Management Accounting and Financial Accounting

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Introduction

Each organization is exposed to various features that determine its action plans regarding all functions. This set of factors is termed as the environment and its influence on the decision-making process of every organization is real. As a result, it is imperative that an organization understands the features of its environment in order to enable it structure its strategies in a form that substantially minimizes any adversities occurring because of the changes in the parameters of the environment.

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Environmental policy

As implied by Rikhardsson, et al. (2005), the decision-making function of an organization is based on finding the best fit between the scarce resources available to the organization and the influences on the environment emanating from the organization. Thus, the main contributing factor to the need of monitoring the environmental factor is the uncertainty and dynamicity of the environment in which the firm operates in relation to achievement of objectives stipulated in its mission statement. Most investments are laid out with the sole purpose of maximizing returns and augmenting the wealth capacity of the investor.

Consequently, the management is mandated to lay down strategies to attain such goals, a feat they have to achieve through improving revenue levels and minimizing costs. In the past, the regulatory authorities were less concerned about the impact of business on the environment at large. As a result, the production cycle was devoid of any restrictions regarding any exude wastes. Companies could dump their waste and engage in production through the methods that translated to lowest cost curves without provision for mitigation of impact on the environment. Consumers were also unaware, or did not care, of the impact the production of some consumable had on the environment.

Matching Profitability and Responsibility

Most firms reaped huge profits without and were not reprehensible for polluting the surrounding. The society was plagued by incurable pestilence and conditions drawn from exposure to the chemicals used. The firms were also victims of their actions with most of the workers suffering directly and indirectly from the fatalities of consumptions and exposure to toxic substances. When global warming became apparent, organization had to spend an increasing volume of their profits on aspects of combating the climatic change in order to survive and remain in business.

The erratic weather drove numerous industries out of business and contributed to the need to change site and location of production and distribution units. Firms were lost in the middle of the crisis since no regulations had yet been laid down regarding accounting for expenditure on matters relating to the environment. Most of the organizations were unable to decipher whether to include it as an expense or as an asset.

The contemporary financial and management accountant holds a key position in the organization, owing to the fact that the output of their functions forms a basis for decision-making. Financial accounting generates information that ensures intelligibility and accountability to stakeholders. As outlined by Mourik (2007), the information contained in financial records relates to the financial position and any changes therein over the periods, as well as cash flow information that are beneficial to the stakeholders. To a financial accountant, the most crucial issues regarding the environment “are the recognition, measurement and disclosure of environmentally related economic impact on business” (Schaltegger & Burritt, 2000 p161).

A case in point is Daimler Company located in Germany whose $372 million profit as reported under standards in Germany, was revised to a loss of $1.1 billion when the company sought to enlist in the New York stock exchange (Schaltegger & Burritt, 2000). This case shows the importance of financial reporting regarding the environment varies from jurisdiction to the other and has significant influence on the organization.

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As a result, an organization should institute measures to provide for aspects of environmental accounting in the financial reports for each period. In spite of the fact that an organization is domestic, the global influence is undeniable. Demand for its product occurs on a global scale (Thomas, 2007). If its policies regarding the environment are not favorable according o the standards of the designated jurisdiction, chances are that tougher standards will be placed on its products, including distribution sanctions.

The contemporary world necessitates consideration of environmental issues in financial analysis. Firms have to cater for their influence on the environment owing to the fact that they draw revenues from activities that have influence on the environment. Risks and opportunities are also present in the environment, with most of these accruing to the organizations. Thus, their activities are influential on their sustainability. The action of an organization could have significant influence on its existence in the future if not immediately. For example, a firm that deals with manufacture of pesticides and other agricultural products should be considerate of its influence on the climate since phenomena like global warming have impact on agriculture, which is the target industry.

Development of an environmental policy

Development of an environmental financial and management policy requires cooperation between the accounting department and production department. Some organizations have departments that deal with environmental aspects of the operations of an organization. Their lack of expertise is bound to contribute to omission of necessary components of the effects on the environment. Secondly, Mourik (2007) proposes that the accounting department is sufficiently conservative regarding cost recognition and allocation. As a result, without ample motivation from reliable quarters, they may overlook the connotation of failure to cater for these cost components. In the absence of specific statutory guidelines, the management accountant should outline the importance of spending on environmental aspects as a strategic stance to attain approval for authorization of the expenditure.

On the country level, it is important for the authorities or industries to come up with a plan that calibrates the components of the environmental policy. Such a plan is more reliable compared to the efforts of a single organization whose discretionary efforts may not measure up to the necessary levels. According to Bennett et al (2002), the corporate accounting system would require an iterative approach. The steps involved are establishment of infrastructure, development of environmental guidelines and activation of environmental accounting exemplified by disclosure levels and auditing.

The infrastructure enables the organizations and governmental representatives to benchmark on the guidelines to be adhered to. The composition of this working group benefits the exercise due to the diversity of interests and expertise thus they are able to achieve objectivity. Secondly, in the workgroups, the representation cultivates the ability of the members to assign roles relating to the various functions of the venture (Gray, et al. 1993). The culminations of the discussions, contained in a report, should match international standards as a way of ensuring unity of action.

The implementation stage is crucial since it has to be specific relating to timelines and extent of the environmental policy. Firms have to be accorded favorable timelines and commensurate adherence levels according to their financial capacity. As explicated by UNEP (2003), ample training is also necessary as a way of ensuring uniformity of action. The regulatory framework established should be at the forefront in upholding the integrity of the guidelines. The auditors and accountants (CPAs) are mandated to insist on strict adherence through vigilant auditing exercises. Auditing standards and processes should be substantial regarding such provision since they are as crucial as other accounting guidelines. The financial records should display the steps taken by the organization so far as well as the plans regarding policy and expenditure.

The credibility of financial records is fostered by the auditors who ascertain that adherence to the stipulated standards and guidelines. As a result, the auditors will rely on the information posted by the financial accountant to draw a conclusion. Dernbach, (2002) posits that audited results are the most reliable reports supplied by the organization to its stakeholders. The short-term and long-term progress of the organization is tied to the characteristics of the audited results; as a result, any financially stimulated aspects of the organization should be clearly outlined in the statements. Friedman (2003) was of the view that the accuracy of the information contained in the financial records is based on total disclosure thus no information is deemed unsuitable.

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In the words of Emmanuel & Merchant (1990), management accounting on the other hand portrays information regarding aspects of the business, which the management deems worth focus. The management may request for information or analysis of one aspect of the environment for management accounting purposes whereas the financial records outline information regarding as many factors as possible. The boundary to disclosure regarding financial records is privacy of information.

As a result, both types of accounting are necessary as steps for portraying what the firm has done in the past and what it plans to achieve in the future. The organization can choose whether to adhere to the public charter or develop their own or even improve on the public charter (Gray, et al. 1993). If the management spends generously on the environment, benefits will accrue to the organization. However, an environmental policy is not a once-off activity.

The dynamic nature the companies operations should be reflected in the future plans of the organization. Each aspect of strategy should be laced with an outline of how the company expects to cater for the environment. As an organization, expenditure for environment should come because of necessity and proclivity as posited by Thomas (2007). If the company’s actions cause environmental degradation, then the expenditure is mandatory. However, if the operations of the company do not directly contribute to the environment, an environmental policy will be a strategic move to build its image among competitors.

Accounting For Expenditure on an Environmental Policy

Karim & Rutledge (2004) agrees with Gray, et al (1993) by postulating that an organization will face charges in forms of fees and fines from the authorities incase their activities contribute to the degradation of the environment. Such fees erode profitability more significantly than the cost of controlling the emissions in the first place. As a result, clean up costs are always higher than measures put in place to prevent the pollution. This is to persuade companies to be proactive and invest in cleaner processes and products. As an organization, it is important to decide whether to indicate expenditure incurred due to environmental concerns as expenses or assets.

The company may have to acquire property and plant to aid in reducing the adverse impact of waste material from production. Relocation to remote areas or upgrading of current plant to cater for any previously contentious issues are all investments which are bound to improve the companies net worth. As a result, Schaltegger & Burritt (2000), outlines that an expenditure incurred to curtail future impact on the environment should be treated as an asset since it is deemed to accrue future economic benefit. However, FASB and EITF have concurred that costs related to dealing with environmental contamination should be expensed if they relate to costs of past occurrences related to the environment.

Corporate social responsibility has become an area of speculation regarding contemporary business operations. Organizations have to give back to the society from which they benefit. Companies need to include environmental policies in their management and financial accounting statement due to numerous reasons. The management of environmental impact costs the company numerous resources that have to be accounted for and displayed in both financial and management accounts. As a result, the organization has to choose the model for apportionment of costs in the management accounts to achieve a true and fair view of he accounts. For example, POSCO Limited of Korea implemented a plan to apportion these costs using the Activity Based Costing as outlined by Bennett et al (2002). Environmental costs faced by each organization can b classified as those relating to the facilities, waste disposal or improvement of the efficiency in prevention of pollution.

Both financial and management accounting are crucial functions in monitoring and managing the environmental factors of an organization. Although management account is fairly a new aspect, the purpose it serves is fundamental as well. Financial accounting is a function of management where performance is depicted in terms of dollar value (Schaltegger & Burritt, 2000). All the operations and functions of the organization are cost centers as well as revenue generators. At the end of each period, the records of trading and revenue generation are displayed as financial statements. The contemporary financial controllers display more that just financial results in the financial statement. At the end of each period, financial records are released to the stakeholders to enable them make decisions relating to investment among others.

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Appeal to Stakeholder

Stakeholders have a right to know the performance of the organization to enable them make a better decision. The stakeholders are mainly classified as owners, creditors, the media and regulatory institutions. Owners are concerned about the level of the returns accruing to them while creditors are keen to gauge the safety of their lending (Epstein, & Manzoni, 2006). Thus, the financial records have to serve this purpose owing to the fact that the stakeholders are the providers of the finances invested. Management accounts on the other hand, are mandated by the need of the management to gauge the status of the organization. As a result, management accounts are normally destined for top management, who has to keep planning and strategizing in order to achieve the objectives.

Stakeholders want to associate with organizations that are responsible of their actions. The long-term sustainability of an organization is based on the ability of the organization to reduce adverse influences on the global scenario and contribute to the improvement of life (Banjerjee 2005). Organizations that are considerate of the environment are favored over the companies whose production cycle is marred with processes that do not contribute to a safer global situation. Similarly, regulatory authorities will not bear ken focus on adherence levels of whose organizations whose environmental policy receives a clean bill of health every period.

The media will also foster the name of the organization with period organization scan and features on their channels as they outline current affairs in the business world.

Most firms are moving towards green energy and outlining the characteristics of their products that are friendly to the environment. As an example, Energex and Ergon oil companies of Australia have diversified to production of green energy that has become their competitive edge (www.energex.com & www.ergon.com). Their target market is attracted by the contribution they are making to the environment by supplying energy from renewable sources.

As asserted by Mourik (2007), practical benefits include the fact that renewable energy is seldom depleted unlike the fossil fuels. As a result, their investment is bound to bear returns for longer and at lower costs. Their financial records are bound to include the investment and expenditure carried out to integrate the environmentally friendly aspects. Since it is the only avenue to portray such information, it will contribute to the reception by the stakeholder.

Structure of Reporting

Financial statements are prepared using standard and stipulated procedures and formats whose design and content characteristics are populated by the authorities. The main aim of standardizing financial records is to enable all the information necessary is included there in. such information is key to decision-making by stakeholders (Carey & Essayyad, 1990). However, public limited companies are characterized by information asymmetry since management has the monopoly of information. Disclosure levels, as they are termed, are aimed at protecting both the management and stakeholders incase of any claims regarding the contents of the financial statements. This fact necessitates accuracy, truth and fairness in the audited records that an organization publishes.

As a result, as the management sits down to discuss any issues that affect the direction to take; it is imperative to include the impact of the environment on their operations as posited by Gray, et al. (1993). Environmental policy incorporates safety procedures laid down by the organization. Workers are the most valuable investment by the organization. Without their input, an organization is not able to perform its functions. The experience gained over the years makes the difference between academically excellent recruits and those who have dedicate d their service to the organization. It is obvious that the organization takes steps to provide safe working conditions for the workers.

Some production facilities pose threats to the safety of their employees. As a result, the management has to account for any measures laid down to curb any possible adversities to employees. Safe working conditions are a major attracting factor to prospective employees who bring talent and spirit to the organization. As a result, the management and financial accountant have to find ways of providing for such expenditure in their reports to enable the concerned stakeholders gain insight into the efforts of the company.

Long-Term Implications

Financial accounting is a mandatory and statutory function for each organization. Each company has to remit audited financial records to act as a basis for taxation among other things (Groppelli & Nikbakht, 2000). Thus, without financial records, the operations of a company are bound to become subject of scrutiny by the regulatory authorities. Stakeholders also use these records to make decisions. Without any tangible information, it becomes challenging to come up with any decisions regarding the viability of the company.

Management accountants serve a necessary function by providing management accounts (Chadwick, 1998 & Langfield-Smith, 2009). However since the users of these records are the management, this information is actually necessitated by administrative reasons more than statutory. As a result, these two functions are the basis of operational capacity of an organization. The environmental factors to which they report form articulate the kind of information required (Schaltegger & Burritt, 2000). Over the years, management and financial accounting have become central to performance of an organization since the long-term performance is squared reliant on their characteristics. Success of a business is based on each step taken during its lifetime. Thus, the decisions made today have long-term effects and are differentiating factors for each business.

Conclusion

Measures to combat the impact on the environment have become central to the accounting function of each organization not to mention everyday activities. However, the opposition occupied by organization in society mandates that they adhere to certain levels of pro-activity regarding the environment. The inclusion of aspects of the environmental policy in the accounting statement acts as the most appropriate way of communicating their efforts and successes in combating the adverse effects of their ventures. In addition to complying with stipulated guidelines, the organization will improve its visibility to potential investors and lenders as well as consumers.

References

Banjerjee, B., 2005. Financial Policy and Management Accounting seventh Ed. New Delhi: PHI Learning Pvt. Ltd.

Bartolomeo, M. 1999. Eco-Management Accounting. Masschussets: Springer, 1999

Bennett, M., Bouma, J. & Wolters, T. 2002. Environmental Management Accounting: Informational and Institutional Developments. Massachusetts: Springer

Carey, O. L. & Essayyad, M. 1990. The Essentials of Financial Management. USA: Research & Education Assoc.,

Chadwick, L. 1998. Management Accounting. California: Cengage Learning EMEA.

Chapman, C. S. 2005. Controlling Strategy: Management, Accounting and Performance Measurement. New York: Oxford University Press

Dernbach, J. C. 2002. Environmental Law Institute Stumbling Toward Sustainability. Washington D C: Environmental Law Institute

Elliott, B. & Elliott, J. 2006. Financial Accounting, Reporting and Analysis. Financial Times/Prentice Hall

Emmanuel, C. R & Merchant, K. A. 1990. Accounting for Management Control. London: Cengage Learning EMEA,

Epstein, M. J. & Manzoni, J. 2006. Performance Measurement and Management Control: Improving Organizations and Society. Netherlands: Emerald Group Publishing

Epstein, M. J. & Lee, J. Y. 2006. Advances in Management Accounting, Volume 15. Netherlands: Emerald Group Publishing

Friedman, F. 2003. Practical Guide to Environmental Management. Washington DC: Environmental Law Institute

Gazely, A. & Lambert, M. 2006. Management Accounting London: SAGE

Gray, R., et al. 1993. Accounting For the Environment, Part 2. New York: Markus Wiener Publishers

Groppelli, A. A. & Nikbakht, E. 2000. Finance: Business Review Books. New York: Barron’s Educational Series

Hargroves, K & Smith, M. H. 2005. The Natural Advantage of Nations: Business Opportunities, Innovation, and Governance in the 21st Century. UK: Earthscan

Hoque, Z. 2005. Handbook of Cost and Management Accounting. London: Spiramus Press Ltd

Karim, K, E & Rutledge, R. W. 2004. Environmental Disclosure Practices and Financial Performance. Connecticut: ABC-CLIO

Langfield-Smith, K. 2009. Management Accounting: Information for Creating and Managing Value. New York: McGraw-Hill

Mourik, C., M. 2007. Globalization and the Role of Financial Accounting Information in Japan. UK: Rozenberg Publishers

Rikhardsson, P. M. et al. 2005. Implementing Environmental Management Accounting Status and Challenges. Netherlands: Springer

Schaltegger, S & Burritt, R. 2000. Contemporary Environmental Accounting: Issues, Concepts and Practice. Greenleaf Publishing

Thomas, I. 2007. Environmental Policy: Australian Practice in the Context of Theory. Sydney: Federation Press

UNEP. 2003. Industry as a Partner for Sustainable Development: UK: Accounting UNEP/Earthprint

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