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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: krishnam@utar.edu.my, petery@utar.edu.my 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 in vestors 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 Green accounting is related to environmental information and environmental eco-auditin g systems [1] and has been defined as ‘the identification, tracking, analysis, and re- porting of the materials and cost information associated with the environmental aspects of an organization [2]. Green accounting is relatively new and a developing field. However, in Malaysia the green accoun ting is con- sidered at an infant stage because, the implementation of green accounting in organizations such as SMEs in Ma- laysia, results in resistance or ignored due to some rea- sons such as lack of awareness, lack of green and ethical education and so on. The green accounting deals with accounting and management issues relating to environ- mental and social impacts, regulations and restrictions, safety, environmentally sound, and economically viable energy production and supply [3]. The foremost role of green accounting is to tackle the social environmental problems and may have impact on attaining sustainable development and environment in any country and influ- ences the company’s behavior in confronting social and environmental responsibility issues. The International Federation of Accountants discusses green accounting as “the management of environmental and economic performance through the development and implementation of appropriate environment related ac- counting systems and practices; while this may include reporting and auditing in some companies, green ac- counting typically may involve to the life cycle costing, full cost accounting, benefits assessment and strategic planning for environmental management”. Furthermore, the United Nations Division for Sustainable Develop- ment [4] emphasizes that green accounting systems gen- erate information for internal decision making, where such information can be either physical or monetary in focus. Indeed, the United States Environment Protection Agency deems that “an important function of green ac- counting is to bring environmental costs to the attention of corporate stakeholders who may be able and moti- vated to identify ways of reducing or avoiding those costs while at the same time improving environmental quality”. In fact, the green accounting systems have the dual purposes of managing and improving the financial environmental performance of an entity. It can also con- sider how organizational operations impact environ- mental systems and issues [5]. In summary, it is known that businesses are formed to deliver services or produce products in order to earn a profit. In the 21st century, accounting goes beyond the bottom line of black or red and it includes “green”, too. With the growing green consumer awareness, companies are more than ever expected to align its business strate- gies with environmental initiatives. Environmentally C opyright © 2013 SciRes. OJAcct K. MOORTHY, P. YACOB 5 conscious companies have already discovered that they can generate business strategies to help them reduce their carbon footprint, minimize their environmental impact, make the best use of natural resources, become more energy efficient, reduce costs, and exhibit social respon- sibility all at the same time [6]. 2. Literature Review Amran and Devi [3] described that green accounting lit- erature has paid little attention to either organizational influences on a company’s practices or has a company’s practices influenced its organization. Dinah Shelton [7] described the importance of and impact on the green au- diting system in relation to the environmental develop- ment. She pointed out that the green auditing and ac- counting is the same and plays critical role in promoting the public and the environmental organizations that could be worked based on the human rights approach. It means that environmental education is working in line with the human rights documents context. On the other hand, Schultz and Williamson [8] argued that the sustainability accounting, which is an ethic of accountability, standardization of sustainability and fu- ture prospects for corporate sustainability, accounting for sustainable development may lead to sustainability con- cept. Interestingly, Heba and Yousef [9] have discussed about the concept and understanding on the environ- mental accounting education. Their article explored the concepts of green accounting and the possibility of broadening the applicability of the environmental report- ing concept to be utilized by governments to make busi- nesses more responsible for their externalities. They dis- cussed the importance of environmental accounting as part of the accounting management, overviews the past and the current regulatory and mandatory status of green accounting and its relationship on the different profess- sions. Recognizing this, Mehenn a and Vernon [10] described that the green accounting is an expansion path which deals and measures with the environmental performance and the integr ation of environmen tal policy with busin ess policy. The business firm’s strategy includes responding to capital and operating costs of pollution control equip- ment. This is caused by increasing public concerns over environmental issues, and by the recent government-led trend to incentive-based regulation. Furthermore, they found that the environmental component of the business strategy, producing the required performance reports and recognizing the multiple skills req uired to measure, com- pile and analyze the requisite data. According to Jennifer Ouellette [11], chemical com- pan ie s stand to benefit from a system of green accounting, leading to better determination of costs and management of resources. The traditional accounting methods used by chemical companies often do not provide adequate in- formation on their environmental costs. This results in ill-informed and often costly management decisions. How- ever, by incorporating environmental accounting proce- dures, industrial firms, regardless of size, can increase profits, use materials more efficiently, and protect the environment. In fact, Lintott [12] argued that the green accounting evaluates a general measure of welfare that leads to costly management decisions. Problems of monetary valuation are likely to lead accounting procedures. In- dustrial firms, regardless of size, can increase profits, use correct estimation of environmental costs. Firms can also learn more about more robust view of sustainability, are ignored. The United Nations Handbook of National Ac- counting, stated about the growing pressures on the en- vironment and increasing environmental awareness that have been generated the need to account for the manifold interactions between all sectors of the economy and the environment. The conventional national accounts focus on the measurement of economic performance and growth as reflected in market activity. It also deals with the sustainability of growth and development, the scope and coverage of economic accounting that needs to be broadened to include the use of non-marketed natural assets and losses in income generation resulting from the depletion and degradation of natural capital [13]. The conventional accounts do not apply the commonly used depreciation adjustment for human-made assets to natu- ral assets. Since sustainable development includes eco- nomic and environmental dimensions, it is essential that national accounts reflect the use of natural assets in addi- tion to produced capital consumption. The above literature review gives the required input for the current topic. Ramanathan [14] looked at green accounting from the premise of social contract theory and based his argument. Green accounting requires mul- tidisciplinary knowledge in behavioral science, engi- neering, sociology and even biology. The fundamental premise behind green accounting is that organizations should internalize environmental costs. Currently these costs are externalized, and the society bears the impact of an organization’s adverse activities on the environment due to the fact it is a “public good”. Internal environ- mental accounting mechanisms such as cost accounting attempts to trace costs of the organization’s activities on the environment [15]. It is expected that once organiza- tions are made accountable for these costs, they would be compelled to minimize the potentially harmful effects of such activities. Also, environmental accounting requires organizations to forecast the potential environmental impact of their activities and accordingly estimate their contingent liabilities and create provisions for environ- mental risks. Copyright © 2013 SciRes. OJAcct K. MOORTHY, P. YACOB 6 3. Green Accounting Measures The above literature review leads to the following green accounting measures in Table 1. The next step will con- sist of questioning the departments or functional services grouped according to processes, and within the processes, the specific environmental activities. A selection tech- nique will be used, meant to reduce th e ex cessive number of specific environmental activities, even a regrouping of these activities into processes. Based on questionnaires collected from the enterprise workers, the centralized information will be analyzed by the Green Accounting team. Based on this data, a preliminary dictionary of the most important environment-specific activities will be prepared. Also information will be collected about allo- cation units of environment-specific costs which the Ac- tivity Based Costing method can provide (environmental cost drivers). 4. Conclusions The green accounting is an emerging aspect of account- ing science that will influence, in the near future. The adoption of basic elements of green accounting will por- tray the role of environment in the economy as well as render easier the analysis of macroeconomic questions Table 1. Green accounting measures. Description Green Accounting Issues and Scope Pollution Prevention Costs Costs incurred to prevent air and water pollution along with water treatment facilities and other activities. Environmental Protection Costs Costs of energy saving measures as well as costs of global warming reduction measu res. Costs of Resource Recycling Costs incurred for waste reduc tion and disposal as well as for water conservation, rainwater usage and other measures aimed at efficient resources usage. Environmental Restoration Costs Cost of environmental restorati on operations (eliminating so il an d ground water contamination, environmental compensation, etc.) Management Costs Management -related environmental protection costs including environmental promotion activities and costs associated with acquiring and maintaining ISO 14001 certification. Social Promotion Activities Costs Environmental protection costs stemming from participation in social activities such as participation in organizations concerning with environmental preservation etc. Research and Development Costs Environment al protection costs for research and Development activities and costs of environmental solutions business activities (Green product/environmental technology design and development costs, environmental solutions business costs, others) etc. with the help of green accounting measures and thus, will lead the economy to a viable path. Despite the fact that the corporate environmental ex- penses increase not on ly in importance but also in mone- tary units, some enterprises continue to underestimate and enter environmental costs in accounts as general expenses. However, some companies try to connect environmental costs with products or services but the methods of alloca- tion cost used are inappropriate. When no proper alloca- tion met hod is use d, the ma nager of an e nterpri se does not receive reliable information with regard to the real costs and profits in order to maintain or change the products and/or processes. Furthermore, the above situation prevents the effective follow-up of yield of an enterprise as well as the right pricing of products and the important activities for the maintenance of competitiveness of an enterprise. The green accounting still faces a number of problems, such as, the lack of support of information, specialized per- sonnel as well as the absence of proportional interna- tional accounting models. In recent years, the efforts for the growth of environmental information systems have led to the creation of proportional systems of administra- tion (Environmental Management Systems) which face problems with regard to the treatment of complicated environmental data. The new tendencies that are found in evolution foresee a more proactive environmental plan- ning through the recognition and the reduction of envi- ronmental cost and consequently the improvement of profitability of enterprises. REFERENCES [1] C. Jasch, “Environmental Management Accounting Met- rics, Procedures and Principles,” UN Division for Sus- tainable Development, Expert Working Group on Im- proving the Role of Government in the Promotion of En- vironmental Managerial Accounting, 2001. [2] United Nations, “The Handbook of National Accounting, Studies in Methods Series F, No. 78 Integrated Environ- mental and Economic Accounting: An Operational Man- ual,” United Nations, New York, 2000. [3] A. Amran and S. S. 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