relationship between environmental management accounting and ...

National Symposium & Exhibition on Business & Accounting 2015 (NSEBA IV) ISBN 978-967-42982-7-2

Awareness of Environmental Management Accounting for Decision Making: A case study on an institution of higher learning Faizah Mohd Khalid1, Noormala Ahmad2 & Siti Jeslyn Hasan3 1,2

College of Business Management & Accounting, Universiti Tenaga Nasional ([email protected], [email protected]) 3 Faculty of Accountancy, Universiti Teknologi MARA,Malaysia. ([email protected])

ABSTRACT. Environmental management accounting is fast being integrated in business strategies around the world. The availability of legislations and policies on environmental aspects, as well as incentives provided by governments encourage the harmonisation of economic sustainability and social and environmental accountability in corporate decision making. The study aims to investigate the awareness of environmental management accounting (EMA) practices in corporate decision making within an institute of higher learning setting. The role of universities is seen as contributing towards producing learned graduates in sustainability, conducting research, by incorporating sustainability agenda in their operations and through partnerships. Semi-structured interviews are conducted on the management and head of faculties of a private institution of higher learning in Malaysia in order to accomplish these objectives. It was found that there was no awareness among the interviewees of EMA as a cost management tool. However, it was also found that the university is concerned about managing its utility and waste costs; which incidentally coincides with EMA characteristics of water and waste management. KEYWORDS: environmental management accounting; sustainability; awareness; university.

1

INTRODUCTION

Economic sustainability is usually not in tandem with human sustainability because it values everything in monetary terms and is not concerned with sustaining natural and common resources (Goodland, 2002). Past study iterates the difficulties faced in finding best practices or approaches to link environmental performance and financial performance. Other research also tells us that businesses will only consider environmental concerns into their daily decision making when the benefits gained from them exceed the costs of implementation. Studies on environmental management accounting (EMA) conducted in Australia have proven that environmental cost management strategy via EMA can be implemented across various organisations, including college at level; and improves financial performances (EPA Australia, 2003). Findings from the Australian research, as well as others similar to it; reinforce the benefits of EMA for economic performance. Apart from concerns of whether EMA implementation will actually increase profitability, concerns about the need to make large investments on infrastructure to kick-off the deed may also impede its implementation. This is by and large, the main key barriers to EMA implementation. The availability of legislations and policies on environmental aspects is also essential in ascertaining that economic sustainability does not outweigh social and environmental accountability in corporate decision making. It should be noted that Malaysia has been recognized as being one of the most active emerging economies in relation to corporate social responsibility, in which EMA is one of the tools (Zulkifli and Amran, 2006). Despite that fact, majority of the Malaysian businesses are still lagging in incorporating sustainability techniques like EMA in decision making and may be resisting its


implementation. Awards such as the Prime Minister's Hibiscus Award which recognises excellence in environment consciousness among companies, attracted only attracted 59 companies in 2007 (Bernama, 2008). With over two hundred thousand private limited companies and over a thousand public listed companies in Malaysia, we wonder of the awareness and level of implementation of EMA and environmental concerns in these entities’ decision making. On a similar note, education institutions of all levels are incorporating good values of sustaining the environment. In view of the level of involvement of high-ranked universities around the world towards these initiatives, it is only logical that Malaysian universities are moving towards the same agenda. It is strongly believed that universities should set precedence as a role model to embed the importance of social, environmental and economic accountability in the younger generation. This means that it should start with a collective awareness by the management and faculty of what environmental management accounting could offer for the betterment of the organization and society. Therefore, this study aims to determine the EMA awareness in managerial decision making in an institution of higher learning setting due to a heightened concern of the level of ignorance and or disregard of environmental implications in corporate decision making in general. The study also hopes to trigger universities to start upholding its integrity and accountability as an institution of higher learning that actually practice what it preaches. Changing the way decisions are made may not be an easy task without the availability of policies and procedures to act as guidelines for better processes but without the awareness and accountability, nothing will be achieved. Semi-structured interviews are conducted from a convenience sample of the management and head of faculties of a private institution of higher learning in Malaysia in order to accomplish these objectives. The paper is structured as follows: review of literature; research methodology; research findings based on selected interviews; and conclusions and recommendations. Findings from this research will reflect the need for collaboration of all divisions in the university in order to preserve and improve university’s decision-making and translated into better operations that preserves the university’s and its environment’s sustainability.

2

REVIEW OF LITERATURE

2.1

Environmental Management Accounting (EMA)

EMA is broadly defined to be the identification, collection, estimation, analysis, internal reporting, and use of physical flow information (i.e., materials, water, and energy flows), environmental cost information, and other monetary information for both conventional and environmental decision-making within an organization (Savage, Ligon & Lomsek, 2002).

According to Schaltegger, Hahn and Burritt (2005), EMA can be described into Monetary EMA (MEMA) and Physical EMA (PEMA). Monetary environmental management accounting (MEMA), as part of environmentally differentiated conventional accounting, incorporates environmentally induced monetary impacts on the corporation. It provides the central accounting source of information for most internal management decisions and addresses the tracking, tracing, and allocation of environmentally induced costs and benefits (Schaltegger and Burritt, 2000). MEMA supports strategic and operational planning, provides


the main basis for decisions about how to achieve desired goals or targets, and acts as a control device (Schaltegger and Burritt, 2000).

Physical environmental management accounting (PEMA) also serves as an information system for internal management decisions. However, in contrast to MEMA its focus is on the physical impacts of the corporation on the natural environment, expressed in terms of physical units, such as kilograms. PEMA tools are designed to classify, collect and record environmental impact information in physical units for internal use by management (Schaltegger and Burritt, 2000). Environmental Management Accounting (EMA) MEMA

PEMA

Specific MEMA tools

Specific PEMA tools

Past orientation

Future orientation

Past orientation

Future orientation

Env. Cost accounting

Monetary Env. Budgeting

Material accounting

Physical Env. Budgeting

Accounting for env. Benefits

Monetary Env. Investment Appraisal

Energy flow accounting

Physical Env. Investment Appraisal

Figure 1: EMA Tool (Schaltegger, Hahn and Burritt; 2005)

2.2

Government’s Awareness of Environmental Management Accounting in Decision Making

Governments around the globe are placing greater emphasis on the environmental issues. Many initiatives have been formulated which also indicate increasing level of environmental awareness. Environmental awareness includes general awareness and awareness which recognizes the costs and benefits associated with environmental issues (Gadenne, Kennedy and Mckeiver, 2009). With regards to EMA, developed countries seem to be a step ahead in promoting EMA. In Europe, for instance, the Pollution Prevention Pays program was designed to disseminate the EMA concept, while in the United States, the high level of potential liabilities pushed companies to be more concern regarding their environmental costs (Sendroiu, Roman, Roman and Manole, 2006).

Developing nations such as Malaysia are also becoming active in promoting environmental awareness. Malaysian government already established extensive legislative devices in protecting the environment such as the environmental impact assessment- EIA (Zulkifli and Amran, 2006) as well as introducing the Prime Minister’s Hibiscus Award. In fact, Malaysia has been recognized as being one of the most active emerging economies in relation to corporate social responsibility, in which EMA is one of the tools (Zulkifli and Amran, 2006). Malaysia was also a participant in the Expert Working Group on Improving Government’s Role in the Promotion of Environmental Management Accounting together with other countries such as Australia, Canada, Japan, Sweden, United Kingdom and United States.

The role played by government in creating awareness and promoting widespread use of environmental management tools is undeniable. Cullen and Whelan (2006) argued that if firms are reluctant


to internalize the non-market or social costs, which include environmental costs, then it is the role of the government to force this internalization. Realizing this, the United Nations (UN) launched a special publication in 2001 which is intended to support policy makers in designing effective policies to promote the use of EMA by industry and other organizations. Other than can be applied within their own operations, the implementation of EMA will also provide the following benefits to the government: 1) Reduce the financial, political and other costs of environmental protection, regulation and enforcement, when more industry is able to recognize environmental protection programs and expenditure on the basis of financial self-interest; 2) Strengthen the effectiveness of existing government policies/ regulations by revealing to companies the true environmental costs that those policies/ regulations impose (Savage, Ligon and Lomsek, 2001).

As highlighted in the UN publication, government may implement a number of EMA policy instruments or activities such as:  Direct requirement of EMA via government regulation  Promotion of the development of voluntary EMA standards, voluntary adoption of EMA standards and practices, and self regulation of EMA practices and performance  Development of EMA concepts, definitions, methodologies and tools  Dissemination of EMA information and tools  Provision of free or subsidized technical assistance  Other incentives such as tax breaks, low-cost financing, award etc.

2.3

Business sector

Environmental issues were previously ignored by both corporations and individuals, and even worse, hazardous waste and similar items were considered a cost of a growing economy (Pithadia, 2006). However, this has gradually changed in the current society. Environmental awareness has been accepted as an emerging value in our society, and the business world is beginning to assimilate the new value our society has concerning environment (Masanet-Llodra, 2006). There are many factors that may determine the extent of environmental awareness which include access to information, time and cost factors, and owner/manager personal characteristics such as age and education (Gadenne et al., 2006).

The environmental awareness triggered in the business sector is not restricted to the developed nations. In a small country, Lithuania, for example, an increasing number of industrial enterprises are reported to implement sustainable industrial development measures especially in the areas of cleaner production and environmental or quality management systems (Jasch and Stasiskiene, 2005). In Malaysia, studies have shown that many companies have adopted the ISO 14001 Environmental Management System standards and the number was proportionately higher than that found in many developed and developing countries including the United States, France, India and China (Zulkifli and Amran, 2006).


EMA, as part of the environmental management tools, is believed to provide many advantages to the business sector. Being able to show that the organization is environmentally responsible can serve as a marketing strategy to increase market share and more importantly, to differentiate the organization from its competitors (Porter and van der Linde, 2005). Pithadia (2006) posits that EMA could also bring the benefits such as:  the ability to more accurately track and manage the use and flows of energy and materials  the ability to more accurately identify, estimate, allocate and manage/reduce environmental costs  more accurate and comprehensive information to support the voluntary and cost-effective programs to improve environmental performance  improves company image with stakeholders such as customers, local communities, employees, government and finance providers.

Despite the growing environmental awareness and ‘green’ attitudes within the corporate sector, empirical results showed that the level of implementation of environmental-friendly practices is low (Gadenne et al., 2009). In a case study research done by Masanet-Llodra (2006), incongruities exist between company’s environmental strategy and its environmental behavior reflected in facts. In other words, the company appears to be highly environmental committed while from facts, this commitment was not translated into action.

In an empirical study on environmental awareness and practices in small and medium enterprises (SMEs), Gadenne et al. (2006) examine the relationship between influences from various stakeholders and the awareness of environmental issues. The findings show that legislation does result in general environmental awareness and due to that, companies are willing to change their business processes and environmental strategies. It is also revealed that the major obstacle for owner/ managers of SME to be aware of environmentally sustainable practices is lack of financial resources.

Hence, to develop the environmental awareness and translate it into action, as in the case of EMA, the business sector needs external help and push, particularly from the government in the form of legislation, policies and incentives. Furthermore, EMA has to be tailored to the special needs of the company rather than be applied as a generic system (Sendroiu et al., 2006).

3

RESEARCH METHODOLOGY

The study is aimed at analysing the awareness of applying EMA for decision making at an institute of higher learning in Malaysia. It seeks to gauge whether top management of the university will consider incorporating EMA in their daily decision making and operations. The method used for this study is semi-structured interviews, analyses and observations. The interviews generally lasted around forty five to one hour in the interviewees’ offices and discussion rooms. The reason for conducting semi-structured interviews is that although the aim of the research is gauge awareness of EMA in the organisation, the researchers also believe that a semi-structured interview will


provide interviewees a chance to explore their perceptions and ideas (Cohen & Crabtree, 2006) and it may also provide the research indicators of whether the university moving towards embedding EMA in managing its core and supporting operations. Observations are also implemented to ensure that the initiatives towards EMA are carried out in both campuses via minutes of meetings, procedures and notices as well as other initiatives which are considered as EMA implementation. All interviews starts with a brief introduction on EMA as it is imperative that the “EMA” term is understood by as most of the interviewees are not from the accounting field; and also due the fact that some organisations do practice management accounting tools and techniques without realising it. Among the questions posed to the interviewees are; whether they are aware of EMA as a tool for good business, their perceptions of the importance of creating an environmentally conducive campus and about the possibility of embedding EMA in their daily decision-making processes. Also, the interviewees were asked whether the university provides services and facilities that advocate social and environmental accountability and sustainability through all of its education courses and external research conducted. Examination of secondary data, i.e. codes of practices, policies as well as minutes of meetings were conducted to determine whether the university embeds environmental-related initiatives that gears towards EMA. Apart from that, observations are conducted during visits to both campuses; examining minutes of meetings that reflect initiatives at reducing resource usage such as water, paper, electricity and examining policies and procedures. The policies and procedures are selected based on divisions that would benefit from environmental-related activities.

3.1

Sample Selection

The research is based on a case study of a private university in Malaysia. The university is specifically chosen due to its commitment towards ‘green energy’. The researchers argue that an organization that has a passion towards environmental initiatives and invests time and resources towards it will also be committed to implementing these ideals; especially owing to the fact that it is a centre of education. It is also wholly owned by public listed company, which is also a government linked company (GLC) that supplies utility services to the Malaysian population. The university is the only private university in Malaysia awarded with a RM6 million research grant on ‘Energy from Landfills in Malaysia’ by the Ministry of Higher Education (MOHE) in 2009. Among some of the university’s initiatives in support of ‘green energy’ are the launching of Centre of Renewable Energy and Institute of Energy Power & Research focusing on research and policy building towards sustainability. Other than that, the university is also the first university in Malaysia being certified with a Quality Environment Practice Certification ISO9001:2000 based on 4 activities including management of research and consultancy and operations of the overall support services. The study also analyses codes of practices, policies of the finance, procurement and property management divisions as well as minutes of meetings of the Utility and Waste Management Committee (UWMC). These documentations are chosen because maintenance of the university grounds, usage of power and water as well as any acquisitions is executed by these divisions. 4

FINDINGS AND DISCUSSION

4.1

Findings from Interviews


The semi-structured interviews were conducted within 4 days based on a convenience sampling. The interviewees’ findings and discussion are drawn according to the following themes: EMA awareness, business operations and decision making, findings from documentation analyses and conclusion.

Post

Level/ post

Vice Chancellor of the University

Top Management

Deputy Vice Chancellor (Academic)

Top management, academic of COE

Dean of College of Engineering (COE)

Top Management, academic of COE

Dean of College of Information Technology (COIT)

Top Management, academic of COIT

Dean of Institute of Liberal Studies (IKAL)

Top Management, academic of IKAL

Dean of College of Graduate Studies (COGS)

Top Management, academic of COE

Director

Top Management, Strategic and Corporate Planning Centre

Financial Controller

Top Management, Finance Division

Senior Manager

Top management, IT & Multimedia services (ITMS)

Senior Manager

Top management, Property Management (PMD)

Manager

Middle management, Procurement Figure 2: List of Interviewees

4.1.1. EMA Awareness The interviews start with a description of EMA as per Savage et. al. (2002). The description provides an appreciation of EMA system within decision making process. It was found that the interviewees were not aware of EMA as a cost management tool for decision making. There was an understanding that EMA in decision making may improve the university’s accountability towards the environment, nonetheless there were skepticism as to whether EMA can actually reduce costs.

We threw the idea of possibly refurbishing and retrofitting the campus with energy efficient fittings and water-saving faucets, for a start. The senior manager heading Property Management Division (PMD) views the tasks as expensive as PMD always emphasize on “saving costs without any investment” ideals. Nonetheless, it was also established that PMD has already embarked on recycling water from man-made ponds around campus to water its compound landscapes. PMD also informed that they are considering purchasing several machines that process leftover food from the cafes and canteens within the campus into organic fertilizers for some of the plants on campus.


It was also gathered that the related divisions in the university adopt a cost management approach in decision making through managing utilities costs by means of controlling utilization.

It was also determined from the interviews that the interviewees perceived environmental-related initiatives will incur more costs due to the fact that it is difficult to obtain eco-conscious companies that can provide eco-efficient supplies and assets at reasonable prices.

4.1.2.

Business operations and decision-making

The term business operation for this research refers to ongoing recurring activities that create value for the stakeholders (Phinney & Barron, 2009). In the context of this study, we are looking at the running of the university’s operations; with the main objective of satisfying its customers’ needs.

Through an interview session with the Procurement manager, it was found that the Procurement division may consider applications to procure items, services or work that are environmentally conducive, based on specifications requested in purchase requisition. Applications and quotations for any items, service or work will be evaluated and decisions made will be based on stringent regulations and price considerations.

The university’s ITMS senior manager was discovered to be an avid environmentalist. He informs that the ITMS division does not have specific operational procedures that adhere to environmental-related initiatives. In terms of procuring IT peripherals and equipments, the division objective is to fulfill the staff requests as well as reduce operational costs rather than purchasing environmentally friendly equipments. Initiatives towards EMA were established in the division through initiatives of campaigning on reducing paper usage, recycling used papers. ITMS also resells empty ink cartridges to manufacturers but stop short of purchasing recycled toners due to their flawed quality.

4.2

Findings from Documentation Analysis

In order to evaluate EMA implementation within the university’s operations, analyses of code of practices and policies and procedures were conducted. The research focuses on 3 divisions namely, Finance Division, Procurement Division and Property Management Division as their operations involve a lot of decision –making exercise that may embed EMA practices. Figure 3 shows the codes of practices, policies and procedures analysed. Division Finance Procurement

Property Management

Code of Practice/ Conduct  Fixed Asset Management   Procurement Code of Conduct (adopted from parent company)  Green Book  Property Services 

Policies Finance policy Procurement Policy

Property Management Policy


 Properties Maintenance  Property Development Utility & Waste Management Committee

 Minutes of meetings Figure 3: Documentation analysed

The university’s codes of practice, policies as well as minutes of meetings of the Utility & Waste Management were analysed for any environment-related management accounting activities in the finance, procurement, property management divisions. Results show that there are some indications of environmental activities/ practices in the university, namely:

Item 9.0 of the Tender Recommendation of the Procurement Division states that for the purpose of deriving best value for the university, one of the key criterion analysed is risk analysis on the tenderer and proposal to ensure, among others; that the tenderer/ proposal will not pose any environmental threats. 5

CONCLUSION

The objective of the study was to determine whether there is EMA awareness among the members of management in an institution of higher learning setting. It was discovered that the university management was aware of potential environmental considerations in making decisions, but not EMA per se. There was also a misconception that EMA was related with planting of trees. No evidence was found to support EMA implementation in the university based on the interviews discussions as well as analysis of reports and records. However, it was learnt from some of the Unit Heads that environmentally conducive decisions could be implemented but were costly and did not go hand in hand with the management’s objectives of controlling and reducing their CAPEX and OPEX. Interviewees felt that initiatives to spearhead EMA may culminate into large investment decisions and due to that fact the tendency of embracing EMA may not materialise sometime soon.

Thus, it can be concluded that the university were unaware of EMA and does not apply it as a cost management tool. However, discussions with interviewees suggested that there was the potential of introducing EMA in decision-making in order to manage cost and increase profitability. For a start, the university has paved the way towards managing utility and waste, which is in line with EMA philosophy.

This is considered as a positive move, which may spearhead the university into incorporating environmental considerations in their decision-making in the near future, thus upholding its integrity and accountability as an institution of higher learning that actually practice what it preaches. Ideally, these initiatives should also be translated into implementing EMA and sustainability on campus, through clear policies and decision-making procedures. With the advent of sustainability and green business it is hoped that the university may become one of the first pioneers that assimilate EMA in decision-making.


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