The Role of Management Accounting and Financial Accounting

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Management accounting and financial accounting both play a role in the development of a robust environmental policy that will contribute to longer-term organizational success.


Management accounting is defined as the “identification, collection, analysis, internal reporting and use of information on material; and energy flows, environment costs and other costs for both conventional and environmental decision-making within an organization” (UN DSD/DESA & UNEP-DTIE 2001, p.3). According to Sharman (2007, p.2), managerial accounting provides vital information to managers (people inside an organization mandated with directing and controlling the operations) in an organizations, while financial accounting provides information about the organization’s financial performance to other stakeholders in and outside an organization. This includes creditors and stockholders and other people who benefit directly or indirectly from the organization’s performance. As such, management accounting is responsible for providing essential data needed to run organizations, while financial accounting provides essential data that helps stakeholders and other outsiders judge the organization’s financial performance (Sharman 2007, p.2).

Environment Management Accounting (EMA) differs from conventional management accounting in that it places more emphasis on accounting for environmental purposes, and entails information regarding the fate of energy and materials as well as physical flows in its reports. According to UN DSD/DESA & UNEP-DTIE (2001, p. 5), the information obtained from EMA can be used for different types of decision-making processes in an organization. However, EMA is specifically useful in activities and assessments with considerable components or cost to the organization.

Literature (Cullen & Whelan 2004, p.1; Sharman 2001, P.4; Parker 2000, p. 50; Labatt & white 2002, p. 98) into EMA suggests that proponents of this concept are divided between conservative and critical management and financial accounting. This paper is of the opinion that regardless of the motives behind organizations pursuing such a course of action, the end result would be that organizations take responsibility of their actions on the environment hence ensuring environment sustainability, and eventuality a long-term organizational success.

According to Cullen & Whelan (2004, p.1), EMA is categorized as social accounting, whereby business organizations extend their accountability beyond providing financial accounts to organization owners (shareholders) to reporting the same to a wider audience in the society, thus making the organization accountable to the larger society too.

Functions of conventional management accounting and Financial Accounting

Management accounting

Management accountants oversee management accounting. It is their duty to prepare reports, which focus on how managers and business units in an organization has performed. In addition, they compare actual organization results to benchmarks and plans set by the organization (Sharman 2001, p.2). EMA reports give frequent and opportune updates on organization indicators, which include backlog orders, total sale records, received orders and capacity utilization records. Should a problem be detected in organization performance, it is also the prerogative of management accountants to prepare analytical reports for purposes of investigating just what is causing the problem. Such is especially the case when organizations detect that profitability on a specific product line is declining (Parker 2000, p. 47; Howes 2003, p. 87). Management accounting reports are also prepared for purposes of scrutinizing the viability of a developing business opportunity or situation.

Financial accounting

Financial accounting leans towards generating limited and specific prescribed quarterly and annual financial statements. Usually, financial accounting works according to Generally Accepted Accounting Principles (GAAP). The emphasis for financial accounting mainly targets generating reports that would report the financial situation of an organization to investors, tax authorities, regulators, lenders and the general audience who may have an interest in investing in the organization in future.

Unlike Management accounting, financial accounting emphasizes on past financial activities and the consequences, verifiability and objectivity, precision, and the summary data that gives an overall perspective about the performance of the organization.

According to Parker (2000, p. 50), every organization regardless of its size needs managers. Such are people responsible for coming up with business strategies, directing personnel, controlling operations and organizing resources. The main three activities that managers undertake in any organization include planning, controlling and directing and motivating. Planning entails establishing a strategy, selecting a plan of action, and defining the plan implementation processes. Controlling on the other hand entails activities carried out to ensure that the identified plans are carried out and that flexibility is maintained for purposes of modifying the course of action whenever the need to do so arises. The directing and motivating requirement for managers entails mobilizing people (employees in the organizations, shareholders as well as other stakeholders) to carry out the plan, support the same and run routine operations (Sharman 2007, p.4).

In EMA, managers integrate the corporate environmental considerations in their plans thereby incorporating environmental aims into the corporate aims. According to Cullen & Whelan (2001, p. 1), managers who do this are well aware if the strategic advantage that environment based management accounting provides to their organizations (Bhat 1996, p. 198; World Economic Forum 2003, p. 67). The advantages mainly entail improved bottom-line outcomes both in terms of public support and increased profitability within an organization. The managers come up with strategic goals and objectives, which results in internalized environmental costs. When such actions are taken, the outcomes in the market economy and the enhanced environmental outcomes compliment each other (Cullen & Whelan 2001, p.1).

Between Management and financial accounting, Sharman (2007, p.6) reckons that management accounting has a long-term orientation that financial accounting. This is be cause management accounting targets future operations, while financial accounting focuses more on summarizing and making deductions based on past financial activities in the organizations. Still, it is undeniable that both can be used to come up with better business environmental policies that could aid in enhancing organization performance. While the future of an organization may not depend entirely on past financial transactions, the data analysis from financial accounting can be used for planning purposes.

Conservative Management accounting and financial accounting

According to Cullen & Whelan (2001, p.2), mainstream literature into management accounting and financial accounting targeting environment management assumes that the main objective of EMA is improved decision making, which integrates economic and environmental outcomes at the corporate or organization level. This assumption is based on the suggestion that pollution is perceived as inefficiency both in terms of wasted resources (energy emissions, scrapped products and others) and activities that an organization undertakes in order to dispose off discharges and waste. In this case, EMA looks like a simple extension of the conventional management and financial accounting, whereby managers identify and encourage the use of tools and resources that improves the performance of the organization without impacting harshly on the environment (Cullen & Whelan 2001, p.4). According to UNDSD (2001, p.2), such an approach is tantamount to “simply doing a better job at comprehensive management accounting, while dressed in an environmental hat.”

According to Cullen & Whelan (2001, p. 20, the narrow perspective of the conservative EMA approach is based on the belief that an increased efficient and effective use of resources and the consequent reduction of flow-on pipe operations will positively affect the bottom line of the acting organization (Henrique’s & Richardson 2004, p. 123). Accordingly, the report by the UNDSD proposes a more inclusive approach whereby, management accounting and financial accounting includes the environmental costs generated by the organization.

A more inclusive approach would involve the physical flow accounting and monetary accounting in order to recognize that the environment has an undeniable impact on the economic situations of organizations and that the company activities affect the environment too. The latter would however be done in a corporate perspective precisely for use in accounting through fates and flow of energy, material and water uses at an organizational level (Buritt et al 2002, p. 21; UNDSD 2001, p4; Gray & Bobbington 2002, p. 111).

According to Cullen & Whelan (2001, p.2), conventional management accounting and financial accounting covers the environmental impacts. EMA on the other hand, uncovers such and in the process improves that quality of information provided by management accountants to the organization managers. This in turn means that the managers are able to emphasize cost efficiency, liability reduction and compliance during their decision making (Parker 2000, p. 50). This opinion is however not shared by Ditz et al (1995, p. 110) who argues that including environmental costs in management and financial accounting will only lead to more distortions in the conventional management especially during the allocation of environment-related overhead costs. Of special consideration are areas such are manufacturing input choices, product mix, pollution abatement and pollution control.

The adoption of EMA by organizations according to Gray & Bebbington (2001, p. 50) however has the capacity to encourage innovation as organizations seek more cost-friendly means of reducing their environmental liabilities. According to Parker (2000, p. 52), such innovation presents not only a strategic competitive benefit to organizations, but could also lead to the identification of new markets and business opportunities. Burritt et al (2002, p. 40) on the other hand states that the inclusion of monetary and physical environmental aspects in management and financial accounting will provide managers with the support appropriate when making the strategic decisions necessary to move the firm to better economic performance.

According to Bebbington & Gray (2001, p. 560), “doing more with less” is a concept that lies at the heart of the management accounting and financial accounting EMA. The concept targets eco-efficiency, which is defined by Cullen &Whelan (2001, p. 5) as the “business end of sustainable development”.

Critical management accounting and financial accounting EMA

Proponents of critical management and financial accounting state that “organizations must be willing to adopt accounting practices that recognize and accounts for man-made costs on the environment and hence should identify and allocate additional costs for use in returning the environment to its original state and the beginning of each accounting period” Cullen & Whelan 2001, p. 4). According to Gray (1992, p. 400), this is tantamount to calculating the cost of environment sustainability. Milne (1996, p. 150) however states that although such accounting would enhance awareness regarding sustainability outcomes to managers and other decision makers, it would still be hard for people (both managers and the society) to ensure that sustainability is attained.

Literature proposing “critical” EMA suggests that “Conservative” EMA has so much rhetoric but little is done to infuse the principles therein in conventional management and financial accounting. As such, Cullen & Whelan (2001, p. 3) observes that opponents of the latter claims that “environment remains subservient to the corporate economic agenda to the conservative EMA proponents”. One such critic is Milne (1996, p. 152) who claims that the conservative approach is conservative and hence exploitative based on the fact that the approach does not question neo-classic economic values that explain economic growth in corporate organizations and which the same corporate organizations base their agendas and interests. To this end, Milne (1996, p. 144) claims that “Conservative EMA has succeeded in putting the environment on the corporate agenda, but even in so doing, the corporate have a corporate agenda that completely ignores the environmental agenda.” These allegations give the impression that organizations pursue environmental management and financial accounting purely on an economic perspective.

As opposed to conservative EMA, “critical EMA recognizes and accounts for environment costs imposed on the larger society during the pursuit of economic agendas” (Ditz et al 2005, p. 120; Esty & Winston 2009, p. 76). This approach not only takes into consideration the profitability part of accounting, but also considers the costs incurred by the society through ecological and environmental damage. Stone (1995, p. 100) states that management and financial accounting that affects environmental policies in the organization must be based on the need to develop strategies that need present organizational needs, without jeopardizing the capacity of future generations to meet their needs.” Milne (1996, p. 152) calls such an approach the “naturalist-preservationist” since in seeks a just and evenhanded account of intra-generation and inter-generation resources.

The problem with the critical EMA is that it looks very good in paper but fails in implementation. According to Cullen & Whelan (2001, p. 6), critical management and financial accounting is yet to receive the acceptance and adoption necessary to make it a reality, mainly because it lacks the legitimacy necessary to make it a viable mainstream management accounting system. This is mainly borne from the fact that the proponents of the concept struggle to turn the principles stated on paper into viable procedures (Stone 1995, p. 100; Hecht, 2005, p. 112). This makes it a moral aspiration based on theory, which needs more research that will eventually turn it into an accounting technique that has the necessary tools and techniques necessary to make it a reality in today’s corporate environment.

According to UN DSD/DESA & UNEP-DTIE (2001, p. 15), business managers, consumers and investors fail to obtain a clear picture of the ecological impact that business activities have on the environment because of challenges facing information exchange in corporate reporting (Surowiecki 2002, p. 250). Consequently, business value that could emanate from management and financial accounting EMA practices are not realized. However, it is clear that a proper corporate reporting channel would provide a critical managing tool to managers, and a timely, germane and reliable report organization channel to external stakeholders.

In an action that suggests that more organizations across the global platform are acknowledging the effect that management accounting and financial accounting (EMA) could have on business success in future, more business organizations are voluntarily publishing environmental reports, which detail their management systems in relation to environmental performance (UN DSD/DESA & UNEP-DTIE 2001, p. 14; Michael et al 2001, p. 60; HBSP 2007, p. 75). Still, a couple of challenges need to be overcome if accounting reports by organizations can be used by external stakeholders as viable benchmarks to gauge organizations’ commitment to environment conservation or as performance benchmarks.

In the presence of an acceptable reporting framework, organizations across the board regardless of size and market presence would be able to publish their financial accounting reports, which would in this case have enhanced credibility, comprehensive and comparability. UN DSD/DESA & UNEP-DTIE (2001, p. 13) notes that this would in turn elevate financial accounting to a level where environmentalists, investors, consumers, stakeholders communities as well as companies themselves accept the financial accounts. This would then mean that any of the listed stakeholders would be able to benchmark, rate, compare and even utilize the reports to gain performance information.

Relevance of environmental policy to longer-term organizational success

According to ACCA et al (2009, p. 2), the success of an organization can no longer be based purely on financial metrics derived through basic management and financial accounting. However, the role of informing the management, stockholders and other stakeholders about the performance and potential resources remain the responsibility of both management accountants and financial accountants. As such, the two groups of accountants need to change with the times in order to include the new considerations that affect the success and viability of an organization in a specific market.

ACCA et al (2009, p. 4) reckons that it is time that accountants looked at resource flows in addition to cash flow. This in turn means that they would need to advice their respective managers regarding adopting policies that would account for anything, which would affect resource flow and consequently organization valuation.

With organizations in the contemporary market being faced with increasing environmental concerns such as energy and water scarcity as well as increased environmental degradation as a result of industrialization, it makes economic as well as environment sense for accountants to consider viable environmental measures that would communicate risks, benefits and values to managers, owners as well as the general audience (Savage 2003, p. 3).


Financial accounting as well as management accounting still struggle with valuating intangibles such as effects of organization on the environment (Andriessen 2003, p. 45; HBSP 2007, p. 65). Worse still, putting real worth on the effect that such actions have on the organizations’ bottom line in the long run still remains more of a foreign concept to most accountants. However, the fact that resources used in the organization may be jeopardized by the activities has served as a wake up call to the accounting profession through out the world. Some of the resources at risk include human resource, raw materials, water and the larger consumer market. This therefore calls for an environment policy that will in the end lay the framework for sustainable management and financial accounting. Information about environment sustainability suggests that sustainability does present the key necessary to long term business success. As such, accountants will need place value on activities by their organizations on the environment and report the same to managers, stakeholders and stockholders for purposes of aiding ion business strategy formulation, enhancing internal managements, as well as shaping the perspectives held by investors as well as other stakeholders.

This paper recognizes that the formulation of an environmental policy is the prerogative of the managers. As such, we conclude that management accountants have a bigger responsibility than the financial accounting counterparts to measure the impact of organizational activities and include the results in their reports hence encouraging the managers to formulate sustainability focused environment policies.


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