Environmental Management Accounting

(EMA)
As A Best Solution in Environmental and Social Damages
Reduction Programs

By:
Brawijaya University Team
( Hilman Prakosa and Esti Laras Aruming T )

Brawijaya University
2010

CHAPTER 1
INTRODUCTION
Businesses have become increasingly aware of the environmental implications of
their operations, products and services. Environmental risks cannot be ignored, they are
now as much a part of running a successful business as product design, marketing, and
sound financial management. Poor environmental behaviors may have a real adverse
impact on the business and its finances. Punishment includes fines, increased liability to
environmental taxes, loss in value of land, destruction of brand values, and loss of sales,
consumer boycotts, and inability to secure finance, loss of insurance cover, contingent
liabilities, law suits, and damage to corporate image. (Johnson, Shane, 2004)
We know there are too many environmental damages caused by company
activities like from Roche, MMG Century Ltd., Exxon Mobile Corp., Royal Dutch Shell,
PT. Newmont Minahasa Raya, and the last sample company, PT. Chevron Pacific
Indonesia. All of the examples above caused many environmental and social damages
that make bad effect for human life, especially our next generation.
Today, majority of corporations try to apply Corporate Social Responsibility
(CSR). But, there are two basic questions appear during this implementation. First, does
CSR can apply effectively to solve environmental problems? And then, the second
question is what the other method to complete CSR implementation for better.
CSR is not only for solving social and environmental problems, but also for
many social responsibilities mean, such as:
1. Profit making only
2. Going beyond profit making
3. Going beyond economic and legal requirement
4. Voluntary activities
5. Economic, legal, and voluntary activities
6. Concentric circles, ever widening
7. Concern for the broader social system
8. Responsibility in a number of social problem areas
9. Giving way to social responsiveness.
(Carroll; Archie B, 2001: 499)

CSR usually used to cover environmental and social damages caused by company
activities. Beside this, the purpose of CSR only to increase company image. If company
could increase their social image, the effect is increasing their product sales. So, company
profit could increase continuously.
Based on the explanation above, we know that implementing of CSR is
ineffectively solution to avoid environmental and social damages. We should do
preventive activities in order to get a real solution to avoid it. We have to reflect
environmental factors in our accounting processes via the identification of the
environmental costs attached to products, processes, and services. The best method to do
this preventive activity is using Environmental Management Accounting (EMA) in our
effort to reach company's aim in environmental responsibility.
EMA is the generation and analysis of both financial and non-financial
information in order to support internal environmental management processes. It is
complementary to the conventional financial management accounting approach, with the
aim to develop appropriate mechanisms that assist in the identification and allocation of
environment-related costs.
In the next chapter, we will explain clearly about CSR, its reporting, its cost and
benefit and EMA implementation for preventive activities to avoid environmental and
social damages.

CHAPTER II
DISCUSSION
2.1 Unexpected CSR Function for Environmental and Social Damages Reduction
Based on the explanation in chapter I, there are many environmental and social
damages that caused by company activities. We have eight companies as a sample that
they made some environmental and social damages, like: Roche, MMG Century Ltd.,
Exxon Mobile Corp., Royal Dutch Shell, PT. Newmont Minahasa Raya, and the last
sample company, PT. Chevron Pacific Indonesia.
Although Roche is a leader in healthcare companies and also known as a
company who concern about green economic, Roche still waste some pollutants that have
directly or indirectly effects for human life. ( Universitas Sriwijaya, 2010)
What about MMG Century Ltd.? They did some environmental damages too.
MMG Century Ltd., has been charged with causing serious environmental harm by
discharging contamination waste water into Page Greek, a protected river area near Lawn
Hill Park during the heavy wet season in 2009. Contaminants including electrical
conductivity, cadmium, zinc, and dissolved sulphate were released into the waterways.
( Unika Soegijapranata Team, 2010)
Exxon Mobile Corp. owner oil tanker (Exxon Valdez) spilled 11 mn gallons of
crude oil into Prince Williams Sound on March 24th 1989 and the oil spilled over 1500
miles of the Alaska coastline and affected many islands in Prince William Sound.
( Universitas Sultan Ageng Tirtayasa Team, 2010)
Royal Dutch Shell such as gas flaring and oil spilling has made the environment
contaminated. Their gas burned, as byproduct from oil drilling, is contaminated with
toxic compounds and the flares send huge toxic plumes into the air. (Ubaya Team, 2010)
PT. Newmont Minahasa Raya, as Newmont Mining Corporation branch in
Indonesia, strain off 2000-5000 cubic ton of effluent into the waters Buyat's bay and it
was wrapped in a layer of thermo cline at 82 meters depth. ( Hasanuddin University,
2010)

And the last sample company is PT. Chevron Pacific Indonesia (CPI). We found
more environmental damage that has been caused by CPI. The big four are:
1. In Marangkayu, there are seven rivers polluted because of CPI crude oil
exploration.
(Administrator, 2008)
2. Environmental damage around Saloloang (TanjungJumlai) area in 2005 because
of gas leakage and oil conduit leakage in 2007. Until now, there are no responses
from CPI about this damage and these risks.
(Administrator, 2007)
3. Some units of CPI in East Borneo include in Proper MERAH category, that
showed by Ministry of Environment. It means that this company has bad
reputation about environmental management. (Administrator, 2007)
To cover their fault, companies use CSR. Corporate social responsibility (CSR) is
process of communicating the social and environmental effects of organization action to
particular interest groups within society and to society at large (Tsang, Erick WK,
1998:624). Ataur Rahman Belal (2001:274) give more definition, that CSR involves
extending the accountability of organization, beyond the traditional role of providing a
financial account to the owners of capital, in particular, shareholders. Such an extension
is predicated upon the assumption that companies do have wider responsibilities than
simply to make money for their shareholders.
The practice of CSR is subject to much debate and criticism. Proponents argue
that there is a strong business case for CSR, in that corporations benefit in multiple ways
by operating with a perspective broader and longer than their own immediate, short-term
profits. Critics argue that CSR distracts from the fundamental economic role of
businesses; others argue that it is nothing more than superficial window-dressing; others
yet argue that it is an attempt to pre-empt the role of governments as a watchdog over
powerful multinational corporations. Corporate Social Responsibility has been redefined
throughout the years. However, it essentially is titled to aid to an organization's mission
as well as a guide to what the company stands for and will uphold to its consumers.
(Administrator, 2010)
As we know, CSR usually used to cover environmental and social damages
caused by company activities. Beside this, the purpose of CSR only to increase company

image. The are three themes which run through the middle ground of CSR represented by
commentators:
1. Who assume that the purpose of CSR is to enhance the corporate image and hold
the, usually implicit, assumption that corporate behavior is fundamentally benign.
2. Who assume that the purpose of CSR is to discharge an organization's
accountability under the assumption that a social contract exists between the
organization and society. The existence of this social contract demands the
discharge of social accountability.
3. Who appear to assume that CSR is effectively an extension of traditional financial
reporting and its purpose is to inform investors.
(Gray, Rob. 1988: 8-9)
2.2 Major and Minor Solutions
2.2.1 Environmental Management Accounting (EMA) as Major Solution
There is major solution as a real effort to avoid environmental and social
damages. We are offering about Environmental Management Accounting (EMA).
2.2.1.1. Definition
Today, there is no fix term to explain about EMA definition. But, we can
use some definition from several source. Definition of EMA from International
Federation of Accountant (IFAC) is the management of environmental and
economic performance through the development and implementation of
appropriate environment-related accounting systems and practices. While this
may include reporting and auditing in some companies, environmental
management

accounting

typically

involves

life-cycle

costing,

full-cost

accounting, benefits assessment, and strategic planning for environmental

management. The other definition come from United Nation Divisions for
Sustainable Development (UNDSD), they said that EMA is represents a combined
approach which provides for the transition of data from financial accounting and

cost accounting to increase material efficiency, reduce environmental impact and

risk and reduce costs of environmental protection.( Kunaifi, Aang, 2009:19-20)
There is a table that shows EMA definition from UNDSD
Table 1: Illustration of EMA Definitions by UNDSD
Accounting in Monetary Units

Accounting in Physical Units

Conventional
Accounting

Environmental Management
Other Assessment
Accounting
Tools
MEMA
PEMA
Monetary
Physical EMA
EMA
DATA ON THE CORPORATE LEVEL
Conventional
Transition of
Material flow
Production planning
bookkeeping
environmental balances on
systems,
part from
the corporate level
stock accounting
bookkeeping
for
systems
and cost
mass, energy and
accounting
water
flows
DATA ON THE PROCESS/COST CENTRE AND PRODUCT/COST CARRIER
LEVELS
Cost accounting
Activity based Material flow
Other environmental
material
balances
assessments,
flow cost
on the process and
measures
accounting
product levels
and evaluation tools
Internal use for
statistics,
indicators,
calculating
savings, budgeting
and
investment
appraisal
External financial
reporting

BUSINESS APPLICATION
Internal use for Internal use for
statistics,
environmental
indicators,
management systems
calculating
and
savings,
performance
budgeting and evaluation,
investment
benchmarking
appraisal of
environmental
costs
External
External reporting
disclosure of
(EMAstatement,
environmental
corporate
expenditures,
environmental report,
investments and (sustainability report)

Other internal use for

cleaner production
projects
and ecodesign

Other external
reporting to
statistical agencies,
local
governments, etc.

liabilities
NATIONAL APPLICATION
National income
National
National resource
accounting by
accounting on
accounting
statistical agency
investments and (material flow
annual
balances for
environmental
countries, regions and
costs of
sectors)
industry,
externalities
costing
Source: UNDSD (2001: 10)

But the application of environmental management accounting (EMA) is not

directly replace conventional management accounting, but its application can be a
supplement for management to analyze about environmental cost to make their decisions.
It is match with Dr. Christine Jasch's explanation (2009)," EMA is simply a better way of

management accounting with detail lied information on material flows. It's not a separate
system, but helping to improve the existing system. However, for the first assessments it
makes sense to aggregate the data in a separate excel file."
There are several prime things in EMA, such as:
1. EMA focused on company's internal cost. EMA does not cover about external
cost for people, society, and environs
2. EMA focused on cost environment calculation.
3. EMA is not only provides accounting for environmental cost or the other
information, but also provide explicit information of energy and material that
including its changes.
4. The information that provided by EMA can use to make a decision and also useful
for the company that implement environmental management proactively.
(Cahyandito, in Aang Kunaifi thesis, 2009:22)
2.2.1.2. EMA Analyzes
EMA needs more knowledge of physical information using physical
accounting and monetary information using monetary accounting linked with
environmental cost. Physical information includes energy flow, water,
material, and its waste. And monetary information includes cost and revenue
linked with environmental.
EMA also needs cost accounting approach because environmental cost can
not be separated with production cost. Cost accounting approach also need for
classifying all of production cost in manufactured company.
Environmental cost usually appears in process of production. It hidden in
overhead that allocated in a cost of product. So, it can make a cost distortion.

Because of the hidden cost, understanding of cost accounting needed in order

to get a good cost allocation.
2.2.2. Minor Solutions
If there is a major solution, so we have many minor solutions too as
supporting ideas. The first minor solution is about green tax. Green tax is a tax
type that regulates environmental sustainability. By green tax, government can
;pcarry out environmental policies for natural resource management. Because
green tax is important enough for implementing green economy, Indonesia have
to apply this to all investors in this country.
Company's effort to reduce environmental damage needs a big budget, so
besides applying green tax, government also should provide tax incentive entitled
green incentive. These incentives give to company who care to keep their
environmental as long as their activities. But, if the company does the fraud in
their financial statements, government could withdraw company's green incentive.
Second, government should make some regulation that companies have to
recovery the surroundings until this condition become well like before the
exploitation or production activities. These regulations can write in a memory of
understanding (MoU) before the agreement between government, companies, and
local or foreign investors.
Third, in order to reduce the environmental cost, some companies can join
into group and built a complete set of waste installation that can use together.
Company should to do this because environmental cost influence the production
cost significantly. Moreover, the companies group also can built private areas like
industrial area where this location is far from public area. So, their damages and
wastes can not attract human life directly.

CHAPTER III
CONCLUSION

Today, there are too many environmental damages caused by company activities
like from Roche, MMG Century Ltd., Exxon Mobile Corp., Royal Dutch Shell, PT.

Newmont Minahasa Raya, and the last sample company, PT. Chevron Pacific Indonesia.
All of the examples above caused many environmental and social damages that make bad
effect for human life, especially our next generation. They use CSR to cover their fault.
CSR has some basic lacks in company effort to reduce environment and social damages
because it's just talk about how increase company image and there is no real effect.
In order to save our environment, we have to apply a great solution like EMA
implementation inside the company. Beside this, we also take some supporting actions,
such as: green tax, green incentive, recovery regulation and built a set of waste
installation that can use together by a company group.

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