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INTRINSIC SUSTAINABLE DEVELOPMENT
THROUGH UPDATED MANAGEMENT ACCOUNTING
by Andria Constantinou
EXECUTIVE SUMMARY:
Poverty, pollution and climate change are primary concerns of the 21st century. Such concerns form part of sustainable development which is defined to be the “ development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Brundtland Report,1987). This kind of development requires alteration of individual attitudes and values which in turn affect social institutions and drive them to a better relationship with society and nature. An impediment for sustainable development is the current practices in organizations which are pertaining to time. Updating management accounting is the key for overcoming this impediment and allow for an Intrinsic Sustainable Development but this requires an analysis of epistemic change from modern to primal episteme. This report’s broad aim is to propose updated current management accounting techniques to enter the new episteme of knowledge since accounting itself is a body of knowledge and can be a driver towards intrinsic sustainable development.
CHANGE IN EPISTEME
One driver of unsustainable development is the change in knowledge, the change in episteme. One of the key attributes of this change is human attitude. Epistemes placed in Europe history include renaissance, classical and modern. According to Foucault (1989, p.30) modernity is divided into “classical era” (1660-1800) and “modern era” (1800-1989). In classical era, the world was assumed to be given by God and humans had zero power in defining events and actions. Modern era is described as being the contribution of humans through social institutions and practices. Humans tried to search for origins and tried explaining events through regulations and systematic knowledge. Furthermore, epistemology was created through the evolution of mathematical formulas, as in accounting, ratios were used as performance indicators (e.g ROCE ). However, modern episteme had some limitations comprise of the lack of theoretical insights, human culture knowledge as well as its characteristic of being temporary.
Volans (2009) stated that “a new economic order is rising from the ashes and a new generator of innovators, entrepreneurs and investors is accelerating the changes essential for delivering scalable sustainable solutions to the world”. Post-modern evolution of knowledge and theory is a base for an altered form of accounting with wider scope the environmental health. As a result, epistemic change from modernity to primal episteme affects significantly business and accounting. The shift towards improving Management Accounting is evidenced by the publication of sustainability reports such as those of the Global Reporting Initiative (Global Reporting Initiative, 2000).
EPISTEMIC CHANGE- EVIDENCE THROUGH MANAGEMENT ACCOUNTING
Management accounting was deemed to be far behind the new evolution of knowledge from the emerging Primal episteme. According to Birkin (2000), what was previously describing success, could “become the hallmark of failure”. Keeping the same “old fashioned” methodologies was a key factor of deterioration of trust between organizations and stakeholders. Milne (1996) argued that Management Accounting omitted the “social costs and benefits of corporate activities”.
The new post-modern episteme affected individuals by expanding knowledge and a cultural evolution was observed. The need for updating Management Accounting towards sustainable development is evidence of this Primal Episteme. Accountants searched for opportunities to provide a balance between economic advantages and a healthy environment.
According to Christensen, Newberry and Potter (2010) management accountants are powerful in this transition and formed an “epistemic community”, contributing in “international policy development, coordination and diffusion”.
Primal Episteme deemed to bring a cultural evolution. This evolution left institutions needing “change to reverse practices that seriously damage social and ecological systems” (Birkin, Edwards and Woodward, 2005). According to the authors, “a shift of accounting view from inward to outward” was needed.
Birkin (2012) argued that the Primal Episteme brought forward many consequences in business practices and processes. These consequences dominantly affect the tools and approaches of Management Accounting. According to Gray (2002), change has been observed through the expansion of accounting database, enhancement of performance management through multiple dimensions and the usage of systems endorsing decision-making thus taking into account future considerations. Birkin (2012), argued that previously organizations aimed towards maximization of profits but currently they aim towards “optimization” through “best social, ecological and economic mix”. Another consequence of the new episteme was that businesses are more focussed on process instead of a product (Birkin, 2012). The author also explained that organizations shifted from concentrating on the company to the industry’s ecology. Organizations are observed to cooperate achieving sustainability through adopting more efficient processes.
Environmental Management Accounting is a key consequence of the epistemic change. EMA is a dominating tool for sustainable development. Sulaiman and Ahmad (p.41) argued that EMA utilizes both natural and economic data on inputs, outputs, “waste and emissions”. This comprehensive kind of information is characterized as being more accurate. EMA contributes to sustainable development through its requirement of using both financial, environmental and social information. Utilizing EMA, companies can rescue the environment from damaging activities while at the same time benefitting financially. Examples of EMA comprise of Balanced Scorecard, Benchmarking and eco-balance account.
Another key consequence observed from the introduction of the new episteme in Management Accounting practice was the shift from the Triple Bottom Line towards Triple Top Line. According to McDonough (2002) one of the disadvantages of Triple Bottom Line was that in reality, it engaged only economic facts and then social and environmental benefits were taken into consideration. The author argued that concentrating on “equity or ecology” first this is “more financially productive”. Birkin (2012) stated that the Triple Top Line “reflects new personal attitudes and core values”. It contributes to the idea that people live in a world and each affliction has an effect on them as well as management accountants considering Triple Top Line can approach better information, thus improve decision-making process.
MANAGEMENT ACCOUNTING METHODS FOR NEW EPISTEME-AGRICULTURAL INDUSTRY
Determining relevant management accounting methods for utilizing in the Primal Episteme it is important to satisfy the goals of sustainability accounting. According to Lamberton (2005) the objectives of sustainability accounting comprise of the measurement of performance in terms of sustainability matters, “discharge accountability from stakeholders” as well as provide attractive information for enhancing decision-making. This section examines six methods which can be used in agricultural industry complying with the objectives of sustainability accounting and they comprise of:
- Eco-Balance account
- Environmental Key Performance Indicators
- Balanced Scorecard
- Material Flow Cost Accounting
- Life Cycle Assessment and
- Activity Based Costing
1.ECO-BALANCE ACCOUNT:
This particular method uses traditional costing together with environmental management for a more efficient utilization of resources. This efficiency could be helpful for agricultural industry since it is concerned mainly by production processes.
In the case of a winery, collection of data should be based on both “physical units and monetized amounts” (Sulaiman and Ahmad). This could help improving the control of winery’s production activities and determine if it is operating in accordance with sustainability. According to the authors, the idea behind this method is that “what gets measured, gets managed”.
The practical benefit of tis method according to Sulaiman and Ahmad is that employees are involved in resource consuming and are acquainted of “any waste generated”, thus they are more active in the company’s processes and are more concerned with improvements in those processes, towards meeting sustainability standards.
Using this method, a winery for example, could be able to determine the way it harms environment in terms of its sales, product development and processes. This information would then be useful for evaluating activities in terms of pollution and determine where there is a need for improvement.
The development of this method over the years is a further evidence of Primal Episteme. the need by companies for identifying the amount of pollution, the impact of their operations to the environment and their will to reduce pollution demonstrates that the new episteme exists and affects organizational operations. This method was developed in such a way that according to Sulaiman and Ahmad, employees can “evaluate environmental problems” and find relevant solutions.
2. ENVIRONMENTAL KEY PERFORMANCE INDICATORS:
Regarding the need for organizations to utilize measurement systems and to control activities for fulfilling stakeholders’ interests effectively, was the reason for the development of Environmental Key Performance Indicators. These indicators should be used for example in a city farm to measure environmental performance through production evaluation and cost controlling while at the same time achieving its targets. For example, a city farm could collect data using electricity/energy/water bills..A proposed example of environmental Key Performance Indicators for an organization in the agricultural industry such as a farm is presented in Appendix 1.
The practical benefits of this method comprise of being focussed only on main indicators (e.g. those indicators concerning only environmental issues). An additional benefit of Environmental Key Performance Indicators addressed by Defra (2006: 18) is that regulatory bodies proposed new concepts regarding reporting environmental activity using KPIs such as for example the “Business Review required by the EU Accounts Modernization Directive”.
The shift from traditional Key Performance Indicators measurement method to Environmental Key Performance Indicators is part of the evidence that the post-modern episteme, Primal, has already been introduced. The traditional Key performance Indicators were based on every activity concerning the organization whereas Environmental KPIs are specifically concerned with Environmental issues and criteria.
3. BALANCED SCORECARD
In recent years, due to the uncertainty and complexity that characterizes agricultural industry, agricultural companies have adapted strategic approaches and operations according to Noell and Lund (2003). One of these strategic approaches is Balanced Scorecard. According to Birkin (2012), a Balanced Scorecard is a “system of presenting and managing diverse aspects of company performance”. Additionally, the author stated that “The balanced scorecard enabled managers to deal with a range of divergent targets in a practical way”. A diagram of Balanced Scorecard is presented in Appendix 2.
According to Laurenzani et al (2005) a company in agriculture industry as for example a farm, could adopt a balanced scorecard approach to satisfy some goals which comprise of be able to prevent from a possible pressure from external environment as well as cover all production costs, be able to boost production and marketing operations to ensure financial stability. Additionally according to the authors, using such an approach could be useful for being focussed on the farm’s targets and goals. An example of a traditional balanced scorecard in practice adapted by a small family farm is presented in Appendix 3. However, in terms of sustainability, a balanced scorecard should be further dilapidated into groups of everyday management performance aspects. For example, it should include the every day management performance tasks and assess whether they have been accomplished or not.
Bernard (2012) argued that adopting a Balanced Scorecard approach can help improve strategic planning of an organization since it recognizes the main drivers for a successful future performance such as “intangibles” in order for a “complete picture of strategy”. Furthermore, the author stated that such an approach could improve quality of information for managers when reporting and better decisions would be taken, thus improving organization’s performance.
A Balance Scorecard approach applicable to “the full range of business relations” (Birkin, 2012) not only to the internal organizational processes is a key evidence of the existence of Primal Episteme since it is far away from traditional management accounting approaches involving strategic aspects and assessing an organization through non-quantitative data.
4. MATERIAL FLOW COST ACCOUNTING:
This Environmental Management Accounting approach was firstly introduced in Germany in 1990s. According to Kokubu et al (2009), it involves measuring waste and emissions and determining products that their manufacturing would impose a negative effect on environment hence improving organizational performance both in economic and environmentally terms. An example of the process of Material Flow Cost Accounting is presented in Appendix 4.
Instead of using a traditional cost accounting method, this approach could be helpful for agricultural companies to collect quality and exact data (since measures all materials from all processes and identifies “output in finished products and waste” (Kokubu et al,2009))hence be a motivational tool for managers to improve production processes while at the same time reducing negative environmental impact through emissions. For example, in a company producing animal food, 200 kg of ingredients for producing the food is considered as input and 150 kg was the final product output as feed and the remaining 50kg are considered as waste and then relevant cost measures take place. The differences in a traditional cost accounting method and Material Flow cost accounting is presented in Appendix 5. The shift from traditional cost accounting and Material flow cost accounting is a sign towards Primal Episteme.
This approach can help organizations in the agricultural industry both internally and externally. Organizations could enhance their potential of profit reducing their costs and waste and competitiveness without an adverse impact to the environment as Kokubu et al (2009) argued. In addition, since many agricultural firms are small in size, such method could be advantageous as it does not require complicated calculations and specific software to be adapted. As a result, this approach could contribute to intrinsic sustainable development through a balance between economic and environmental benefits.
5. LIFE CYCLE ASSESSMENT:
This simple and qualitative assessment approach taking account of environmental information according to Lamberton (2005) can be really helpful for agriculture companies since it can be proved to be cost effective. Assessing a product’s impact on environment during its useful life, Life Cycle Assessment is a relevant method to be used.
According to EduTransfer Design Associates and Haywire Creative (2012), this assessment is useful since many retailers such as Walmart impose sustainability criteria to its suppliers. Especially food products organizations will be benefited from this assessment.
In the case of farms, farmers will make efforts to reduce the negative impact on the environment since most adverse environmental impact is observed through the production level in a life cycle, thus they will try to increase efficiency in the production process.
Barber and Pellow (2006:53) stated that Life Cycle Assessment is a significant method for an agricultural organization’s path towards sustainable development since it measures emissions and waste from the “extraction of raw materials, through the production process and final product use, disposal or recycling”. Appendix 6 presents an example of a Life Cycle Assessment process.
6. ACTIVITY -BASED COSTING
Lee and Kao (2001) argued that this approach could help organizations improve their costs and overheads, this makes Activity-Based Costing a method with accuracy providing the most appropriate information. The authors also explained that in order to gain an advantage in competition, waste should be eliminated as well as “other non-productive activities”. This method would be useful for agricultural organizations as they could enhance productivity through reducing unproductivity and control costs more efficiently, a target of many agricultural organizations.
This method of Management Accounting would determine the activities of the company thus measuring the relevant costs of each of these activities hence give to product the relevant cost “based on activity consumption” (Gunasekaran and Singh, 1999). One example of the process of this method is presented in Appendix 7.
The significant role this method has to play in agricultural organizations is evidenced by the research of Lee and Kao (2001) which concluded that an agricultural company, specifically a wholesaler of fish managed to enhance operation efficiency and “encourage the trends of economic liberalization and internationalization” by adopting this method which focusses on cost control and management through analyzing its operational costs.
Activity-Based Costing developed overcoming disadvantages of traditional management accounting methods which gives evidence of the episteme change. According to Popesco (2010), it focusses on wider areas analyzing different classes of costs thus allowing the measurement of costs at “deferring levels of managerial decisions” thus enhancing the quality of decision-making.
CONCLUSION:
Accounting based on environmental insights forms a new “productive accounting that places survival of the species at its very heart” (Gray, 2002). The management accounting methods proposed satisfy the objectives of Sustainable Development through developing a balance between environmental and financial benefits. As a result, Primal Episteme with updated/strategic management accounting could support Intrinsic Sustainable Development. According to CIMA (2011), “sustainability requires management accountants to monitor and manage non-traditional data to guide strategic decisions”. This can be achieved by the methods proposed, aiming towards a more sustainable organization which attributes to an “economic ecology where economic activity grows within and is supported by a healthy ecosystem” (Birkin and Polesie, 2011).
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