Green Accounting and the Environmental Audit
David M. Boje
October 23, 1999

Environmental Auditing - The auditing standards of ISO 14000 provide general principles for environmental audits, guidelines for auditing environmental management systems (EMSs), and qualification criteria for environmental auditors. Individuals will be able to become certified auditors based on specific knowledge and experience in environmental operations, regulations, and technologies. The environmental audit is viewed as a critical component of an effective EMS and it will need to be performed on a regular basis to measure the conformance of an EMS to an organization's environmental policy.

Table One - Adapted from Department of Energy (press here for original)
 
General Activity Areas Cost Elements
Activities -Characterization of the life cycle system
-Assessment of Areas in need of Green
-Design of the Audits
-Recruit an Audit Team
Audit Work -Mobilization of Top Management Support
-Monitoring, sampling, testing, and analysis work
Areas for Possible Audit -Surface Water
-Groundwater
-Air Pollutants
-Solid Waster 
-Liquid Sediments and Sludges
-Noise Decibal Levels
-Health of Workers
-Health of Community
-Effects on Animal and Plant Species
Propose Changes -Biological treatmetns
-Chemical Treatment
-Physical Treatment
-Thermal treatment
-Decommision problem technologies and processes
-Replace problem technologies
-Training of workers and managers
Disposal -Disposal of toxic materials
Demobilizaton -Site Restoration
-Demobilization
Long-Term Surveillance & Maintenance -Institutional Controls
-Monitoring
-Maintenance
-Security

Audits in UK do Not offer any Protection to Individual Stakeholders (press here).
But, are the standards enough?  Can Environmental Audits control the worker and community effects?

Variations in Environmental Audit Standards -
  • State Statutes Regarding Environmental Audit Privilege (Press Here).  23 States have laws about environmental audit standars. 13 States have bills pending before their state legislatures. That leaves 13 States without any environmental auditing standards.
  • Environmental Protection Agency - EPA has actively encouraged and participated in the development of environmental auditing and improved environmental management practices since the mid-1980s (press here). EPA Environmental Auditing Project (press here).

    Environmental Accounting Project has developed this database as a collection of various environmental accounting case studies (press here). Examples follow:

    Analysis
     
     Table A: Cost Consisterations
    Plastic Coated Racks
    Year One Savings
    Materials
    $5,262
    Disposal
    $4,445
    Quality
    $8,660
    Employee Productivity
    $7,525
    Total Savings
    $25,892
    .
    Year One Costs
    Maintenance
    $3,674
    Total Costs
    $3,674
    (1) Use of New Plastic-Coated Racks
         The cost of switching to the plastic coated racks was estimated by Precision Circuits as $22,522. The
         primary direct savings to the company came from reduced materials and disposal costs related to eliminating
         nitric acid. Additional savings came from a reduction in the number of defective boards and increased
         employee productivity.

    (2) Change in Waste Water Treatment Process
         The investment associated with implementing the new waste water treatment process was estimated at $900.
         This small investment yielded significant benefits: Net annual costs for treatment chemicals were reduced by
         $17,697 (current dollars). In addition, net annual disposal costs were reduced by $10,526 (current dollars).
         The new process resulted in an annual $150 (current dollars) increase in maintenance costs.

    Financial Results
         (1) Use of New Plastic-Coated Racks
         The 5-year net present value of this investment is $33,589. The 5-year internal rate of return is 66%. Straight
         payback time is just over 1 year. A portion of these savings are attributable to quality improvements.

         (2) Change in Waste Water Treatment Process
         This relatively inexpensive change has a 5-year net present value of $62,824. The 5-year internal rate of
         return is 1,886%. Straight payback time is well under 1 year.

    (press here) for complete copy of the New Plastic-Coated Racks Example.

    The Environmental Auditors Registration Association (EARA) is an independent, non-profit making organisation, dedicated to raising standards of professional competence in the environmental auditing field. EARA was established in 1992, following widescale consultation with industries, environmental consultancies, professional institutions, certification bodies and other interested parties (press here). The Association for Accountancy and Business Affairs (press here). AABA trustees are: Professor Christine Cooper, Mr. Jim Cousins MP, Professor Colin Haslam, Professor Richard Laughlin, Dr. Austin Mitchell MP, Professor Prem Sikka and Professor Hugh Willmott.  They are working to reform and reconstruct auditing practices in the UK.

    The following Audit stages are from: A Protocol of the Environmental Audit

    Stage I  Set the Context
     
    Stage 2A  Plan the audit:  Organizational  considerations
     
    Stage 2B Plan the audit:  Methodological considerations
     
    Stage 3  Undertake the audit
     
    Stage 4  Evaluate the findings

    Stage 5 Report and verify
     
    Stage 6 Implement action plan based on audit  And feed back loop into new audit cycle ...
     

    Model Protocol for an Environmental Audit includes:
     
    1. Set the Context. Committing top management to the green mission, green corporate program, a green team, and environmental audit. This will mean training managers in Green terms, Green reference materials, and Green regulation. Green strategic training will be needed to link green concerns to core corporate objectives. A corporate environmental program defines each unit's green responsibilities.

    2. Plan the Audit. Set up a cross-functional green audit team to set scope and scale of audit, determine methods, and define priorities. Appoint a team leader. The team should involve relevant stakeholders and experts. Representatives across the organization need to get involved in green realities and green regulations. Scale and scope, as reviewed above, defines if the audit will be for the entire company; a site; a process; or a product. Scope and scale will tell you what is the scientific complexity and knowledge needed, time need, and resources required. Review policy, mission, stragety, and planning documents. Identify environmental impacts of product/services/sties. Assess level of stakeholder interest in the issue. Plan a checklist or framework for the audit. Set up test and verification procedures.

    3. Undertake the Audit. Use surveys, interviews, and observation. The team needs to pull in stakeholders and expertise to get the audit done. Arrange to obtain needed information and perform needed studies. Collect data from all key operations. Review background and baseline data. Is documentation up to day? Use survey to assess staff awareness of environmental policies, mission, and operating procedures, green impacts. Interview staff (observe body language, ask open-ended questions). Inspect the site/process/product/ Sample a range of variables using statistical sampling techniques. Apply verification and testing procedures.

    4. Evaluate Findings. What is impact between practices and costs, what are options, and what are recommendations. Is operation in compliance with mission and policy? Trace all known linkages of product/process to environmental impact. Appraise significance of each impact. Decide need for more rigorous analysis of green impacts. Is a more detailed audit needed? Explore ways to address problems. Assess cost, technical, and other implications. Make recommendations, stating cost estimates, time, and resource needs.

    5. Report. Summarize findings and recommendations to decision makers and stakeholders. Make clear distinctions between options. Identify major priority areas for immediate attention. Identify areas for more rigorous audit. Write in clear language.

    ? Executive summary (1-2 pages)
    ? List of Audit Objectives
    ? Methods Used in Audit
    ? Executive Summary (with clear action recommendations)
    ? Present Key Information
    ? Analysis of Information (tie to objectives/method)
    ? Main Findings/Conclusions
    ? Recommendations and Action Plans
    ? References Used
    ? Technical Appendices
    ? Supporting Materials
    6. Implement Action Plan. What changes to operations and policies need to be made? What are the significant impacts? What intervention is needed? Set objectives and targets. Develop a corporate program. Set implementation guidelines.

    7. Obtain Verification and Feedback. Review accuracy of audit and propose improvements to audit process. Monitor and evaluate the audit findings. Do outcomes match predictions? Collect data to assist in future design and strategy formation. Share results with other parties. Plan a follow-up process. Assess implementation. Set scope of intervention. Reappraise in light of outcomes. Evaluate the audit. (Source: Ledgerwood, Street & Therivel, 1994)

    EPA CASE EXAMPLE -- Office of Pollution Prevention and Toxics (7409) Washington, DC 20460  EPA 742-R-97-004 June 1997
    ENVIRONMENTAL COST ACCOUNTING FOR CHEMICAL & OIL COMPANIES :  A BENCHMARKING STUDY A Project of the Institute for Corporate Environmental Management at the University of Houston in Partnership with the Business Council for Sustainable Development - Gulf of Mexico --- Authors: David Shields,   Beth Beloff, Director, & Miriam Heller. (Press Here) for Table of Contents

    " Reliable environmental cost information and accounting models for allocating environmental costs to specific activities, processes, and products are essential for the market-driven approach, as well as  for the broader integration of environment into the business, to succeed."  U.S. and Mexican companies participated in an environmental cost accounting benchmarking project.

    The result of the team discussion was: "Partners were most interested in 1) understanding how to monitor for environmental costs; 2) developing systems for cost accounting; 3) automating environmental accounting information systems; 4) and learning about methods to allocate environmental costs to product and process."

    A survey was conducted that elicited a framework of the relationship of corporate culture and envrionemtnal stewardship and accounting data systems: "The framework reflects the interrelationship between corporate culture (attitude toward environmental stewardship) and the availability of resources for development of an environmental accounting system. Only companies with a clear desire to integrate environmental decision making into the normal business context is likely to make such an investment."

    COST ACCOUNTING SYSTEMS
    "A variety of methods were used. Some systems were wholly integrated, or layered, onto the General Ledger. Other systems were in the fledgling stage, existing as ad hoc systems that access information from other established systems to fulfill decision making needs as they arise."

    Environmental Cost Accounting System Development

    "Each of the partner companies discussed their current system for generating environmental cost information." (CLICK HERE FOR ORIGINAL)

    Table B - Environmental Cost Accounting : Cost Sheet for product A*
     
    Cost Element
    Unit of Measure
    Consumption 
    per 100 lbs.
    Unit
    Price
    Cost per
    100 lbs.
    Intermediate Material A
    lb
    75.3604
    $6.0702
    $457.45
    Raw Material B
    lb
    125.2400
    $1.5239
    $190.85
    Raw Material C
    lb
    92.8863
    $1.7625
    $163.71
    Direct Labor
    hr
    1.3100
    $26.3200
    $34.48
    Equipment X
    hr
    0.4400
    $95.3818
    $41.97
    Equipment Y
    hr
    0.1364
    $170.6994
    $23.28
    Equipment Z
    hr
    0.4000
    $47.9629
    $19.19
    Repair/ Maintenance Equipment X
    hr
    0.4400.
    $45.2140
    $19.89
    Repair/ Maintenance Equipment Y 
    hr
    0.1364
    $50.3554
    $6.87
    Repair/ Maintenance Equipment Z
    hr
    0.4000
    $16.9008
    $6.76
    Electricity
    KWhr
    104.9500
    $0.0467
    $4.90
    Steam
    ml
    4.8000
    $4.2672
    $20.48
    Auditing and Quality Control
    hr
    0.1400
    $53.3962
    $7.48
    Effluent - Flow
    MG
    6.0000
    $0.3339
    $2.00
    Effluent -TOC
    lb
    35.2182
    $0.4519
    $15.92
    Incineration - Solids
    lb
    23.8282
    $0.4519
    $10.77
    Incineration - Organic Liquids
    lb
    85.2605
    $0.4108
    $35.03
    Incineration - Aqueous
    lb
    65.4289
    $0.7204
    $47.13
    Geníl Facilities, Services &      
    $21.02
    Overhead        
    Unit Overhead      
    $42.33
    Total      
    $ 1171.50
    * Adapted from ( Ciba - Geigy, 1996) (CLICK HERE FOR ORIGINAL)

     Good Questionaire to use to assess environmental accounting practice (press here).

    OTHER TOOLS and MATERIAL
    1. Pollution Prevention Financial Analysis and Cost Evaluation System P2/FINANCE is a spreadsheet software application for conducting financial evaluations of current and potential investments. It is unique among capital budgeting tools, because it expressly addresses traditional obstacles to the financial justification of pollution prevention (P2) investments (free download) - (press here).

    2. DuPont's Enviornmental Audit Slide Show (press here).

    3. NEC has been conducting environmental audits at its facilities in Japan since 1973 (press here).

    4. Michigan's New Environmental Audit Law (press here).

     

    Press for TD Consulting Gameboard,
    Green Accounting Gameboard
    or Storytelling Organization Gameboard.
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