In Australia, just like in any other country in the world, the issue of environmental regulation is causing growing concern among business practitioners because there is a lot of pressure both from the public and from special interest groups that are pressing for industries and other business areas to comply with environmentally friendly measures. There are two ways of assessing or analyzing this matter and one is by reviewing the voluntary practices that many business firms have adopted to maintain or gain popularity with consumers since they are producing or supplying only ethically or environmental friendly produced goods and services as opposed to another firm that is carrying out production unethically (Anderson, & Cunningham 2002, p. 28). This argument has been used to justify the lack of a need for national legislation measures that would amount to interference with market forces and would require that all business bodies comply with environmentally friendly production.
Additionally, in case of difficult economic times such as recessions, the very public that was advocating for environmentally friendly goods and services has been known to abandon these preferences and instead settle for the cheaper, less environmentally friendly produced goods and services. As if that is not enough, the businesses and firms that undertake the voluntary practices are at constant risk from the other firms and businesses in the market that shirk such ethical duty and responsibility and continue to produce products as usual. It becomes interesting to note here that whereas superficially it may appear that national legislation by the government is in fact government interference with the free market, which is not so as national legislation is actually just a means of making the market forces apply in a more ethical manner (Collison, Ferguson, & Stevenson 2007, p. 329). In effect, it provides the market forces with a higher, more ethical, and more environmentally friendly threshold in which to be propagated.
Accounting theories and laws
Conversely, this issue also needs to be analyzed from an accounting perspective. Before carrying out this contentious debate,(this matter is highly controversial as businesses have varied opinions on the effect of the new legislation in Australia) it is necessary to familiarise with the basic concepts of accounting that shall come into play and so the next section of this paper does just that, beginning with a definition of terms.
A defining objective of accounting is to provide information to interested parties who may lack the requisite access to the full necessary information that they need to make valuable economic decisions. This being the case, one would ask why such an objective exists in a free market system. Is it not supposed to be so that all the relevant information is available to all the key players within the market system? Well, ideally, this should be so. However, one only needs to look at the securities industry to realize that in reality, which is not the case.
The economy is rent with inherent anticompetitive features that have outlived the antitrust laws put in place to curb the same since the 1980s (Elkington, Knight, & Hailes 1991, p. 476), for at the time of the creation of the antitrust laws, these inequalities were not viewed as such and the antitrust legislations did not encompass them in their provisions. Therefore, the result is information asymmetry, meaning that not all the active sides in the market have all the information they need and that there creates a need or a justification for accounting regulation.
Regulations: definitions and justifications
Regulation can be defined in a myriad of ways including that it is: “a sustained and focused control exercised by a public agency over those activities valued by a society or a community.” (Elkington, Knight, & Hailes 1991, p. 342) Additionally, it may be viewed as a specific set of commands, an example of which would be the Corporations’ Act that sets out in detail the duties of the board of directors. More general definitions include “deliberate state influence” and even more general, “all forms of social control and influence.”
This regulation extends to those people in charge of preparing the information being provided to market players, markedly, the accountants and auditors. In practice, at that level of preparers of information, respective professional regulation bodies take over the task of regulation so that for instance, the competence of these accountants and auditors is ensured by the respective oversight bodies in the profession (Evans, Burritt, & Guthrie 2011, p. 55). However, at this point, it is necessary to look at the history that led up to the need for accounting regulation.
Back in the nineteenth century, the industrial revolution was rocking Europe and the public and the government were equally flourishing economically. At this point, the theoretical affiliation of most was liberalism. Liberalism advocates for individual determination or self-determination, which in turn means that personal interests will be protected from encroachment by the state. This being the popular dogma of the age, market forces were hallowed and beyond government touch, and therefore, it came as a surprise to most that there were increasing reports of abuse of these forces since many thought that the forces were very good and could not possibly result in any social wrongs.
Nevertheless, soon enough, social ills became impossible to ignore. Industries got notorious for fostering inhumane and dangerous working conditions in a bid to stay competitive and oust competition (Evans, Burritt, & Guthrie 2011, p. 32). This became manifest in the form of child labor, slavery, increased working hours, and poor pay. The result was poverty and misery among the bourgeoisie, who form a majority of the population. As noted before, the industrial revolution favored market forces taking charge of production and the common slogan of laissez-faire, which is French for left alone or let became gospel truth (Evans, Burritt, & Guthrie 2011, p. 23). This resulted in complete opposition to the pure capitalism routine that hitherto had seen governments taking control over the major production industries. However, soon, the public was outraged by these social ills and in response to their outcries, the government imposed regulations that were felt to be for the benefit of society and were regarded as socially desirable.
This period in history is relevant for the debate in this paper because it signifies the importance of striking a balance between market forces in a free market and the need for regulation to achieve some sort of working equilibrium (Gladwin 1993, p. 56). This aspect is an economic principle and it cuts across the board be it in accounting, in environmental planning, or in regular commerce. One only needs to look at the market keenly to know that some sort of regulation is necessary. For instance, without regulations, there would be no need for smuggling narcotics and other drugs as the market forces would indicate demand and the automatic response in such an unregulated scenario would be to supply enough drugs to satisfy the available demand. The same applies to all other illegal businesses such as prostitution, human trafficking etcetera and so it is important to consider regulation as a positive rather than a negative word at times (Gladwin 1993, p. 61), because market forces on their own lack a moral disclaimer and if let to run loose, there would be chaotic ramifications. Another less extreme example is that of drivers. If not regulated by any traffic rules whatsoever, there would be numerous accidents but thanks to the regulations in place, they have a sense of responsibility engineered by the knowledge that they shall be accountable for any unlawful acts.
Regulation in accounting can be traced back to the 1920s and 1930s which featured an economic crash that led to an active search for accounting principles and definitions of accounting theories; in short, accounting became regulated (Forsyth 1997, p. 279). The result of all these was the creation or entrenchment of accounting laws including legislation for the disclosure of information, taxation legislation, and legislation that affected the creation and operation of professional institutions, corporations, and associations, which in turn carried out an in-house regulation of the members.
There are several notable justifications for regulation and these include 1) the preservation of competition. Market forces are in place to ensure that each player in the market has a fair chance at ousting a competitor through innovation. However, numerous firms and industries have been prosecuted in front of anti-trust tribunals for just the opposite kind of competition. These are the firms that are responsible for colluding to hike prices at the expense of consumers and in the process, as they succeed in creating monopolies (Forsyth 1997, p. 280). Monopolies constitute a failure of market forces because they are the embodiment of a system in which competition has ceased to exist. To counter this eventuality, governments create anti-trust legislation to either punish the players that abuse a dominant position or to proactively prevent the creation of monopolies. In the United States of America, the Sherman and the Clayton Act are in charge of the competition laws of the country. In Australia, the Australian Competition and Consumer Commission (ACCC) holds that title and its duty is to ensure competitiveness and to ensure that all the players comply with the Trade Practices Act of 1974.
An environmental justification for regulation is apparent in the cost of curbing pollution. It is far much easier to simply dump the waste materials into a river instead of buying and installing the expensive machinery required for healthy disposal. However, upon dumping, the firm responsible has gained an economic advantage due to the cheapness of the procedure whereas the rest of the society shall continue to pay for such discharges with their lives in case of diseases like cancer or with the loss of productivity of their agrarian land (Guthrie, & Parker 2001, p. 169). In such an instance, a regulation that would require a proper way of discharging pollutants of firms is desirable. Additionally, such regulation can act retroactively by requiring the responsible firm to carry out its Corporate Social Responsibility (CSR) in the form of compensating the families that suffered due to its unethical conduct as well as providing employment schemes for the working-age population in its vicinity.
Regulations are also necessary for ensuring the equitability of outcomes generated by environmental conservation activities. For instance, when the state makes directives for forest preservation, the timber cutters and their families shall be adversely affected as they shall lose their sources of livelihood or employment and the firms shall close (Hey 2003, p. 19). Nevertheless, the community shall benefit as they shall all have a forest maintained and developed for future generations. In such a case, regulations come in to ensure that the outcomes of the directives are equitable. This can be done by hiring the former timber cutters to manage the preservation project as well as providing alternatives for their income generation. This principle of ensuring equitability of outcomes is known as the “Pareto optimality” principle and it simply means that one is made better off without necessarily making another worse off (Collison, Ferguson, & Stevenson 2007, p. 339).
Several theories justify regulations and these include: 1) The Public Interest Theory- this theory suggests that regulations are necessary for the achievement of publicly desired results that if left to the market forces, society would be denied. The public constantly demands corrections to the inefficient or otherwise inequitable markets and the only way that the government can indulge them is by putting in place legal regulations, otherwise known as legislations. 2) Interest Group Theories- this theory suggests that regulations are a product of the various relationships among different groups and between these groups and the state. As such, regulations are more of a competition for power than merely a measure to satisfy a public interest (Hey 2003, p. 26).
After enactment, regulations need to be enforced and there are three possible avenues to do this. 1) Self Regulation- this occurs at the professional accounting level. There are in-built disciplinary bodies that are in charge of ensuring compliance with established rules. 2) Compliance approaches- these are diplomatic measures and they encourage conformity with established regulations. 3) Deterrence approaches- these approaches work in reaction to breaches of established regulations and they use prosecutions to deter copycat infractions. In Australia, the enforcement mechanism for regulations follows a principle-based approach. How this works is that the enforcers ensure that users can theoretically justify their accounting technique as complying with the spirit of the legislation or regulation (Hughes 1995, p. 52).
Environmental legislation in Australia: history and justification
In Australia, legislation concerning the environment and pollution control is enacted at three levels: commonwealth, state, and local levels. The state still retains the original jurisdiction over environmental laws but due to Australia’s international obligations, the commonwealth reserves the right to control, override or work in conjunction with such legislations (Hughes 1995, p. 53). Australia being a member of the commonwealth is subjected to any environmental legislations passed at the commonwealth level and these in addition to the state legislation and regulations mean that Australian industries currently are subjected to a flood of environmental legislation that does not seem to plan to abate any time soon.
Perhaps it would be helpful to outline the history of environmental legislation in Australia since 1960 when the issue first became a concern.
- In 1970, State Pollution Control Commission Act in New South Wales, and the Environmental Protection Act in Victoria
- In March 1992, A Commonwealth Environment Protection Agency (currently known as Environment Australia) was created
- Industrial Chemicals (Notification and Assessment) Act 1989.
- In New South Wales, the State Pollution Control Commission was replaced by an Environment Protection Authority this body administers some 16 pieces of environment protection legislation
- Still in New South Wales, in 1997, several legislations were passed including:
- protection of the Environment Operations Act 1997
- Environmental Planning and Assessment (Amendment) Act 1997.
- Contaminated Land Management Act 1997
- Pollution Control (Load Based Licensing) Amendment Act 1997
- Waste Minimisation and Management Act in 1995
- Protection of the Environment Operations Act 1997
- Environmental Offences and Penalties Act 1989
Needless to say, these legislations are bound to affect Australian businesses and their effect is yet to be determined comprehensively (OECD 2009). However, more than half of Australian businesses concur that the new legislation, specifically the National Pollutant Inventory (NPI), the National Greenhouse Energy Reporting Act (NGER), the Energy Efficiency Opportunities Act 2006, and the Carbon Tax present opportunities that far outweigh the risks, at least in the long run (OECD 2009).
Various reactions of businesses in Australia towards the new environmental legislation
These businesses believe that the legislation that aims at creating a ‘clean’ Australia provides an opportunity to develop new products and services as well as for the improvement of relationships with consumers. Additionally, the will boost innovation and investment into clean technology (Peltzman 1999, p. 231). Most firms concede that the contemporary customers opt to pay more for instance for electricity generated from renewable as opposed to that which is generated from coal. On the other end, the risks created by these new legislations cannot be ignored and they include:
The compliance costs that arise from the new environmental legislations shall dent the budgets of many firms as they are required to report and assess their energy consumption as well as come up with useful suggestions on how they can reduce both their consumptions and GHG emissions (Guthrie, & Parker 2001, p. 166). Secondly, the legislations create an uncertain investment environment both at the local and international levels. Most of the dissenting firms maintain that Australia should not go about the environmentally friendly path solo or unilaterally as other international players do not share the same views. This means that whereas in Australia it would be illegal to profit out of an environmentally unfriendly practice, the same standard is not shared throughout the globe and they propose that for these legislative endeavors to succeed, there is a need for a global agreement (Peltzman 1999, p. 234). However, if Australia proceeds with its plan, they risk going uncompetitive internationally. Soon, Australians shall be losing their jobs and seeking employment elsewhere in the world where the tax obligations have not caused them to reduce their salary package since other nations have not subscribed to Australia’s legislation, the cost of tax credits cannot be passed down overseas and firms in Australia shall have to absorb these to their detriment.
A third risk is a potential brand or reputation damage that non-compliers risk given the new legislation. This makes the firms in Australia feel as though they are being railroaded or dictated upon to accept the new legislation because a failure to do so shall result in public displeasure that shall in turn lead to huge losses. However, this argument is very weak especially about the common saying that “the customer is always right” (Pfeffer 2008, p. 58). In effect, it is the Australian consumers that made an outcry that resulted in the government indulging them through the enactment of these legislations. Consequently, complaining about the brand reputation is not a valid argument as even without the legislation, the consumers would still have preferred environmentally friendly goods and services over free-rider products.
The fourth risk is that there shall be higher operating costs and the fifth is the fear of lower profits (Pfeffer 2008, p. 59). These two risks require a critical analysis of the implications of three of the aforementioned legislation: the National Greenhouse Energy Reporting Act (NGER), the Energy Efficiency Opportunities Act 2006, and the Carbon Tax.
Requirements placed on businesses in Australia by the various Acts
The National Greenhouse Energy Reporting Act (NGER)
The main objective of this Act is for businesses to report and disseminate information on their corporate energy use and GHG emissions (FKP 2011), so that:
- They provide strong and reliable data to underpin the governmental and financial integrity of the government policy and legislation.
- There is a reduction in the number of GHG and energy reports that are required across various government departments and programs.
- They can provide the public with adequate information on GHG and the energy performance of Australian businesses (FKP 2011).
Additionally, as from 2009, this Act requires companies that either exceed the threshold level of GHG emissions or preset energy use or energy production to report annually to the government their usage (FKP 2011).
Non-compliance with this legislation shall give rise to penalties for the corporation and executive officials as well as creating a risk of potential fines and legislation.
Conversely, one could choose to look at this as an opportunity instead of a snag. Indeed, the legislation is there to say and there is only a likelihood of an increase in the number of laws passed in favor of the environment both in Australia and in the rest of the world. Consequently, a more optimistic perspective of this matter would allow one to put in practice the adage that information is power. If a firm takes these legislations within its stride, it stands at a competitive advantage over other firms in the market because it means that it can strategically and cost-effectively address the risks inherent in the legislation for its business. It follows that such a firm can creatively devise and implement mitigation strategies well in advance (Scharpf 1999, p. 45).
The Energy Efficiency Opportunities Act 2006
This Act requires larger energy consumers to assess and report “on how they plan to reduce their energy use and GHG emissions” (FKP 2011, p.7). The legislation aims to assist businesses in the improvement of their operations’ energy efficiency and their preparations for emissions trading through the reduction of their energy consumption. Therefore, the legislation helps businesses to come up with and initiate energy-efficient and cost-effective opportunities. It also helps them increase their productivity and reduce their GHG emissions, and finally, it assists in the provision of better scrutiny of energy use by larger energy consumers. In a practical sense, it limits consumers of more than 0.5 petajoules (PJ) of energy per year (FKP 2011) by requiring them to 1) register with the Australian Government Department of Resources, Energy and Tourism; 2) submit their assessment and reporting schedules; 3) conduct energy use assessments, and 4) report on their energy use and on the potential opportunities to save energy in their businesses (Stigler 1998, p. 20).
The Carbon Tax
This Carbon pricing has some interesting implications for business corporations in Australia and these include: the reduction of fuel tax credits that in effect means the excluding petrol users, there shall be increased fuel prices from 2012; increased residual values for vehicles that have a lo to average fuel consumption; subject to popular trends, the demand for green vehicles is expected to grow; and finally, consumers or rather the customers of vehicles shall opt for carbon clauses in the sale contracts in a bid t avoid the risk of having the sellers pass down the costs of additional fuel (Stigler 1998, p. 5). Consequently, such consumers of carbon-intensive vehicles shall have a competitive advantage.
Impacts of environmental regulations on accounting and free markets
After that analysis, the question of the implication of the recent increment in environmental legislation from an accounting perspective receives a clear answer. That is: accountants in Australia shall now have more on their plates than they have ever had before. This means that it is a good thing from an accounting perspective, except if the accountants are in a firm that is affected adversely by these legislations for such firms there is a lot to be done to comply with the new directives and that means that they shall have to juggle with their budgets to make room for investment in clean technology which thanks to the legislation has just become a mandatory requirement (Tingey-Holyoak, & Burritt 2009, p. 10). Noncompliance is out of the question as it would only result in the loss of customers as they shift to the cleaner business corporation as well as the fines and litigations promised within the respective Acts in case one does not comply. Consequently, for one to progress economically in Australia, the smartest move currently is to suspend any unrelated investments and carry out an assessment of the necessary changes required to meet the established threshold.
For further motivation, and besides accounting, the planet shall be a healthier home for humanity and Australia is one of the pioneers in such far-reaching achievement. One only needs to look at the harmful effects of pollutants set out within the Act for justification for these legislations (FKP 2011). These include decreased lung function and lung inflammation, heart and lung diseases, exacerbation of symptoms in asthma patients, eye and ear passage infection and irritations, heart diseases, increased mortality rate for cancer patients, etcetera (Tinker 1994, p. 73).
Notably, the heads of these businesses are at least acquainted with a person who is suffering from one or several of these symptoms and it would be thoughtful to alleviate any future suffering. The tax returns from these policies shall be transferred to low-income households in the form of credit and tax cuts to compensate for the high electricity bills that such families will have to foot to clean up Australia.
This paper has discussed the issue of regulation with regards to free-market policies and given the contemporary issue in Australia regarding the increased environmental legislation and the accounting implications. It maintains the view that market forces alone do not always work for the good of society and at times, regulation, in the form of legislation such as that being enacted in Australia is necessary to lubricate the wheels of market forces in working towards a better society. The accounting side effect of the above legislation is a temporary influx of demand for accounting services as firms straighten out their affairs to comply with the new legislations but thereafter, the market forces shall act to ensure competitiveness and innovativeness at a higher threshold- one that is environmentally friendly.
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