1 | P a g e

Environment Accounting and Audit

INDEX

SR. NO. PARTICULARS PAGE NO.

1. Introduction to Environment Accounting 2-7

2. Objectives of Environmental Accounting 8

3. Scope of environmental Accounting 9

4. Forms of Environmental accounting 10-11

5. Application of Environmental accounting 12-13

6. Challenges of Environmental Accounting 14

7. Environment management accounting to reduce cost 15-19

8. Why separate Environmental Accounting and

Auditing is important?

20-23

9. Introduction to Environment Audit 24-25

10. Audit tools and techniques 26

11. Environment Audit Process 27-31

12. Environmental regularity and project performance auditing

32

13. Advantages/Disadvantages of Environment

Accounting/Audit

33-37

14. Conclusion 38-39

15. Webliography 40

2 | P a g e

Introduction to Environment Accounting:

Environmental accounting is a subset of accounting proper, its target being to incorporate both

economic and environmental information. It can be conducted at the corporate level or at the

level of a national economy through the System of Integrated Environmental and Economic

Accounting, a satellite system to the National Accounts of Countries[1](among other things, the

National Accounts produce the estimates of Gross Domestic Product otherwise known as GDP).

Environmental accounting is a field that identifies resource use, measures and communicates

costs of a company’s or national economic impact on the environment. Costs include costs to

clean up or remediate contaminated sites, environmental fines, penalties and taxes, purchase of

pollution prevention technologies and waste management costs.

An environmental accounting system consists of environmentally differentiated conventional

accounting and ecological accounting. Environmentally differentiated accounting measures

effects of the natural environment on a company in monetary terms. Ecological accounting

measures the influence a company has on the environment, but in physical measurements.

Generations ago few people were aware of economics beyond their own jobs and expenses, and

few companies thought beyond the economics of their profit and loss statements. Industries were

neither clean nor green, and gave little consideration to the environmental impact of their

business.

In the late 19th century a handful of men passionate about the natural beauty of the country in

which we live advocated for its protection and appreciation, and the environmental movement

was born and supported by the action of a president who established the National Park System,

and a man by the name of John Muir who mused over the beauty of a valley called Yosemite.

Those simple actions helped grow an awareness of the value of the world in which we live, and

our obligations to it as stewards. As that awareness grew the public and industry alike began to

see the potential for major environmental problems. This realization brought environmentalism

into the world of business.

3 | P a g e

Today businesses face a ladder of environmental regulations and industries from manufacturing

to technology must now consider their ecologic and social impact. Businesses today are required

to consider their larger footprint, and the smartest of those businesses learn how to do it in away

that is not only ecologically and socially responsible, but also economically feasible and

financially beneficial.

Financial health and profitability seldom happen by accident, and without proper planning and

foresight, navigating environmental legislation and social reporting could drain a business dry.

Environmental and social accounting grew out of an imperative to balance a company’s financial

health with its broader obligations.

Environmental accounting is organized in three sub-disciplines: global, national, and corporate

environmental accounting, respectively. Corporate environmental accounting can be further sub-

divided into environmental management accounting and environmental financial accounting.

Global environmental accounting is an accounting methodology that deals areas

includes energetics, ecology and economics at a worldwide level.

National environmental accounting is an accounting approach that deals with

economics on a country's level.

Internationally, environmental accounting has been formalised into the System of Integrated

Environmental and Economic Accounting, known as SEEA. SEEA grows out of the System of

National Accounts. The SEEA records the flows of raw materials (water, energy, minerals,

wood, etc.) from the environment to the economy, the exchanges of these materials within the

economy and the returns of wastes and pollutants to the environment. Also recorded are the

prices or shadow prices for these materials as are environment protection expenditures. SEEA is

used by 49 countries around the world.

Corporate environmental accounting focuses on the cost structure and environmental

performance of a company.

Environmental management accounting focuses on making internal business strategy

decisions. It can be defined as:

4 | P a g e

“…the identification, collection, analysis, and use of two types of information for internal

decision making:

1) Physical information on the use, flows and fates of energy, water and materials (including

wastes) and

2) Monetary information on environmentally related costs, earnings and savings.”

As part of an environmental management accounting project in the State of Victoria, Australia,

four case studies were undertaken in 2002 involving a school (Methodist Ladies College, Perth),

plastics manufacturing company (Cormack Manufacturing Pty Ltd, Sydney), provider of office

services (a service division of AMP, Australia wide) and wool processing (GH Michell & Sons

Pty Ltd, Adelaide). Four major accounting professionals and firms were involved in the

project; KPMG (Melbourne), Price Waterhouse Coopers(Sydney), Professor Craig

Deegan, RMIT University (Melbourne) and BDO Consultants Pty Ltd (Perth). In February 2003,

John Thwaites, The Victorian Minister for the Environment launched the report which

summarized the results of the studies.

These studies were supported by the Department of Environment and Heritage of the Australian

Federal Government, and appear to have applied some of the principles outlined in the United

Nations Division for Sustainable Development publication, Environmental Management

Accounting Procedures and Principles (2001).

Environmental financial accounting is used to provide information needed by

external stakeholders on a company’s financial performance. This type of accounting

allows companies to prepare financial reports for investors, lenders and other interested

parties.

Systems and Metrics for Sustainability Measurement

There are a number of systems of measurement that can be employed on an organizational level

to develop metrics for analyzing the impact of choices made in response to environmental or

social imperatives. Audit and measurement are the backbone of environmental and social

accounting, so adopting proven strategies to learn essential metrics will assist accountants with

effective analysis.

5 | P a g e

GRI – The Global Reporting Initiative is an international organization based in Amsterdam that

developed a sustainability reporting framework. The framework establishes performance

indicators for measurement of social, environmental and economic impact through business

decision making. Reports based on the GRI Framework can be used as internal measures or as a

means to demonstrate compliance with laws. A business that joins the alliance or participates in

the training process applies the framework’s measurement principles to its accounting practices.

ISO 14000 – Often considered the gold standard for measurement and standardization, The

International Organization for Standardization has evolved from 9000 to 10000 to 14000. The

14000 series includes protocols that assist with development of environmental controls and

measurement systems.

Environmental and Social Economics – Not Just for Government Anymore

Oversight for the social impact of business and industry, and measurement of the impact of

businesses on the environment has long been assumed to be the purview of the government. The

Environmental Protection Agency is the watchdog for the environmental consequence of doing

business. Environmental and social accounting are based on the principles that measurement and

proactive management of practices that have the potential to influence environment and

community also impact the economic health of the organization that applies them.

Sustainability accounting presumes that a business can create a longer life-cycle when avoiding

non-renewable practices. Many businesses and industries that have little to no reporting

obligation and are subject to few, if any, oversight guidelines, still engage in environmental,

social or sustainability accounting as a means to financial viability and longevity.

Big Picture and Little Picture

When considering the concepts of environmental or sustainability accounting, the presumption is

that these are strategies for larger companies with waste disposal protocols, and manufacturing

divisions. While those circumstances certainly warrant careful analysis and measurement,

environmental, sustainability and social accounting have applications in businesses of any size.

Smaller business engages in social and environmental accounting when they choose to purchase

local goods and services and track the cost savings of decreased travel and shipping costs as well

as the reciprocal business from local vendors. Larger companies that engage in environmental or

6 | P a g e

social accounting for broad margin resource analysis may still engage in smaller, more

microeconomic practices that have the potential for bottom line influence.

Environmental Accounting in Action – The Kyoto Protocol

The highest profile, most globally reaching, actionable example of environmental accounting is

the Kyoto Protocol. The Kyoto Protocol is a legally binding agreement entered into voluntarily

by developing and fully industrialized nations designed to reduce six greenhouse gasses that are

believed to contribute to global warming. The Kyoto Protocol is environmental accounting in

action on an international scale. Using metrics established by the United Nations, the Kyoto

Protocols measures change in carbon emissions. National governments develop collaborative

relationships with industries that produce greenhouse gasses, or industries that manufacture

products that result in consumer-generated emissions (cars and trucks, for instance), and assume

responsibility for developing and enforcing legislation that facilitate compliance.

Measurement and metrics are the cornerstone of the Kyoto Protocol, and industries that fall

under the specter of oversight through the Kyoto Protocol have adopted an aggressive pursuit of

environmental accounting, not only in response to the reporting action required by the protocol,

but to develop systems and execute decision making that ensures that companies remain

profitable through the cycle of manufacturing and air quality control changes, which almost

always increase cost.

When the Kyoto Protocol was in the news, attention was principally on the cost of compliance

and the impact on fully industrialized nations. The US refused to ratify the protocol over

economic concerns. But countries that have willingly agreed to participate in the Protocol have

turned to sound environmental accounting practices to mitigate the costs associated with

participation.

Qualifications and Certifications

Becoming an expert in environmental, social or sustainability accounting often happens as a

result of a business creating a strategic action plan that includes environmental or social

objectives. Operating without an understanding of the social and environmental impact of its

decisions is tantamount to wearing a fiscal blindfold. An accountant who evolves the skills

necessary to measure these impacts fills a unique niche within a business.

7 | P a g e

Accountants with a strong interest in - or corporate directive toward – environmental accounting

and sustainability measurement can pursue the Certified Professional Environmental Auditor’s

(CPAE) credential through the Board of Environmental, Health and Safety Auditors

Certifications. The CPEA credential is highly relevant for professionals involved in health and

safety or environmental controls. The credential was developed in collaboration with the Institute

of Internal Auditors, and is recognized by the Environmental Protection Agency and the

Department of Energy. The certification requires a bachelor’s degree, passing an examination,

paying a fee and demonstrating relevant workplace experience in the areas of auditing, health

and safety or environmental management. Certification may be in the area of Environmental

Audit or Health and Safety.

8 | P a g e

Objectives of Environmental Accounting

The objectives of environmental accounting and reporting are as follows:

1. To help in negotiation of the concept of environment and to determine the enterprise’s relationship

with the society as a whole and the environmental pressure group in particular.

2. To segregate and collaborate all environmental related flows and stocks of resources.

3. To minimize environmental impacts through improved product and process design.

4. To estimate the total expenditure on protection and enhancement of environment.

5. To assess changes in environment in terms of costs and benefits.

6. To ensure effective and efficient management of natural resources.

9 | P a g e

Scope of Environmental Accounting

The scope of Environmental Accounting (hereinafter called as EA) is very wide. It includes

corporate level, national & international level. Asfar as this article is concerned the emphasis is

given on the corporate level accounting. The following aspects are in-clouded in

EA:1. From Internal point of view investment made by the corporate sector for minimization of

losses to environment. It includes investment made into the environment saving equip-

ment/devices. This type of accounting is easy as money measurement is

possible.2. From external point of view all types of loss indirectly due to business

operation/activities. It mainly includes:

a. Degradation and destruction like soil erosion, loss of biodiversity, air pollution,

water pollution, voice pollution, problem of solid waste, coastal& marine

pollution.

b. Depletion of non-renewable natural resources i.e. loss emerged due to

overexploitation of non-renewable natural resources like minerals, water, gas, etc.

c. Deforestation and Land uses.

This type of accounting is not easy, as losses to environment cannot be measured exactly in

monetary value. Further, it is very hard to decide that how much loss was occurred to the

environment due to a particular industry. For this purpose, approx. idea can be given or other

measurement of loss like quantity of non-renewable natural resources used, how much Sq. meter

area deforested and total area used for business purpose including residential quarters area for

employees etc., how much solid waste produced by the factory, how much wasteful air pass

through chimney in air and what types of elements are included in a standard quantity of

wasteful air, type and degree of noise made by the factory, etc. can be used.

10 | P a g e

Forms of Environmental accounting

Environmental accounting can be classified under three forms:

1. Environmental management accounting

Environmental management accounting focuses on material and energy from information as well

as environmental cost information. It can be studied under the following sub classes:

(i) Segment environmental accounting: This is an internal environmental accounting tool that

facilitates the selection of an investment activity, or a project which is environmental friendly

from among all processes of operations. It also helps in evaluating the environmental effects of

the project for a certain period.

(ii) Eco balance environmental accounting: This is also an internal accounting tool to support

the firm for sustainable environmental management activities.

(iii) Corporate environmental accounting: This is a tool to inform the public of relevant

information compiled in accordance with the environmental accounting. It can be called as

corporate environmental reporting and it uses the cost and effect of its environmental

conservation activities.

2. Environmental Financial Accounting (EFA)

Environmental financial accounting refers to the financial accounting practice with special

reference to the reporting of environmental liability costs and other significant environmental

costs.

3. Environmental National Accounting (ENA)

Environmental National Accounting focuses on natural resources stocks & flows, environmental

costs & externality costs etc.

Relevance of environmental accounting

Environmental course are one of the most important types of course that a business enterprise

incurs as they provide goods and services to their customers. In the present global scenario the

environmental performance of an enterprise holds an edge over determining the success of

11 | P a g e

business. Environmental costs and performance ought to have enough management attention due

to the following reasons:

1. Most of the environmental costs can be effectively reduce or avoided as a result of better

business decisions, ranging from base level to top level, to invest in “green” projects.

2. Many environmental costs such as the waste row materials may provide no additional value

to the product or system. Thus environmental costs may be obscured in overhead accounts.

3. Better management of environmental costs can result in improved environmental

performance and significant benefit to the society as a whole.

4. The understanding of environmental costs and the performance of processes and products

may lead to more accurate costing and pricing which will aid the organizations in developing

more environmental friendly products and services in the future.

5. It is identified that environmental cost can be written off by generating revenues through

sale of waste by products or transferable pollution allowances such as carbon credits.

6. Accounting for environmental costs supports a company’s development and facilitate an

overall environmental management system. Such a system will facilitate the company to obtain

international standards such as ISO 14001 developed by International Organization for

Standardization.

12 | P a g e

Application of environmental accounting

Legal Framework for Environmental Accounting in India

The environmental clearance from various government authorities has taken the centre of

attraction with the abolishing of industrial licensing for all practical purposes. India has a Union

Ministry of Environment with the motive of coordinating among the states and the various

ministries, the environmental protection and anti-pollution measures. The country has also

passed various legislations to ensure the protection of environment. The latest Companies Act,

2013 also incorporates a stress on green initiatives. The various laws pertinent to environmental

protection in the country are listed below under two different heads:

1. Directly related to the protection of environment

(i) Water (Prevention and Control of Pollution) Act, 1974

(ii) Water (Prevention and Control of Pollution) Cess Act, 1977

(iii) Air (Prevention and Control of Pollution) Act, 1981

(iv) The Forest Conservation Act, 1980

(v) The Environment (Protection) Act, 1986

2. Indirectly related to the protection of environment

(i) The provision in the Constitution (Article 51A)

(ii) The Factories Act, 1948

(iii) Hazardous Waste (Management and Handling) Rules, 1989

(iv) Public Liability Insurance Act, 1991

(v) The Motor Vehicle Act, 1991

(vi) Indian Penal Code

(vii) The National Environment Tribunal Act, 1995

(viii) Indian Fisheries Act, 1987

13 | P a g e

Environmental accounting Practices in Indian companies

Environmental accounting is at inception stage in India. In the context of requiring

environmental related disclosures from business units on a periodic basis, the first public

announcement was made by the Government of India in 1991, immediately after adopting the

financial reforms that liberalized the economic policies of the country. The Ministry of

Environment and Forests has proposed that “Every company shall, in the Report of its Board of

Directors, disclose briefly the particulars of steps taken or proposed to be taken towards the

adoption of clean technologies for prevention of pollution, waste minimization, waste recycling

and utilization, pollution control measures, investment on environmental protection and impact

of these measures on waste reduction, water and other resources conservation.”

In 2011, the Securities and Exchange Board of India mandates listed companies to report on

Environmental, Social and Governance (ESG) initiatives undertaken by them, according to the

key principles enunciated in the 'National Voluntary Guidelines on Social, Environmental and

Economic Responsibilities of Business.'

The Companies act 2013 emphasizes on corporate social responsibility that makes it mandatory

for certain class of profitable enterprises to spend money on social welfare activities. It is

mandatory for companies with net worth of more than Rs 500 crore, or turnover of Rs 1,000

crore to adopt a CSR policy. Also it provides that the companies are required to give more

disclosures besides Company’s general state of affair and financial performance regarding

conservation of energy and environmental protection.

Also, The Union Ministry of Environment and Forests has issued various instructions in to

prepare environment statements. It is mandatory in the country to get an environmental clearance

for all new projects that concerns both the Union Ministry of Environment and Forests and the

corresponding State Government department of environment. There are various guidelines in this

regard and all such projects are expected to obtain environmental and antipollution clearance

before they are actually set up. It can be observed through their accounts that mainly the

following set of information is disclosed.

What type of devices are installed to control pollution

The steps taken for energy conservation

14 | P a g e

Steps taken for optimum utilization of resources

Steps taken for decompose the waste water and production process waste

Steps taken for improving the quality of product and services, production process etc.

A gazette notification on environmental audit has been issued by ministry of environment and

forests on 3-3-1992 which was amended through a notification on 22-4-1993(India: Environment

Statement, as a part of Environment Audit, Govt. of India, 1993) requires the submission of an

environment statement to the Central Pollution Control Board. This notification is applicable to

any person carrying out an industrial operation or process requiring consent to operate by under

section 25 of the Water (Prevention and Control of Pollution) Act 1974, under section 211 of the

Air (Prevention and Control of Pollution) Act, 1981 or both, or authorization under the

Hazardous Waste (Management and Handling) Rules, 198, issued under the Environment

(Protection) Act, 1986. In this environment statement, the concerned industry is required to

provide information on:

Water and raw material consumption

Pollution generated

Impact of pollution control measures on conservation of natural resources

Nature of hazardous and solid wastes produced and disposal practices adopted

Measures taken for environmental protection, and

Steps taken to popularize the benefits of environmental accounting and reporting among the

corporate sector.

15 | P a g e

Challenges of Environmental Accounting

Even though the environmental accounting and reporting practices are being attempted by many

countries, the concept has certain obstacles in implementation. The major limitations are as

follows:

1. Environmental accounting lacks economic value.

2. There is no standard method of estimating the social value of environmental goods and

services.

3. Social value given to environmental goods and services are changing so fast that the

estimates are likely to be obsolete before they are available for use.

4. There is no accounting standard for environmental accounting

5. It involves inapplicable assumptions

6. Environmental accounting is not a legal obligation except for few industries in India.

7. It lacks reliable industry data.

16 | P a g e

Environment management accounting to reduce cost

Identify environmental costs

You can find much of the information needed to prepare environmental management

accounts in your business' general ledger. A review will show you the costs of materials, utilities

and waste disposal, and it will help you to identify the best opportunities for immediate cost

savings.

However, as environmental costs tend to be treated as a general overhead rather than being

allocated to individual products this can distort the full costs of different products. Accountants

can help to determine the true value of environmental costs .

Departmental managers and senior employees should understand the individual processes in

detail and be able to help you identify how large costs are broken down across different

activities. In addition, these managers can provide guidance and information that will help you

identify the best way to make changes, and over what timescales they can be implemented.

Face-to-face meetings with managers are also important in providing an understanding of

physical quantities eg raw materials and waste, rather than purely financial costs. This kind of

information is important when setting targets because operational managers don't often have cost

information, and may find it easier to measure physical quantities.

Departmental managers can also help identify internal costs and where savings can be made. For

example, although the general ledger and supplier invoices will show the cost of disposing of a

skip full of waste, departmental managers will know how long it takes to fill the skip. These

costs need to be included in environmental management accounts.

You can use activity-based costing to develop a detailed understanding of costs and identify cost

drivers which reflect the links between causes and effects of environmental impacts. You can

then use this information to recalculate the costs of products, processes and services. See the

page in this guide on how to allocate environmental costs to specific processes.

Identify opportunities to cut environmental costs

17 | P a g e

Once you identify environmental costs to your business , you should analyse them to see where

they can be reduced or eliminated. The largest environmental costs are likely to include:

waste and effluent disposal

water consumption

energy

transport

consumables and raw materials

Waste

Waste production offers significant opportunities for savings because of its effect on:

costs of unused raw materials and disposal

costs of transport, storage and handling

possible penalties for compliance failures such as pollution

taxes for landfill

In addition, waste has environmental costs in the loss of land resources and the generation of

methane, a potent greenhouse gas.

You can identify how much material is wasted in production of products by comparing the

weight of materials bought with the product yield. This is known as a 'mass balance', and is a

valuable tool to identify areas for cost saving.

For more information on reducing and managing waste, see our guides on waste reviews,

policies and action plans and reduce your business waste to save money.

Water

Businesses pay for water twice - first to buy it and then to dispose of it. As mains supply,

sewerage and trade effluent charges rise, controlling water use offers several opportunities to

make cost savings. To make the most of these opportunities, you need to identify clearly where

water is used, and where you can reduce consumption. Find out how to monitor your water

18 | P a g e

consumption in our guide on how to monitor your water use. Find advice on saving water in

our guides on how to save water at commercial premises and save water at industrial

premises.

Energy

Energy is a significant expense for most businesses, but usage can often be reduced at little or no

cost. In addition, the benefits can be increased by government initiatives and grants which

encourage businesses to be more energy efficient such as enhanced capital allowances. See our

guide on tax breaks and finance for your business .

Environmental management accounts will help you identify inefficiencies and wasteful practices,

and thus opportunities for improvements and cost savings. See our guide on how to save money

by using energy more efficiently.

Transport and travel

Reducing the environmental impact of both business travel and the transport of goods and

materials can have significant cost benefits. Using public transport rather than company cars,

investing in more fuel-efficient vehicles and better journey planning will reduce fuel,

maintenance and other costs. See our guides on workplace travel planning and reducing your

vehicle emissions.

Consumables and raw materials

The cost of raw materials and consumables needed to make products or deliver services can be

readily identified, and discussions with senior managers will show where savings can be made.

For example, the use of recycled or sustainable products can reduce costs as well as having

environmental benefits.

You should encourage suppliers to participate and be involved in the process. Consider a

'servicised' contract where your suppliers are paid for their service performance and not for the

volume of supply. This should provide suppliers with an incentive to look for ways to minimise

rather than maximise the quantities of products consumed. In the long-run, suppliers also have an

incentive to look for ways to redevelop or reformulate what they are supplying, even substituting

it with a different technology.

19 | P a g e

For more information, see our guide on how to supply chain efficiency and environmental

impact.

Allocate environmental costs to specific processes

Allocating costs to processes or products is an important element in preparing management

accounts. It enables you to identify the key areas that you should focus on to cut costs.

You should produce a flow chart showing the main activities of the business, breaking down the

processes into enough detail to allow you to allocate an estimate of the environmental costs to

each activity. The flow chart should not be overly detailed, but should have enough information

to show clearly where you can make savings.

Reviewing the general ledger and face-to-face interviews with managers and senior employees

will allow you to list material, labour, utility inputs and waste outputs and give accurate

environmental and financial costs.

To help analyse the data, you may find it useful to prepare a spreadsheet showing the materials,

utilities and wastes for each of the main processes.

Once this has been achieved, you can start to reduce environmental costs significantly, often at

little or no additional cost. Further improvements can be made by investing in:

eco-designing products

optimising product processes

using new technology

recovering and reusing materials

The most effective way to cut costs is to set objectives and targets so that you have clear goals to

work to. See the page in this guide on how to set environmental targets to increase profits.

Set environmental targets to increase profits

Environmental management accounts should provide an analysis of environmental impacts, with

detailed analysis of financial costs and physical quantities allocated across the business'

processes, products and services.

20 | P a g e

You can use this information to produce an action plan including:

targets for reducing waste, improving energy efficiency, cutting water use and improving

the reuse or recycling of materials and equipment

an estimate of potential cost savings and payback period, with data to enable managers

to measure progress against the targets, tracking success and identifying where further

attention is needed

assessments of the actual cost savings and payment periods of capital investment

projects when they have been completed

periodic progress reports for senior management by including additional data in

monthly management accounts

In addition to financial targets, environmental targets should also be included expressed in terms

of improved efficiency.

It will not always be possible to make immediate improvements. However, it should be possible

to define specific projects for which environmental and cost reductions can be achieved.

Communication plays an important role in maximising the benefits of environmental

improvements, eg through the use of emails or newsletters for staff, suppliers and customers. In

addition, all employees should be encouraged to participate fully, so that the business benefits

from their enthusiasm and knowledge. See our guide on making the case for environmental

improvements.

21 | P a g e

Why separate Environmental Accounting and Auditing is

important?

Environmental costs are inadequately reflected in conventional accounting.

Unintentional hiding of environmental costs in overhead accounts.

Inaccurate allocation of environmental costs.

Inaccurate accounting for volumes, valuations and consequences.

Inaccurate allocation of environmental costs from overhead accounts back to processes,

products and process lines.

Inaccurate characterisation of environmental costs.

Lack of inclusion of significant environmental costs in accounting records

Environmental accounting contributes to enhanced environmental performance by organisations,

while simultaneously improving operational and financial efficiency, thereby promoting

sustainable development. Accountants and auditors have traditionally not been associated with

conservation or the environment. However, as providers of financial information, reports, and

assurance on which business decisions are frequently based, they are increasingly drawn into the

environmental arena.

The objective of an audit of financial statements is to enable the auditor to express an opinion on

whether the financial statements are presented fairly and are prepared, in all material respects, in

accordance with the financial reporting framework to present a true and fair view of the entity.

Material respect can be directly linked to environmental costs, obligations, impacts and outcomes

thereof. It is clear that the audit of financial statements requires the auditor to consider

environmental matters as part of the audit - and will increasingly require the services of an

environmental accounting specialist to verify and audit environmental costs. Industry should

recognize that environmental costs, liabilities and asset impairment affect the preparation and

22 | P a g e

audit of financial statements. The financial statements, subject to audit, are those of the entity,

prepared by management of the entity with oversight from those charged with governance.

However, an audit is conducted on the premise that management and, where appropriate, those

charged with governance have acknowledged certain responsibilities that are fundamental to the

conduct of the audit – such as environmental costs and liabilities. In addition, the audit of

financial statements does not relieve management, or those charged with governance, of their

responsibilities. Non-compliance with environmental laws and regulations may result in fines,

litigation or other consequences for the entity that may also have a material effect on the

financial statements.

The credibility of financial reports is dependent upon the quality and accuracy of the contents

and the mechanisms that are in place to transparently verify them. Stakeholders that make use of

the financial reports must be able to do so in absolute confidence in the contents. External

specialist environmental accountants and auditors from ENVIRO FOCUS will provide

independent verification that the information provided is correct and is a means of ensuring that

there can be no disputes over the accuracy of the report data.

To assist accountants, auditors, directors of companies and industry management across all

spheres of industry alike, ENVIRO FOCUS will undertake and assist with:

Extract environmental costs from financials and report thereon separately

Measurement and disclosure of environment related financial information in financial

accounting and reporting.

Estimation and valuation of environmental impact and costs in financial accounting.

Accounting for stock, and flow of natural resources, in environmental accounting.

Verification and audit of costs for environmental accounting

Verification and audit of environmental audit report

23 | P a g e

Assisting accountants and/or auditors with environmental accounting and audit

Determine costs and record costs of environmental compliance, etc

Determine and recording environmental costs of projects

Verify and audit environmental accounting report

Costs to prevent, abate or remedy damage to the environment

Costs of consequences of environmental damage, damage to others or damage to natural

resources

Consequences of non-compliance with environmental laws and regulations

Vicarious environmental liability costs imposed by law

24 | P a g e

Introduction to Environment Audit:

Environmental audit is a general term that can reflect various types of evaluations intended to

identify environmental compliance and management system implementation gaps, along with

related corrective actions. In this way they perform an analogous (similar) functio n to financial

audits. There are generally two different types of environmental audits: compliance audits and

management systems audits. Compliance audits tend to be the primary type in the US or within

US-based multinationals.

As the name implies, these audits are intended to review the site's/company's legal compliance

status in an operational context. Compliance audits generally begin with determining the

applicable compliance requirements against which the operations will be assessed. This tends to

include federal regulations, state regulations, permits and local ordinances/codes. In some cases,

it may also include requirements within legal settlements.

Compliance audits may be multimedia or programmatic. Multimedia audits involve identifying

and auditing all environmental media (air, water, waste, etc.) that apply to the

operation/company. Programmatic audits (which may also be called thematic or media-specific)

are limited in scope to pre-identified regulatory areas, such as air.

Audits are also focused on operational aspects of a company/site, rather than the contamination

status of the real property. Assessments, studies, etc. that involve property

contamination/remediation are typically not considered an environmental audit.

ISO 14001 is a voluntary international standard for environmental management

systems ("EMS"). ISO 14001:2004 provides the requirements for an EMS and ISO 14004 gives

general EMS guidelines. An EMS meeting the requirements of ISO 14001:2004 is a management

tool enabling an organization of any size or type to:

1. Identify and control the environmental impact of its activities, products or services;

2. Improve its environmental performance continually, and

3. Implement a systematic approach to setting environmental objectives and targets, to

achieving these and to demonstrating that they have been achieved.

25 | P a g e

Organizations implementing ISO 14001 usually seek to obtain certification by independent

Certification Bodies. Certification indicates that the documentation, implementation and

effectiveness of the EMS conform to the specific requirements of ISO 14001. This standard is

currently being updated to include elements of including a lifecycle perspective and including

top management anongst other changes. The draft (DIS) standard ISODIS 14001:2014 is

currently the draft standard applicable until the ISO 14001:2015 standard is finalised and

published.

In 2002, the ISO organization also published ISO 19011, the standard for auditing quality and

environmental management systems (ISO 19011:2002), which was used for internal audits and

certification audits of EMS until it was updated in 2011. The 2011 version on ISO 19011

restricts its use in first and second part audits, while third part audits (certification audits) are

now covered in ISO/IEC 17021.

A common misconception is that ISO 14001 certification automatically implies legal

compliance. Certification under ISO 14001 does not directly reflect compliance with any legal

requirements, although ISO 14001 demands the organization to evaluate its compliance with

legal requirements. If there is no compliance with some legal requirement, ISO 14001 requires

that the organization sets specific targets related to the non-compliance(s) and establishes,

implements and maintains programmes to achieve compliance. Therefore, it is possible that, at

the time of audit, the organization fulfils the requirements of ISO 14001, yet there are one or

more non-compliances with specific requirements, which are identified and which the

organization actively works to correct. Specific guidance on this subject is provided by the

European co-operation for Accreditation.

26 | P a g e

Audit Tools and Technique:

The term "protocol" means the checklist used by environmental auditors as the guide for

conducting the audit activities. There is no standard protocol, either in form or content.

Typically, companies develop their own protocols to meet their specific compliance

requirements and management systems. Audit firms frequently develop general protocols that

can be applied to a broad range of companies/operations.

Current technology supports many versions of computer-based protocols that attempt to simplify

the audit process by converting regulatory requirements into questions with "yes", "no" and "not

applicable" check boxes. Many companies and auditors find these useful and there are several

such protocol systems commercially available. Other auditors (typically those with many years

of environmental auditing experience) use the regulations/permits directly as protocols. There is

a long standing debate among environmental audit professionals on the value of large, highly

detailed and prescriptive protocols (i.e., that can, in theory, be completed by an auditor with little

or no technical experience) versus more flexible protocols that rely on the expertise and

knowledge of experienced auditors and source documents (regulations, permits, etc.) directly.

However, usage of structured and prescriptive protocols in ISO 14001 audits allows easier

review by other parties, either internal to the Certification Body (e.g. technical reviewers and

certification managers) or external (accreditation bodies).

In the US, permits for air emissions, wastewater discharges and other operational aspects, many

times establish the primary legal compliance standards for companies. In these cases, auditing

only to the regulations is inadequate. However, as these permits are site specific, standard

protocols are not commercially available that reflect every permit condition for every

company/site. Therefore, permit holders and the auditors they hire must identify the permit

requirements and determine the most effective way to audit against those requirements.

During the past 20 years, advances in technology have had major impacts on auditing. Laptop

computers, portable printers, CD/DVDs, the internet, email and wireless internet access have all

been used to improve audits, increase/improve auditor access to regulatory information and

create audit reports on-site. At one point in the 1990s, one major company invested significant

resources in testing "video audits" where the auditor (located at the corporate headquarters) used

27 | P a g e

real-time video conferencing technology to direct staff at a site to carry live video cameras to

specific areas of the plant. While initially promising, this technology/concept did not prove

acceptable. An emerging technology in environmental auditing is the use of tablet computers.

Environment Audit Process

To ensure that your environmental management system (EMS) is properly set up and effectively

maintained, you need to plan and carry out environmental audits. Each audit should consist of a

planning stage, the audit itself and post-audit activities.

You should follow a systematic approach to your environmental audits:

Plan the audit - decide which area, process or procedure you are going to audit according

to the plan. Speak to the manager responsible to ensure that resources will be available

and that there is no conflict with operational requirements.

Prepare checklists - read through the procedures applicable to that area and then prepare

an internal audit form.

Obtain and review any necessary background documents.

Review your EMS documents.

Conduct and document the audit - ask questions and observe. Record the replies and your

observations on your audit form immediately - download an example internal

environmental audit form (DOC, 56K). Try to carry out your audit when people are

carrying out the process or working in the areas being audited.

Identify and summarise all non-conformances and observations.

Request corrective actions - write down your suggestions and get agreement from the

person responsible for the area being audited.

Complete any administrative tasks.

28 | P a g e

State the date for the next audit.

Non-conformances and observations

Non-conformances are failures within the system and usually relate to employees not following

work procedures.

When a non-conformance is recorded, the auditor should suggest a way of correcting the fault to

stop it from happening again. They should prepare a non-conformance report or corrective action

request form that details:

what has gone wrong

how to rectify the fault

who will do the remedial work

when it will be completed

how to prevent the fault from happening again

a follow-up date

Observations recorded by the auditor may relate to areas in which there are no specific non-

conformances, but where the auditor feels that the system or environmental performance could

be improved in some way.

The audit report

An audit report is essential to ensure that the results of the audit are passed on effectively. The

report should consist of:

a brief description of the areas that have been audited

a review of the audited areas

non-compliances

corrective actions agreed

29 | P a g e

other areas of potential risk

opportunities for improvement

a summary list of non-compliances

The findings of the audit should be reviewed and assessed, and any actions implemented

according to a specified programme. In some cases - for example where you have discovered a

breach of legislation - you will need to take immediate action.

The aim of the audit process is to provide objective evidence about the effectiveness of the EMS,

not to allocate blame for any areas of non-compliance.

External environmental audits

In addition to carrying out internal audits of their environmental management system (EMS),

many businesses use an external organisation to check that their EMS meets the standard they

are working towards.

For example, this could be certification to ISO 14001 or verification under the Eco-Management

and Audit Scheme (EMAS). Smaller businesses may prefer to follow BS 8555 using United

Kingdom Accreditation Service (UKAS) accredited schemes. Find out more about scheme

options in our page on certification and standards for EMS is our guide on environmental

management systems - the basics.

A successful external audit will confirm that your EMS:

conforms to specified requirements

is able to consistently achieve its policy and objectives

is effectively carried out

The benefits of having your EMS externally certified include:

attracting investors, employees and clients through showing your commitment to

environmental management

30 | P a g e

confidence that your EMS meets requirements

confirmation that you have adopted the right approach to your EMS

Certification to an environmental management standard requires that all elements of your EMS

are audited and verified by an accredited third-party certifier or verifier. For EMAS, you will

also need your environmental statement to be verified for its relevance and accuracy.

Auditors use a range of methods for certification - you should understand what they will be

looking for at each stage. The main aim of the external audit is to review your business'

environmental policy, environmental management programme, operational controls and audit

cycle.

The external audit is usually a two-stage process:

initial audit - the scope of the management systems are checked

main audit - a more detailed audit of the system

Once your EMS has been approved by external auditors, you can register it to the appropriate

standard.

Carry out an EMS management review

A management review is the final element of the environmental management system (EMS)

process. It involves a formal evaluation of the adequacy of your business' EMS - taking into

account any new environmental issues, legislation, changing circumstances and continual

improvement.

Management review meetings should be attended by individuals with either executive or

specialist responsibility, for example:

the site director

the management representative

line managers with specific environmental responsibilities

In these meetings, the management representative should give the results of any recent audits to

senior management and present a written report detailing audit findings.

31 | P a g e

The management review should cover:

environmental performance and progress in achieving objectives and targets

compliance with legislation

results of internal audits and reports

actions required as a result of non-conformances

new processes and any changes to known environmental issues

any changes in circumstances - for example changes in legislation or new technology

the effectiveness of training

the need for any revisions to your environmental policy, objectives and targets

follow-up actions from previous management reviews

recommendations for improvement

The management review meetings are a vital part of your business' EMS as they show

commitment at the highest level - allowing those with authority and specialist knowledge to put

forward ideas and solutions to problems. They should be minuted and you must ensure that any

agreed actions are carried out.

32 | P a g e

Environmental regularity and project performance auditing:

Monitoring and verifying compliance with environmental laws, regulations, EIA, EMP

and RoD requirements and compliances

Reduce the risks and costs associated with non-compliance with regulations

Evaluating cost savings by minimizing waste and preventing pollution

Identify liabilities and risks

Verify and evaluate project performance against environmental performance and

compliance, project goals, timeframe, expected outcomes and cost.

Indicators of environmental related performance fairly reflect the performance of the

entity.

Physical “stock-take” audit to verify and evaluate project expenses and performance to

provide assurance against corruption, bribery, fraudulent and/or unauthorized spending

Environmental programs are conducted in an economical, efficient and effective manner.

Auditing project performance to ensure investor objectives and desired outcomes are

complied with.

33 | P a g e

Advantages/Disadvantages of Environment Accounting/Audit

Advantages:

Organisations understand how to meet their legal requirements;

Meeting specific statutory reporting requirements;

Organisations can demonstrate they are environmentally responsible

Organisations can demonstrate their environmental policy is implemented

Understanding environmental interactions of products, services & activities

Knowing their environmental risks are managed appropriately

Understanding how to develop and implement an ISO 14001 EMS; and

Improving environmental performance and saving money.

Others include:

Avoid liability. Some environmental laws encourage companies to conduct

environmental audits by providing incentives. In four jurisdictions—NL, NT, NS and

NU—the environmental laws address environmental audits in the context of voluntary

reporting. Explanation: If your company undertakes an environmental audit and discovers

that it’s not in compliance with a legal requirement, the law encourages the company to

voluntary report such non-compliance to the government and negotiate an agreement to

deal with the violations and any adverse impact they may have had on the environment.

In fact, the laws in NT, NS and NU specifically state that a company that voluntarily

discloses non-compliance found through an environmental audit cannot be prosecuted for

that non-compliance, provided that the government wasn’t already aware of the violations

on its own and that the company corrects the violations. (The law in NL is silent on this

issue, although it does encourage voluntarily reporting.) Thus, in these four jurisdictions,

audits can reduce the company’s liability for environmental offences by helping to

identify violations and give your company a chance to address them with the government

without being prosecuted.

34 | P a g e

Even if your company isn’t in one of these four jurisdictions, an environmental audit will

help uncover violations and give the company a chance to address them before the

government gets involved and decides to prosecute.

Prove due diligence. Due diligence requires companies to prove they took all reasonable

efforts to address known risks, prevent violations and ensure compliance with the

environmental laws. Environmental audits are ideal for helping companies meet that

burden. After all, one of the purposes of an audit is to measure the company’s compliance

with the environmental laws and the effectiveness of its EHS program. So if your

company ever gets prosecuted, an audit program will be a major boost to a due diligence

defence. More importantly, if done correctly, environmental audits help prevent

prosecutions to begin with by enabling you to ferret out and correct violations and

improve the company’s environmental policies and programs.

Save money. Lastly, environmental audits can help identify costly problems, such as

inefficiencies in the company’s operations. Fix these problems and the company will

benefit financially.

Disadvantages:

Disruption caused in the facilities being audited

Whatever function. process or site of a company is audited at a particular point in time. the

activities of the facility are disrupted by the audit. The disruption is generally greatest during the

on-site visit by the environmental audit team as personnel have their activities observed, are

asked questions, or asked to locate and provide relevant documents and records — or their

normal work routines are disrupted in some other way. However, the disruption is not limited to

the period of the on-site visit but extends to the pre- and post-visit phases: work is disrupted

during the preparation for the audit and when any resultant recommendations for improvement

are implemented.

35 | P a g e

Adverse consequences of audits uncovering breaches of environmental

regulatory requirements

One of the most serious consequences of an environmental audit for a company is the

possibility that the audit will uncover past or present breaches of environ- mental laws or

regulations. Companies fear that regulators or third parties may impose liability for the

previously unknown violations. The legal or regulatory breaches may not even be those

of the company itself. For example, soil or groundwater on the company’s property may

have been contaminated by a previous owner but the present company may be faced with

enormous remediation costs and, possibly, also claims for damages by third parties who

have been harmed in some way by the contamination.

Possible adverse consequences of reporting environmental informationA

disadvantage accruing to companies that publish information about their environmental

performance is that their reports need to be — and need to be accepted by users as —

complete and unbiased (that is, reporting both ‘good’ and ‘bad’ environmental

performance). However, if a company’s report discloses detrimental environmental

effects caused by its activities, products or services that were not previously known, this

may generate negative publicity and/or prompt an adverse reaction by environmental

regulators. It may, for example, trigger regulatory investigations and, possibly, litigation.

Absence of generally accepted environmental reporting and

verification standards.

In the absence of generally accepted standards that prescribe the information to be

included in published environmental reports and how quantitative items are to be

identified, measured and reported the content, format and quality (in terms of

completeness, accuracy and validity) of environmental reports varies widely. Similarly,

without generally accepted verification standards, the rigour of the verification

investigation to which the reports are subject varies markedly and, questions arise as to

the value of the verification process.

A further disadvantage for companies resulting from the absence of environmental

36 | P a g e

reporting standards is the potential for users of their reports to misinterpret statements

made or data provided. Such misunderstanding may result in adverse consequences for

the company: it may, for example, result in unjustified negative publicity or even in a

court action alleging misrepresentation. Along similar lines, in the absence of verification

standards there is a danger that users of verified environmental reports may not properly

understand the nature and level of the assurance provided. If informed users are familiar

with externally audited financial statements, they may mistakenly conclude that a similar

high level of assurance is provided by the verification of environmental reports.

High costs of producing environmental reports and having them

verified

As for internal environmental audits, a significant disadvantage for companies that

publish verified environmental reports is the cost involved. Many companies that publish

a separate environmental (or sustainability) report produce

a document that is as ‘thick’ as their annual report and one which contains significantly

more photographs, graphs and diagrams. Such reports are extremely expensive to

compile (in terms of gathering relevant information and data, deciding what to include

and what to leave out, and how to present the material to be included). They are also

expensive to produce in hard and/or electronic form and to publish.23 Companies that

have their environmental reports independently verified also incur the costly professional

fees of the versifiers.

Notwithstanding the financial resources that are consumed by publishing verified

environmental reports, companies engage in this activity only if they believe those

resources are used to good effect. By implication, these companies consider that the

financial costs involved, together with the other disadvantages attaching to environmental

reporting and verification, are outweighed by the advantages to be gained: in other words,

they believe the exercise makes good business sense.

37 | P a g e

EA suffers from various serious limitations as follows:

1. There is no standard accounting method.

2. Comparison between two firms or countries is not possible if method of accounting is

different which is quite obvious.

3. Input for EA is not easily available because costs and benefits relevant to the

environment are not easily measurable.

4. Many business and the Government organizations even large and well managed ones

don't adequately track the use of energy and material or the cost of inefficient materials

use, waste management and related issue. Many organisations, therefore, significantly

underestimate the cost of poor environment performance to their organization.

5. It mainly considers the cost internal to the company and excludes cost to society.

6. EA is a long-term process. Therefore, to draw a conclusion with help of it is not easy.

7. EA cannot work independently. It should be integrated with the financial accounting,

which is not easy.

8. EA must be analyzed along with other aspects of accounting. Because costs and

benefits related to the environment itself depend upon the results of the financial

accounting, management accounting, cost accounting, tax accounting, national

accounting, etc.

9. The user of information contained in the EA needs adequate knowledge of the process

of EA as well as rules and regulations prevailing in that country either directly or

indirectly related to environmental aspects.

38 | P a g e

CONCLUSION

Environmental accounting is an important measure for understanding the role played by natural

environment in the development of an economy. It provides data that contains the contribution of

natural resources to economic wellbeing as well as the costs imposed by environmental pollution

and resource degradation. In India, the level of environmental related disclosures in the corporate

annual reports is poor. Neither the latest company law nor the accounting standards by ICAI

prescribes the disclosure norms for environmental related aspects in the corporate financial

reports. As the environmental disclosures are voluntary in nature, except few industries for

which environmental accounting is mandatory such as oil and petroleum, natural gas, cement,

steel, etc. the companies hesitate to implement the practice in their books of accounts. The poor

environmental performance of the company may also bind them to no-disclosure. The lack of

awareness and commitment on the part of company management about the social responsibility

of the firm also keeps the firms away from reporting environmental costs and benefits. Thus, it

can be concluded that the absence of a standardized environmental accounting practice and

disclosure norms at national as well as international levels spur the corporates to be away from

the environmental accounting practices and to shut their eyes towards the deterioration in the

environment. Environmental issues have increased in importance in past decades. That this trend

promises to continue is reflected in the increasing financial attention firms are giving to these

issues. Thus, accountants need to be aware of environmental issues and to consider their

influence upon both internal and external reporting.

The evolution of the appropriate financial treatment (GAAP) for these issues will provide

challenges to accounting professionals. This evolution is interesting both for its own sake and

also for the perspective it provides on other emerging GAAP issues.

Environmental accounting is in preliminary stage in India and whatever shows in the accounts in

this regard is more or less compliance of relevant rules and regulation in the Act. Actually,

unless common people of India are not made aware towards environmental safety, development

of accounting in this regard is a little bit doubtful. It is the call of the time that corporates prepare

a firm environmental policy, take steps for pollution control, comply with the related rules and

regulations, and mention adequate details of environmental aspects in the annual statements. For

39 | P a g e

sustainable development of country, a well-defined environmental policy as well as proper

follow up and proper accounting procedure is a must.

Environmental accounting is in preliminary stage in India and whatever shows in the accounts in

this regard is more or less compliance of relevant rules and regulation in the Act. Actually,

unless com-mon people of India are not made aware towards environ-mental safety,

development of accounting in this regard is a little bit doubtful. It is the call of the time that

corporates prepare a firm environmental policy, take steps for pollution control, comply with the

related rules and regulations, mention adequate details of environmental aspects in the annual

statements. For sustain-able development of country, a well-defined environmental policy as

well as proper follow up and proper accounting procedure is a must.

40 | P a g e

Webliography:

https://en.wikipedia.org/wiki/Environmental_accounting

https://en.wikipedia.org/wiki/Environmental_audit

http://www.accountingedu.org/environmental-accounting.html

http://thecommercepedia.blogspot.in/2015/03/environmental-accounting-and-reporting.html

http://www.envirofocus.net/index.php/auditing

http://environmentalcomplianceinsider.com/topstories/why-you-should-conduct-an-

environmental-audit%E2%80%94and-how-to-do-it

http://thecommercepedia.blogspot.in/2015/03/environmental-accounting-and-reporting.html

http://www.newaccountantusa.com/newsfeat/ip/ip_environmental.html

http://www.environmentalauditors.com.au/what- is-an-environmental-audit.html

http://accountingjunction.com/2014/03/09/disadvantages-of-environmental-audit/

https://www.nibusinessinfo.co.uk/content/set-environmental-targets- increase-profits