Review of Management Accounting

Right now, the current measurement systems are inconsistent and incomparable.
Unlike the financial information for public companies that we can compare and rely
upon, we do not have the same reliability for sustainability accounting information.

Many techniques that were developed decades ago such as budgeting, variance
analysis, cost-volume profit analysis and payback investment appraisal are still
widely used. One reason being that these techniques have been adapted to respond to
the changing environment.

Increasing attention is now being given to making companies accountable for ethical,
social, and environmental issues and the need for organizations to be managed in a
sustainable way.
 Environment and sustainability issues.
Until recently more attention has been given to social responsibility reporting relating
to ethical, social and environmental issues within company’s annual external reports,
possibly due to pressures from stakeholders and government regulations requiring
more social responsibility reporting.

There are currently a number of different ways to report ESG information. Among
the most popular is the Global Reporting Initiative, which takes a multi-stakeholder
perspective. That means that information on how a company’s actions affect many
different parties — not just shareholders — is reported.

ESG refers to the environmental, social and governance information about a firm.
There is growing evidence that companies that take their environmental and social
responsibilities seriously perform better financially.
Management accounting has been criticized for not giving sufficient attention to
social, environmental and sustainability issues, to be incorporated within
management accounting information system.

The principle of sustainability requires that companies should operate in ways that
secure long-term economic performance by avoiding short-term behavior that is
socially or environmentally wasteful.

ESG investors are attracted to companies that meet certain ESG criteria while they
avoid investing in companies they believe are unethical, like tobacco or gun
manufacturers (known as sin stocks). They also pressure firms to improve their ESG
performance, or they divest from some companies completely.
Porter and Kramer (2006) argue that a business or a society that pursue policies that
benefit their interest at the expense of others, may have a temporary gain but will
undermine the long-term prosperity of both.\\They recommend that companies
should follow the principle of shared value, which are policies and operating
practices that enhances the competitiveness of a company while advancing
economically and socially. Some examples are:
• Philips earns 38% of total revenue from green product sales.
• IKEA saved £1 M by removing plastic bags from checkouts in the UK in 30
months.
• GE’s brand value increased by 17% after the launch of ‘Ecomagination’, a
business initiative to meet customer demand for more energy.
In most cost accounting systems, environmental costs are hidden within general
overheads and are either not allocated to cost objects or are allocated. Environmental
cost should be accumulated by separate cost pools, and traced to the products using
ABC concepts.
 How do we measure sustainability?
Measuring sustainability is where it gets tricky. Much of the information used to
gauge a firm’s sustainability is provided by the company itself, and it’s not always
audited. This makes it very different than financial information, which is subject to
detailed audits.

Environmental cost quality reports can be produced based on the principles of a cost
quality report. Following categories of environmental costs can be reported:
• Environmental prevention costs: the cost of activities undertaken to prevent the
production of waste that could cause damage to the environment. Eg. Training
employees, recycling waste.
• Environmental detection cost: the costs incurred to ensure that a firms activities,
products and processes conform to regulatory laws and voluntary standards. Eg.
Inspection of products, auditing environmental activities.
 How do we measure sustainability?
• Environmental internal failure costs: costs incurred from performing activities
that have produced contaminants and waste that have not been discharged into the
environment. Eg. Cost of disposing toxic materials.
• Environmental external failure costs: costs incurred on activities performed
after discharging waste into the environment.
 Role of management accounting
In addition to managing and controlling environmental costs, management
accounting systems should support the creation of shared value and sustainable
development. The environmental consequences of products should be evaluated
using life cycle cost management system.

Incorporating a society/ environmental perspective within a balanced scorecard

framework has been adopted by some companies to link their environmental strategy
to concrete performance measures.

The balanced scorecard (BSC) is a strategic management tool that provides a

framework for measuring and managing performance across a range of perspectives,
such as financial, customer, internal business processes, and learning and growth.
BSC can be adapted to include specific metrics and indicators that reflect a
company's sustainability performance and stakeholder engagement.
 Focus on Ethical Behaviour
Business ethics deals with activities of a firm to ensure that products and production
processes do not cause harm. It reveals standards for conduct and decision making of
employees and managers. Ethics in production ensures that production activities are
not damaging to the consumers and the society. Employees’ unethical behaviours are
predominant in organizations without organizational ethics. Ethical business
objectives could be achieved through corporate social responsibility.
• Anti-trust laws are concerned with competitive practices among businesses and
are intended to maintain a favourable competitive environment.
 Focus on Ethical Behaviour
Management accountants have their strongest ethical influence in areas of internal
control and risk management. Even though specific procedures are codified, it is up
to the accountant to apply regulations in a manner that reflects and, in some cases,
influences the ethical culture of the company. Fundamental principles are:
• Integrity- Being honest
• Objectivity- Not being biased
• Confidentiality
• Compliance