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Environmental cost accounting and auditing

Peter Letmathe
Assistant Professor, Ruhr-Uni Bochum, Bochum, Germany
Roger K. Doost
Professor, School of Accountancy, Clemson University, Clemson,
South Carolina, USA

Keywords (1979) were published which included rules on
Environmental impact, Introduction how to calculate the business costs of
Sustainable development,
Hazardous materials, The currently high consumption of goods and environmental protection. These guidelines
Environmental audit, Law, Waste services falls short of the vital necessity for helped companies to comply with their
sustainable development. West European reporting requirements for public statistics in
Abstract Germany. But this approach was not decision-
countries seem to be further ahead with
An environmental cost accounting
system is a flow- and decision- regard to the environmental matters as oriented and, therefore, not suitable for
oriented extension of traditional compared to the USA. For example, the systematic environmental management.
cost accounting systems. It is German Federal Environmental Agency (1997) Hence, many companies tried to achieve legal
based on cause-and-effect compliance and to satisfy the interests of their
emphasizes the following alarming trends:
analysis which helps to assign the
. Increase in mean global air temperatures stakeholders mostly through self-designed
costs of environmental impacts
correctly to their perpetrators. by 0.3 to 0.6 C since the end of the management methods.
This article attempts to nineteenth century. During the 1980s and 1990s, the German
demonstrate how to use an government introduced a number of new
. Sea level rise of between 10-25 centimeters
environmental cost accounting
over the last 100 years. regulations in the environmental area. As a
system for internal and external
audits and performance . Depletion of the stratospheric ozone layer. result, the legal compliance costs for waste
improvements. The generated . Accelerating species extinction. water purification and for filtering emissions
information is appropriate to see if increased substantially. Further, the costs of
. Continued erosion and rapid loss of fertile
objectives and targets are
soil. many undesired byproducts such as
achieved. High amounts of
environmental impacts point to . Pollution and overfishing of the seas. hazardous waste and waste water increased
inefficiencies in the production . Gradual over-taxation of the earth system in many cases by several hundred percentage
area. Their elimination can help through anthropogenic loads. points. This development motivated many
accomplish both ecological and . A change of the direction of the Gulf companies to look closer at the costs of their
business goals of a company.
Stream which can result in chaos of the output flows, and many case studies about
whole world climate. cost reduction through environmental
protection were published. Gege (1997), who
The total estimated damage caused to the is a representative of an environmentally-
natural environment in one day according to oriented association of enterprises (BAUM),
the German Federal Environmental Agency estimated in 1997 that companies could
(1997) is given by: reduce by 5 per cent their total costs with a
. the destruction of 55,000 hectares of decision-oriented environmental
tropical forest; management system. These systems should
. the reduction of arable land by 20,000 include reliable data about the costs of
hectares; material and energy. Gege's book contains
. the extinction of 100 to 200 species; about 1,000 examples on how companies
. emission of 60 million tons of carbon achieved cost reduction through
dioxide into the atmosphere. environmental protection. Klassen and
Extension of traditional cost accounting McLaughin (1996) see a significant impact of
systems to account for environmental impacts environmental management on firm
and their costs started towards the end of the performance. As key advantages, they
1970s in Germany. In 1979, two guidelines of mention cost reduction because of
the Bundesverband der Deutschen Industrie technological changes and reduced material
(1979) and of the Verein Deutscher Ingenieure and energy consumption. Eco-labeling of
Managerial Auditing Journal products can result in a substantial gain in
15/8 [2000] 424±430 the marketplace.
The current issue and full text archive of this journal is available at
# MCB University Press Letmathe (1998) provides more systematic
[ISSN 0268-6902]
environmental cost accounting approaches,
[ 424 ]

1999. e. To run such a system. e. (1997) argue that the correct assignment of environmental costs to their perpetrators can help reduce costs in other Structure of an environmental cost areas too. is based on a systematic cause-and-effect which include costs of environmental analysis. accounting systems must be justified. 12). Hence. Opportunities to extend and adjust the system to meet changing business requirements Purpose of environmental cost facilitate the decision to introduce such a accounting system. maximizing incentives for the cost centers to reduce profits or higher level of market share.and decision-oriented base for the environmental management perspective of environmental cost accounting system and for planning. it is not necessary that the cost area managers be very An environmental cost accounting system is knowledgeable about cause-and-effect of a flow-oriented cost accounting system which environmental costs. In traditional cost environmental impacts also makes sense for accounting systems. it Roger K. processes and environmental protection (see Hansen and products with their real costs. For example.Peter Letmathe and which were developed in this decade. and also considers the costs of environmental. Doost focuses not only on the correct accounting for also leads to higher costs of manufacturing Environmental cost accounting and auditing the costs of environmental protection but because of additional material. an appropriate instrument to ensure legal processes. The can help find measures and change the main goals are to check legal compliance and attitude of the organization to environmental to find inefficiencies which can reduce both protection (see Ansari et al. cost of waste disposal and environmental aspects in all areas of spoilage. of thinking of most companies. spoiled production correctly. For legal compliance. are the main incentives to reduce for emissions. Especially output-related costs. e. Even if an arbitrarily. This information environmental management system. the results can example. creates both a decision-oriented information The flow.g. Environmental cost accounting planning which use cost data automatically. there is considerable potential ones caused those costs to occur in the first for more success in achieving the traditional place. shows the real costs of inputs and the Besides. environmental data improve the business processes and ensures cost-efficient understanding of the business processes. overhead which goes to spoiled goods.. Managerial Auditing Journal 15/8 [2000] 424±430 related flows of materials and energy. companies which have data about be applied in other areas.g. Ansari et al. The Environmental costing accounting overall goal is to accomplish both business contributes to an internal pricing system goals and improvements in the area of which evaluates inputs. for measuring output flows are often surprised about the quality and service costs. environmental cost accounting is especially advantageous if costs of materials. An appropriate information base does the existing cost accounting system. impacts. control and supplements the more process-oriented way supervision of material and energy flows. emissions. waste organization does not have the explicit goal disposal and waste water costs may be of protecting the environment and only accumulated and prorated arbitrarily among reacts according to the environmental the various cost centers regardless of which regulations. the integration of the and how it can improve the results of traditional and the environmental cost performance-oriented audits. the complex cause and effect of [ 425 ] . ch. This procedure Mowen. For example. A high amount of waste is very accounting system often a sign of inefficiencies in business To identify and to assign environmental costs processes. environmental impacts and their costs. This procedure does not include any company objectives such as. it is necessary to extend cost. This is Therefore. volume of their waste flows and the costs Environmental audits examine the whole which are related to them. and products have an impact in compliance with lower costs.g. labor. water are assigned correctly to the inputs The systematic consideration of the which cause them. these costs are treated organizations with a defensive like other overhead costs and allocated environmental strategy. the amount of environmental impacts and To achieve this. waste disposal and waste environmentally-related costs. it improves the results of extension if benefits of the additional the audits as well. In addition. 1997). The internal prices. But not only decrease the necessary efforts to management will only agree with such an carry out the audit. He not only increases costs of waste disposal. This paper shows how an information are higher than the costs to get environmental cost accounting system works them. It integrates other areas.

In this step. Figure 1 shows the material or energy source should be structure of this environmental cost measured. Doost The following approach emphasizes the task of material and energy are causing the Environmental cost accounting and auditing of cost accounting to deliver information for significant environmental impacts. For Only if flows of material and energy are example. This procedure is production. The cause not only appropriate to reduce and the kind of environmental impacts environmental impacts. To requirements of the ISO 14001 standard. it is useful to implement 1 At first. most of the impacts are related their actual volume can be compared with to materials including storage. the impact of one item of a Managerial Auditing Journal 15/8 [2000] 424±430 business processes. the significance. If planning. A single material can cause accounting system.Peter Letmathe and environmental impacts should be considered. these flows in an appropriate way. This is also one of the to inputs. different environmental impacts. control the flow of material and energy. To achieve 3 To be able to calculate environmental costs. the EMS-group has to identify environmental bills of materials and environmental impacts of its energy and to assign them systematically organization. five steps which are partly have to be determined. Normally. the quantities of material and energy this target. 2 The next step is to figure out which flows Roger K. the which lead to higher cost and/or quality EMS-group has to decide which of the problems can also be avoided. the standard quantities. Only the high-significance flow of material and energy should be impacts will be considered and evaluated evaluated with their realistic costs. environmental cost be underestimated Figure 1 The concept of an environmental cost accounting system [ 426 ] . control and supervision of possible. and distribution. chlorofluorocarbons contribute recorded and evaluated with their realistic to the greenhouse effect and to the costs. Only a in an environmental cost accounting realistic assignment can prevent that system. processes and products. environmental impacts are of high or low 4 After accounting for their quantities. For the purpose of carried out simultaneously are required: planning. environmental costing can help control depletion of the ozone layer. inefficiencies should be documented.

These internal prices can be used for . Its experience and mentioned in step 3. In this step. processes and products. environmental impacts have to be assigned 3 Product-caused environmental impacts to the input which caused them. The quality manager knows about the existing and potential sources of quality problems. stakeholders can reduce conflict of interests. input-related environmental impacts can be Additionally. bills of materials and energy can assign them correctly to their perpetrators be generated. Doost other costs may also be relevant.Peter Letmathe and systematically. Besides the purchase cost. This means that specific process. Statistical quality control provides information about the optimum specification of materials and other process parameters to meet the quality standards of the organization. An example is Bill of environmental impacts of a process The bill of environmental impacts of a the energy use during the consumption process (see Figure 3) contains phase or the waste after the product's use. and the process risks as well. The total energy. then of burning coal. like significant differences between the standard the carbon dioxide emissions as the result and actual environmental impacts. . If there are directly caused by the use of an input. Communication with the organization's planning and control of inputs. The environmental management gathers This will be carried out according to the data about environmental impacts of the bills of material and energy which were organization. environmental impacts which are caused if a To investigate the flows of materials and process is carried out. The sources which are required to run it. all the input-related process. stakeholder groups have knowledge Bills of environmental impacts which can lead to a more environmentally All environmental impacts can be traced friendly and cost efficient production. To As a result. Customers. the environmental costs have to organization wants to introduce a be assigned correctly to their causing technologically new process. objects like input. Bill of environmental impacts of an input . Input-related environmental impacts are independent of the process in Bill of environmental impacts of an input which the input is inserted. Scientific literature gives further details Roger K. like emission depend on the process in which the input is which depends on the temperature of a used. can be traced back to a product but not to a single input or process. The is needed to carry out the production direct process-related environmental impacts process knows the materials and energy cannot be assigned to a single input. [ 427 ] . who already work with this technology. processes. This information can then be three different kinds of environmental used to plan environmental impacts in impacts can be distinguished: advance and to control the level of impacts 1 Input-related environmental impacts are during the production phase. can provide Figure 2 further information. The manufacturer of the machine which input-related environmental impacts. . Ideally. Such handling of purchased goods or waste. They impacts which can be traced back to a single are a consequence of carrying out a material or energy source. information is extremely valuable if an Managerial Auditing Journal 15/8 [2000] 424±430 5 Finally. members of the products and environmental impacts. Examples about the productivity and specific risks Environmental cost accounting and auditing are costs for the treatment and logistical of a production technology. They are caused by a the amount of environmental impact does not combination of inputs. he/she can give details calculated through the multiplication of about technological efficiency and the input-coefficients of the process with the spoilage rate. back to flows of material and energy. oil or other fossil energy corrective action should be taken. Internal prices are knowledge can contribute to the the result of adding all cost components of estimation of material and energy flows a single material and energy sources. The bill of environmental impacts of an input 2 Process-caused environmental impacts (see Figure 2) includes all environmental cannot be assigned to a single input. sources. these information sources may be of environmental impacts of a process are the interest: sum of both the direct process-related and the .

The costs for the EMS documentation are also included in this category. In addition to the purchase are caused through the processes and inputs costs. refinement. Supervision costs are incurred on the documentation and control of harmful Figure 4 substances and waste to achieve legal Bill of environmental impacts of a product compliance. many manufacturers have to legal compliance can be achieved much take back their old products (see Epstein. these indicate uncontrolled environmental impacts. relevant (see Figure 5): The described bills of environmental . They help to control the use of material and energy according to the environmental objectives and targets in the environmental program. But because the 1996) after usage. better with appropriate data. . represented through the amount and transportation as well as costs for of emissions or waste water. The amount of cost depends on the ability to dismantle and recycle the products. Costs of environmental risks are determined by financial risks which are uncertain with regard to their occurrence and their amount. The costs of environmental risks can be estimated through the expected value minus or plus a security charge.g. waste water. and emissions. An example is the new European regulation which obliges all car Figure 3 manufacturers to take back all old cars Bill of environmental impacts of a process from the year 2005. The input-related quantities. Processes which improve the reusability of the products can reduce such costs. 1994). the Managerial Auditing Journal 15/8 [2000] 424±430 calculation of internal prices of material and Bill of environmental impacts of a product energy sources is the next logical step to With the bill of environmental impacts of a create a decision-oriented information base. The internal prices (Figure 5) change the relative prices of inputs. are higher than security measures to avoid accidents and the standard impacts. e. In Europe.Peter Letmathe and input-related environmental impacts per unit environmental impacts are only measured in Roger K. . Therefore. It is also conceivable to consider the externalities of material and energy use. If the actual environmental . processes and products. systematically. The result indicates the substitution of harmful material through [ 428 ] . Logistic costs include the costs of storage impacts. Also . other cost components are often to manufacture the product. . The environmental Internal pricing impacts of a product contain the direct The recorded quantities of material and product-related environmental impacts and energy need to be evaluated with their all input-and process-related impacts which realistic costs. inefficiencies in the business processes. Examples are liability risks of high environmental impacts (see Rubenstein. Treatment costs result from the impacts give a company the opportunity to separation. Additional control costs may be used to set incentives to reduce the use of a material which causes considerable environmental impact. control and supervise its used materials or undesired residuals like environmental impacts much more waste. business goals cost efficiently. there is no way to ensure legal Environmental cost compliance and the accomplishment of accounting and auditing environmental impacts are given by the bills of environmental impacts of the inputs. and cleaning of plan. product (see Figure 4) significant environmental impacts can be assigned correctly to a product. Doost of the considered input.

information from an environmental base of an environmental cost accounting cost accounting system can be used for system in the same way as the external investment decisions. Both audit. Environmental cost accounting provides Internal audits can be carried out to information for planning. environmental management systems. audits are conducted to see if the management 1994) their: system meets the requirements of the relevant . computer operations to ascertain about flow with the flow in the next period. Performance audits measure the External audits or third-party audits are current performance of the organization and carried out to review the management system try to identify potentials for improvement. The most common external audits defining objectives. If these and reporting procedures for measuring outputs are accounted for through the costs and variances attributed to various environmental cost accounting system. control and prepare for external audits for the mentioned supervision. These audits can use the information Besides. a high amount of wasted heat can indicate the need for investment in a heat recovery system. and new requirements. Data . organizational arrangements to ascertain standards. companies need to review (Cushing. All areas which use cost data standards. 1996) standard is dedicated to . performance audits should prioritize areas/cost centers which are responsible for most of the environmental impacts. appropriate data exist to achieve the organization's goals. Figure 5 For these tasks to be accomplished. Although they are formal and not that proper division of responsibilities result-oriented standards. external audits must Environmental cost be repeated frequently (see Culley. To training. auditing. Inefficiencies can also be pointed out by high variations of the amount of undesired byproducts. software. targets. Doost result in lower costs. the less time. it operations and cost flows. waste water and emissions is the result of inefficiencies. Hence. targets and measures are the ISO 9000 and ISO 14001 audits which which should be attained in the future. They are also conducted to automatically integrate the extended ascertain compliance with management's information into their own planning system. waste water. Calculation of internal prices for material and energy flows comprehensive information is needed which is based on a cause-and-effect-analysis. and To examine how environmental cost money need to be spent by the external accounting can deliver useful information for auditors in this area.Peter Letmathe and other substances which are less harmful and review its improvements. and emissions. and personnel. it makes sense to distinguish Another kind of audit is performance between internal and external audits. effort. financial controls to make certain about and targets can include the reduction of the adequacy of responsibility accounting waste. To retain ISO 14001 Roger K. system planning to make sure about the about input and output flows of material and adequacy of system development projects energy show if the business processes are to handle the complexities of the proposed properly documented. A [ 429 ] . For example. accounting and auditing Especially the way the organization Managerial Auditing Journal 15/8 [2000] 424±430 Auditing and environmental costs documents and supervises its improvements may be viewed with much interest. internal auditors. for launching new audits. by an independent external auditor or Performance audits can also be a basis for registrar. The ISO 14001 (see cost system. and would be much easier to compare the current . or ISO 9000 certification. Clemens. auditing. measures to achieve them. Concrete measures . etc. 1998). the organization has to handle the tasks necessitated as a result of define concrete objectives. To review the quality management or achieve an adequate level of a performance environmental management system. The bills of environmental continuous and systematic review of the impacts can be integrated in production company's environmental measures by the planning and control systems. This proper data processing capabilities in gives the organization the opportunity to terms of equipment. a high volume of waste. personnel policies to ascertain the continual improvement as the overall goal of presence of proper standards for hiring. The more work is done through products. can support the work of the registrar. Very often. and assigning of personnel to accomplish this. goals.

and McLaughin. documents the responsible handling of DuÈsseldorf. Counting What Counts: Turning Corporate Accountability to Competitive Advantage? Conclusion Federal Environmental Agency (Germany) (1997). G. IL. Environmental and Quality Systems Integration. audit department is often a necessity to satisfy Environmental Protection Agency (EPA) requirements and reduce potential additional References Ansari.B. Englewood Cliffs. New York. ``The These flows can be reviewed much easier if impact of environmental management on an environmental cost accounting system firm performance''. Vol. Richtlinie 3800 ± Kostenermittlung fuÈr Anlagen The recording of material and energy flows und Maûnahmen zur Emissionsminderung. (1996).J. R. of the considered area and resource Gege. Where continuous supervision Quorum. records to review. if any. August. pp. Umweltmanagement. amount of emissions. S. If the Vol. (1998). and Owen. solid waste management.C. Epstein. comply with environmental laws. Bell. contribute to the health of the ecology for our A self-audit and inspection by the internal generation as well as generations to come. The first three areas are audited with the Environmental Protection Agency (EPA) (1998). R. 205-18. D. MuÈnchen. preparation guide for organic coating Bundesverband der Deutschen Industrie (1979). . VDI- present. the EPA finds few. D. violations. Clemens. wastewater. pollution prevention. Rubenstein. Irwin. It is needed for Lehman. environmental issues and is therefore a good basis for demonstrating the organization's Further reading environmental compliance. and . . C. (1994). in relationship is necessary. 1998) has published a self-audit Environmental Costs. pp. . J. Hansen. Klammer. Waste can be separated and at determine the entity's compliance with least a part of it recycled. B. accelerated. community right-to-know. effective environmental cost accounting Because management is focusing on overall system can help the company achieve its costs and not only on purchase cost.J. but it provides a Environmental cost Spoilage can be avoided through technical accounting and auditing very important road map for internal and and organizational measures or substitution external auditors in their endeavors to Managerial Auditing Journal 15/8 [2000] 424±430 of materials. Systems. (1997). (1998). ``Worrying that is based on a cause-and-effect about environmental auditing''. Addison-Wesley. and Mowen. An environmental cost accounting system Gallhofer. NY. .. M. Such a system Accounting Forum. inspectors see that these data are in Letmathe. Prentice-Hall. EPA. W. and Haslam. and Lawrence. .D. Chicago. performance improvements.Peter Letmathe and high volume of fresh and waste water usage not only helps the company in terms of Roger K. Doost can be reduced by a closed-loop cycle. Vahlen. C. Measuring and Managing Agency (EPA. Vahlen. Improvements achieved as a more efficient processes. ``Accounting for product take managers. Culley. Social and better identification and proper charging of Environmental Accounting. Complete Guide to ISO 14001. Lewis. MuÈnchen. . Klassen. 5th ed. Management Accounting. (1999). Special Edition of environmental related costs. wastewater management. D. (1994). Accounting Information . Westport. Another way is to company policies as well as environmentally- reduce the costs for waste disposal through related laws.. facilities which covers the following areas: Anleitung zur Bestimmung der Betriebskosten . external costs. M. Sustainable Germany. (1996). M. responsibilities of supervisors and Epstein. provides the appropriate data. J. . Management Science. air emissions. Boca Raton. Washington. Envrionmental features. help of several checklists which includes the Self-audit and Inspection Guide for Facilities inspection of the following areas: Conduction Cleaning. of significant environmental impact is Verein Deutscher Ingenieure (1979). supervisor's and manager's management pp. and Birchard. hazardous materials/waste management.. P.P. This leads also to result of creation and monitoring of an lower purchase costs for raw material. Preparation. OH. (Eds). 29-33. fuÈr den Umweltschutz in der Industrie. 1199-214. KoÈln. (1995). back''.M. 19. DC. M. Organic Coating of Metal Parts. The Environmental Protection (1997). R. (1996). 42. Management Accounting. Cushing. T. Berlin. CT and London. NJ. and waste. Umweltbezogene compliance with the inspected physical Kostenrechnung. organic finishing facilities. physical features to inspect. and make more informed decisions.R. . S. it can goals. LA. Kosten senken durch recovery. Cincinetti. South- The reviewed records include data about the Western.B. the whole inspection can be Accounting for the Sustainable Coperation. [ 430 ] .