of size, can increase profits, use
described the importance of and impact on the green au- correct estimation of environmental costs. Firms can also
diting system in relation to the environmental develop- learn more about more robust view of sustainability, are
ment. She pointed out that the green auditing and ac- ignored. The United Nations Handbook of National Ac-
counting is the same and plays critical role in promoting counting, stated about the growing pressures on the en-
the public and the environmental organizations that could vironment and increasing environmental awareness that
be worked based on the human rights approach. It means have been generated the need to account for the manifold
that environmental education is working in line with the interactions between all sectors of the economy and the
human rights documents context. environment. The conventional national accounts focus
On the other hand, Schultz and Williamson [8] argued on the measurement of economic performance and
that the sustainability accounting, which is an ethic of growth as reflected in market activity. It also deals with
accountability, standardization of sustainability and fu- the sustainability of growth and development, the scope
ture prospects for corporate sustainability, accounting for and coverage of economic accounting that needs to be
sustainable development may lead to sustainability con- broadened to include the use of non-marketed natural
cept. Interestingly, Heba and Yousef [9] have discussed assets and losses in income generation resulting from the
about the concept and understanding on the environ- depletion and degradation of natural capital [13]. The
mental accounting education. Their article explored the conventional accounts do not apply the commonly used
concepts of green accounting and the possibility of depreciation adjustment for human-made assets to natu-
broadening the applicability of the environmental report- ral assets. Since sustainable development includes eco-
ing concept to be utilized by governments to make busi- nomic and environmental dimensions, it is essential that
nesses more responsible for their externalities. They dis- national accounts reflect the use of natural assets in addi-
cussed the importance of environmental accounting as tion to produced capital consumption.
part of the accounting management, overviews the past The above literature review gives the required input
and the current regulatory and mandatory status of green for the current topic. Ramanathan [14] looked at green
accounting and its relationship on the different profess- accounting from the premise of social contract theory
sions. and based his argument. Green accounting requires mul-
Recognizing this, Mehenna and Vernon [10] described tidisciplinary knowledge in behavioral science, engi-
that the green accounting is an expansion path which neering, sociology and even biology. The fundamental
deals and measures with the environmental performance premise behind green accounting is that organizations
and the integration of environmental policy with business should internalize environmental costs. Currently these
policy. The business firm’s strategy includes responding costs are externalized, and the society bears the impact of
to capital and operating costs of pollution control equip- an organization’s adverse activities on the environment
ment. This is caused by increasing public concerns over due to the fact it is a “public good”. Internal environ-
environmental issues, and by the recent government-led mental accounting mechanisms such as cost accounting
trend to incentive-based regulation. Furthermore, they attempts to trace costs of the organization’s activities on
found that the environmental component of the business the environment [15]. It is expected that once organiza-
strategy, producing the required performance reports and tions are made accountable for these costs, they would be
recognizing the multiple skills required to measure, com- compelled to minimize the potentially harmful effects of
pile and analyze the requisite data. such activities. Also, environmental accounting requires
According to Jennifer Ouellette [11], chemical com- organizations to forecast the potential environmental
panies stand to benefit from a system of green accounting, impact of their activities and accordingly estimate their
leading to better determination of costs and management contingent liabilities and create provisions for environ-
of resources. The traditional accounting methods used by mental risks.

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6 K. MOORTHY, P. YACOB

3. Green Accounting Measures with the help of green accounting measures and thus, will
lead the economy to a viable path.
The above literature review leads to the following green
Despite the fact that the corporate environmental ex-
accounting measures in Table 1. The next step will con-
penses increase not only in importance but also in mone-
sist of questioning the departments or functional services
tary units, some enterprises continue to underestimate and
grouped according to processes, and within the processes,
enter environmental costs in accounts as general expenses.
the specific environmental activities. A selection tech-
However, some companies try to connect environmental
nique will be used, meant to reduce the excessive number
costs with products or services but the methods of alloca-
of specific environmental activities, even a regrouping of
tion cost used are inappropriate. When no proper alloca-
these activities into processes. Based on questionnaires
tion method is used, the manager of an enterprise does not
collected from the enterprise workers, the centralized
receive reliable information with regard to the real costs
information will be analyzed by the Green Accounting
and profits in order to maintain or change the products
team. Based on this data, a preliminary dictionary of the
and/or processes.
most important environment-specific activities will be
Furthermore, the above situation prevents the effective
prepared. Also information will be collected about allo-
follow-up of yield of an enterprise as well as the right
cation units of environment-specific costs which the Ac-
pricing of products and the important activities for the
tivity Based Costing method can provide (environmental
maintenance of competitiveness of an enterprise. The
cost drivers).
green accounting still faces a number of problems, such
as, the lack of support of information, specialized per-
4. Conclusions
sonnel as well as the absence of proportional interna-
The green accounting is an emerging aspect of account- tional accounting models. In recent years, the efforts for
ing science that will influence, in the near future. The the growth of environmental information systems have
adoption of basic elements of green accounting will por- led to the creation of proportional systems of administra-
tray the role of environment in the economy as well as tion (Environmental Management Systems) which face
render easier the analysis of macroeconomic questions problems with regard to the treatment of complicated
environmental data. The new tendencies that are found in
Table 1. Green accounting measures. evolution foresee a more proactive environmental plan-
ning through the recognition and the reduction of envi-
Description Green Accounting Issues and Scope
ronmental cost and consequently the improvement of
Pollution
Costs incurred to prevent air and water pollution profitability of enterprises.
along with water treatment facilities and other
Prevention Costs
activities.

Environmental
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