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Concept of Environmental
Accounting and Practice in India
Every business has an ductivity and leads to loss of ing has emerged. The joint
overriding responsibility to amenities. workshops organised by the
make the fullest possible use The developing countries United Nations Environment
of its resources both human like India are facing the twin Programme (UNEP) and the
and material. An enterprise is problem of protecting the World Bank set out to exam-
a corporate citizen. Like a citi- environment and promot- ine the feasibility of physical
zen it is esteemed and judged ing economic development. and monetary accounting in
by its actions in relation to the A tradeoff between environ- the area of natural resources
community of which it is a mental protection and devel- and the environment and to
member as well as by its eco- opment is required. A careful develop alternative macro in-
nomic performance. As far as assessment of the benefits and dicators of environmentally
Indian corporate sector is con- costs of environmental dam- adjusted and sustainable in-
cerned it is sad, but true that ages is necessary to find the come and product.
Parallel to this revision, the
statistical division of the Unit-
For India, both ‘Environment Protection’ and Economic
Dr. Mukesh ed Nations (UNSTAT) has
Chauhan Development’ are the matters of great importance. However,
developed methodologies for
some sort of tradeoff is needed between the two. For this pur-
a system of Integrated Envi-
pose, Environmental Accounting is required to measure the
(The author is a Lec- ronmental and Economic Ac-
environmental impact of economic activities by corporate sec-
turer in Commerce
counting (SEEA), issued as an
at Mahatma Gandhi, tor. A standard system of this type of accounting is still evolv-
Govt. Arts College, SNA handbook on Integrated
Mahe (Pondicherry). ing in India. The article provides an insight into the concept
Environmental and Economic
He can be reached
in the Indian perspective.
at mukesh_ Accounting.
com) Environmental accounting
needs to work as a tool to mea-
it has not been performing as safe limits of environmental sure the economic efficiency
a good citizen that’s why there degradation and the required of environmental conservation
are so many laws that have level of development. activities and the environmen-
been laid down and further A study on price of pol- tal efficiency of the business ac-
amended from time to time as lution in India made by two tivities of company as a whole.
and when required to bound World Bank officials for 1992 Management seldom tries to
the corporate sector to fulfil (M. Balachandran 2002) shows make proper arrangement to
their social responsibility for the impact of the major prob- save the environment unless it
better development of Indian lems in terms of cost. They is required as per law as there is
Economy. have calculated that damage to no direct relationship between
Responsibility towards en- environment costs India about investment and benefits.
vironment has become one of Rs. 34,000 cr per year, about In many contexts environ-
the most crucial areas of social 9.5 per cent of gross domestic mental accounting is taken to
responsibility. Recent years product. mean the identification and
have witnessed rising concern But unless the proper ac- reporting of environment spe-
for environmental degrada- counting work is done either cific cost such as liability cost
tion, which is taking place by the individual firm or by the and waste disposal costs. It is
mainly in the form of pollution Government itself, it cannot accounting for any costs and
of various types, viz. air, water, be determined that both has benefits that arise from change
sound, soil erosion, defores- been fulfilling their responsi- to a firm’s, products and pro-
tation, etc. It is a worldwide bilities towards environment cesses where the change also
phenomenon. It spoils human or not. Therefore, the need involves a change in environ-
health, reduces economic pro- of environmental account- mental impact.

720 The Chartered Accountant November 2005

Corporate enterprises are monetary value) of its en- Scope of Environment
facing the challenges to deter- vironmental conservation Accounting
mine their true profits, which activities are used. The scope of Environmen-
are environmentally sustain- 2. Environmental Financial tal Accounting (hereinafter
able ones. For this, compa- Accounting (EFA): called as EA) is very wide. It
nies need to account for the Financial Accounting with includes corporate level, na-
environment. They should a particular focus on reporting tional & international level. As
take account of its most sig- environmental liability costs far as this article is concerned
nificant external environmen- and other significant environ- the emphasis is given on the
tal impacts and in effect, to mental costs. corporate level accounting.
determine what profit level 3. Environmental National Ac- The following aspects are in-
would be left (if any) if they counting (ENA): cluded in EA:
attempted to leave the planet National Level Account- 1. From Internal point of
in the same state at the end of ing with a particular focus view investment made by
the accounting period as it was on natural resources stocks & the corporate sector for
in the beginning. flows, environmental costs & minimization of losses to
externality costs etc. environment. It includes
Forms of Environmental Need of Environmental Ac- investment made into the Environ-
Accounting counting at Corporate Level: environment saving equip- mental
1. Environmental Manage- It helps to know whether ment/devices. This type of account-
ment Accounting (EMA): corporation has been dis- accounting is easy as money ing needs
Management account- charging its responsibilities measurement is possible. to work
ing with a particular focus on towards environment or not. 2. From external point of as a tool
material and energy flow in- Basically, a company has to view all types of loss r to mea-
formation and environmental fulfill following environmental indirectly due to business sure the
cost information. This type responsibilities. operation/activities. It economic
of accounting can be further a. Meeting regulatory re- mainly includes: efficiency
classified in the following sub- quirements or exceeding a. Degradation and of envi-
systems: that expectation. destruction like soil ronmental
a. Segment Environmental b. Cleaning up pollution erosion, loss of bio conserva-
Accounting: This is an that already exists and diversity, air pol- tion ac-
internal environmental ac- properly disposing of the lution, water pol- tivities and
counting tool to select an hazardous material. lution, voice pol- the envi-
investment activity, or a c. Disclosing to the investors lution, problem of ronmental
project, related to environ- both potential & cur- solid waste, coastal efficiency
mental conservation from rent, the amount and na- & marine pollution. of the busi-
among all processes of op- ture of the preventative b. Depletion of non- ness activi-
erations, and to evaluate measures taken by the renewable natural ties of the
environmental effects for a management (disclosure resources i.e. loss company
certain period. required if the estimated emerged due to over as a whole
b. Eco Balance Environmen- liability is greater than a exploitation of non-
tal Accounting: This is an certain percent say 10 per renewable natural
internal environmental ac- cent of the companies net resources like min-
counting tool to support worth). erals, water, gas, etc.
PDCA for sustainable en- d. Operating in a way that c. Deforestation and
vironmental management those environmental dam- Land uses.
activities. ages does not occur. This type of accounting
c. Corporate Environmen- e. Promoting a company is not easy, as losses to envi-
tal Accounting: This is a having wide environmen- ronment cannot be measured
tool to inform the public tal attitude. exactly in monetary value.
of relevant information f Control over operational Further, it is very hard to de-
compiled in accordance & material efficiency gains cide that how much loss was
with the Environmental driven by the competitive occurred to the environment
Accounting. It should be global market. due to a particular industry.
called as Corporate En- g. Control over increases in For this purpose approx idea
vironmental Reporting. costs for raw materials, can be given or other mea-
For this purpose the cost waste management and surement of loss like quantity
and effect (in quantity and potential liability of non-renewable natural re-

November 2005 The Chartered Accountant 721

sources used, how much Sq. 3. Input for EA is not eas- clusion with help of it is
meter area deforested and total ily available because costs not easy.
area used for business purpose and benefits relevant to 7. EA cannot work inde-
including residential quarters the environment are not pendently. It should be
area for employees etc., how easily measurable. integrated with the finan-
much solid waste produced by 4. Many business and the cial accounting, which is
the factory, how much wasteful Government organiza- not easy.
air pass through chimney in air tions even large and well 8. EA must be analysed
and what types of elements are managed ones don’t ad- along with other aspects of
included in a standard quantity equately track the use of accounting. Because costs
of wasteful air, type and degree energy and material or the and benefits related to the
environment itself depend
of noise made by the factory, cost of inefficient materi-
upon the results of the fi-
etc. can be used. als use, waste management nancial accounting, man-
and related issue. Many agement accounting, cost
Limitations of organisations, therefore, accounting, tax accounting,
Environmental Accounting significantly underesti- national accounting, etc.
EA suffers from various mate the cost of poor en- 9. The user of informa-
serious limitations as follows: vironment performance to tion contained in the EA
1. There is no standard ac- their organization. needs adequate knowl-
counting method. 5. It mainly considers the edge of the process of EA
2. Comparison between two cost internal to the com- as well as rules and regu-
firms or countries is not pany and excludes cost to lations prevailing in that
possible if method of ac- society. country either directly or
counting is different which 6. EA is a long-term process. indirectly related to envi-
is quite obvious. Therefore, to draw a con- ronmental aspects.

Lamiya Lokhandwala

722 The Chartered Accountant November 2005

Legal Framework for ii Water (Prevention xii. Merchant of ship-
Environmental Accounting and Control of Pol- ping Act, 1958.
in India lution) Cess Act, xiii. Indian Port Act.
While industrial licensing 1977. xiv. Indian Penal Code.
has been abolished for all prac- iii. The Air (Prevention xv. The National En-
tical purposes, environmental and Control of Pol- vironment Tribunal
clearance from various Gov- lution) Act, 1981. Act, 1995.
ernment authorities has now iv. The Forest (Conser- It is important to note that
taken the centrestage. With vation) Act, 1980. all new projects require envi-
increasing global concern over v. The Environment ronment clearance. This clear-
the protection of the environ- (Protection) Act, ance concerns both the Union
ment, India too has set up a 1986. Ministry of Environment and
Union Ministry of Environ- (b) Indirectly related to envi- Forests and the correspond-
ment with the object of co- ronment protection: ing State Govt. department
ordinating among the states vi. Constitutional provi- of environment. Guidelines
and the various ministries, the sion (Article 51A). have been issued and all such
environmental protection and vii. The Factories Act, projects are expected to obtain
anti-pollution measures. Nec- 1948. environmental and anti-pollu-
essary legislation has also been viii. Hazardous Waste tion clearance before they are
passed. (Management & actually set up.
The various laws relevant Handling) Rules, A Central Pollution Con-
to environmental protection 1989. trol Board (CPCB) has also
are as under: ix. Public Liability In- been set up. Wherever cases of
(a) Directly related to envi- surance Act, 1991. violating of standards of wa-
ronment protection: x. Motor Vehicle Act, ter or air pollution have been
i. Water (Prevention 1991. detected, show cause notices
and Control of Pol- xi. Indian Fisheries Act, have been issued to industrial
lution) Act, 1974. 1987. units and all such units are be-

November 2005 The Chartered Accountant 723

ing kept under constant sur- in 1992 (amended vide following types of infor-
veillance. notification GSR 386 mation are given:
According to the Annual (E),dt.22-04-1993), un- (i) What type of devices
Report of the Ministry 1997- der the Environmental installed for pollu-
98, out of 1551 large and (Protection ) Act, 1986 tion control.
medium industries identi- has made it mandatory (ii) Steps taken for en-
fied in the 17 categories of for all the industrial units ergy conservation.
highly polluting industries, to submit an environ- (iii) Steps taken for raw
1261 have installed the requi- mental statement to the material conserva-
site pollution control facilities concerned State Pollution tion.
and 165 units are in the pro- Control Boards while (iv) Step taken for waste
cess of installing such facilities. seeking consent to oper- water and produc-
125 units have been closed ate under the relevant en- tion process waste.
down. vironmental norms. The (v) Step taken for
As a result of notices is- Environmental State- improvement of
There is sued by the Central Board ments enable the units quality of prod-
some vari- 2137 units which did not have to take a comprehensive uct and services,
ety in dis- requisite effluents treatment look at the industrial process of produc-
closure over systems, 480 units have been operations, facilitate the tion, etc.
time, be- closed down and 1457 units understanding of mate- 2. A study was conducted
tween coun- are about to be closed. 106 rial flows and help them among 80 executives of
tries and units have set up such systems to focus on areas where different industries by
between and 94 units have been grant- waste reduction and con- Dr. B.B. Padhan and Dr.
industries. ed extension of time. sequently saving in mate- R.K. Bal which revealed
Social During the year 1997-98 rial cost, is possible. that corporate world is
disclosure around 680 complaints regard- b. Indian Companies Act, fully aware of the require-
in general ing various types of pollution- 1956 requires to include ments of environmental
and envi- air, water, noise and soil have in Director’s report envi- reporting. They are also
ronmental been received and attended to. ronment related policies/ aware of the environ-
disclosure in The concern of the Ministry problems and annexure mental issue. The corpo-
showing details of energy
particulars for protecting the environ- rate executives have also
consumption/energy con-
reflects the ment in the coastal waters and expressed their views in
changing the coastal belt has led to the favour of environment re-
c. Cost Accounting Record
business imposition of a no-construc- porting by the industries.
Rules for various indus-
climate and tion belt of 300 meters beyond tries made by the Central
Despite their awareness
social, eco- the high water tidal limit on Government also require
and consent over envi-
nomic and the Indian coast line. This has
disclosing monetary and
ronmental reporting by
political en- affected the beach hotels and quantitative values in
industries is it very poor.
vironment coastal resorts. Apart from the Cost Accounting.
It is so inadequate that
in which general concern for construc- very little information
they occur tion of the environment, the Practice of Environmental
is found in the annual
concern for the management Accounting in India report.
of hazardous substances for 1. Very few corporations 3. In the words of Jong Seo
the protection of the forest give adequate informa- Choi, research studies
wealth and wild life and for tion regarding environ- have examined the extent
preventing biological degrada- mental issue. If as per to which companies pro-
tion have also brought about requirement of appli- duce social information,
some restrictions which the cable law they have to of which environmental
existing industrial units and prepare and submit any information would be
also entrepreneurs wishing to information relevant to part. A number of gen-
set up new plants and factories environment they do eral themes that emerge
should keep in view. so. The Environment from this include the
Ministry has issued in- following:
Accounting Requirement struction in this regard (i) The proportion of
a. A Gazette Notification to prepare environment companies disclos-
on Environmental Audit statement. It can be ob- ing and extent of
issued by the Ministry of served through their ac- that disclosure are
Environment & Forests counts that mainly the small and the quan-

724 The Chartered Accountant November 2005

tity is low. ments regularly to ensure full
(ii) There is some vari- compliance with the statutory
ety in disclosure over requirements.”
time, between coun- (III) Maruti Udyog Limited
tries and between (1993-94):
industries. Social “Environment:
disclosure in general Modification of the exist-
and environmental ing effluent treatment plant
disclosure in par- was undertaken to take care of
ticulars reflects the additional effluents generated
changing business due to capacity expansion.
climate and social, Data on non–methane hy-
economic and po- drocarbons in Paint Shop and
litical environment Engine Testing shop, ambient
in which they occur. air quality, stack emissions and
However, the total effluents are being regularly
amount of voluntary monitored and the parameters
disclosure stays fairly are maintained well within
constant over time prescribed limits. Develop- environment due to the
and what changes is ment of green belt around gas working of organization.
the subject addresses turbine and R&D areas was Prepare a environmental
in the disclosure. further augmented by planta- policy accordingly.
(iii) There is a very defi- tion of 3000 additional sap- 3. Preparation of short term
nite size effects in lings. as well as long-term en-
those larger compa- 5. It was also revealed that vironmental budget for
nies are more likely most of the companies both revenue and capital
to disclose than disclose the environment nature.
smaller companies. information in descrip- 4. Prepare list of various ele-
(vi) Very little disclo- tive manner rather than ments causing for pollu-
sure would qualify to financial type i.e. no tion of various types and
as information under account is made for the show what types of action
any normal criteria degradation of natural have been taken for con-
and very little of it capital when calculating trol over the same. This
indeed will contain corporate profits. type of statement should
numbers, financial be an integral part of an-
or otherwise. Suggested Framework nual accounts.
4. Environmental reports Environmental accounting 5. A separate statement
as contained in the Di- will remain as compliance of should be prepared show-
rectors Report of three applicable rules and regula- ing investment in the var-
Indian Companies are as tions unless it is not planned ious equipment for pol-
under: and approved from top to bot- lution control along with
(I) Asian Paints (India) Ltd, tom. To make the environ- benefits to the environ-
(1993-94): mental accounting an integral ment from such equip-
“Ecology and Safety: part of the overall accounting ment. Such a benefits
Samples of treated efflu- system at corporate level, the should be measured either
ents are periodically checked following outlines are sug- in quantity or money.
for Compliance with stan- gested: 6. The financial or op-
dards” 1. Study the various Acts erational effect of en-
(II) Goodlass Nerolac Paints applicable to the compa- vironmental protection
Limited (1993-94): ny, analyze the rules and measures on the capital
“ Pollution: regulations regarding en- expenditures and earn-
The company regularly vironment applicable to ings of the enterprise for
monitors measures in force in the company. the current period and
accordance with the Pollution 2. Briefly analyze the re- any specific impact on fu-
Control Act for the protec- quirement of various laws ture periods.
tion of environment and for regarding environmen- 7. When material, the ac-
ensuring industrial safety. The tal issue. Also analyze tual amount charged to
company carries out improve- the various impacts on operations in the current

November 2005 The Chartered Accountant 725

period, together with a possible to segregate the certified environmental
description of the envi- amount that relates to auditor. Government may
ronmental measures to environmental measures, prescribe qualifications
which they relate. This this fact could be stated. and experience for issue
amount might be sub-di- 10. Contingent liabilities such a certificate. Such a
vided into the following arise due to environmen- report will provide a great
general ledger accounts:- tal related issue should be help to control over pol-
i. Liquid effluent treat- shown clearly either in lution.
Environ- ment. the descriptive manner Finally it is suggested that
mental ii. Waste gas and air or quantitative manner or management should follow
indicators treatment. both. the policy of “prevention is
should be iii. Solid waste treat- 11. Environmental account- better than cure”.
calculated ment. ing should be a part of
for evalua- iv. Analysis, control and management accounting. Conclusion
tion of envi- compliance. Therefore, environmental Environmental account-
ronmental v. Remediation. management account- ing is in preliminary stage in
aspects and vi. Recycling. ing information system India and whatever shows in
the same vii. Other (for example- should be developed. the accounts in this regard is
should be accidents, safety, 12. Environmental respon- more or less compliance of rel-
disclosed etc.) sibility centers should be evant rules and regulation in
properly in 8. In case where it is not decided so that actions the Act. Actually, unless com-
annual ac- possible to segregate the can be taken against de- mon people of India are not
counts amount that relates to faulter managers if their
made aware towards environ-
environmental protection are deviation form stan-
mental safety, development of
measures, this fact should dard pollution limits
be stated. accounting in this regard is a
13. Environmental indicators
9. When material, the ac- should be calculated for little bit doubtful.
tual amount capitalized evaluation of environmen- It is the call of the time that
during the current period, tal aspects and the same corporates prepare a firm envi-
the accumulated amount should be disclosed prop- ronmental policy, take steps for
capitalised to date, and erly in annual accounts. pollution control, comply with
the period for amortis- 14. Incentive and punish- the related rules and regula-
ing, or writing off such ment policy should be tions, mention adequate details
amounts, together with linked with environmen- of environmental aspects in the
a description of the en- tal issue. annual statements. For sustain-
vironmental measures to 15. Government should able development of country,
which they relate. This make it compulsory for a well-defined environmental
amount might be sub- every polluter to sub- policy as well as proper follow
divided into categories. mit environmental audit up and proper accounting pro-
In case where it is not report being done by a cedure is a must. r

726 The Chartered Accountant November 2005