Environmental management accounting and environmental management in manufacturing industries in Uganda

Transcription

1 Working Paper No. 2014/39 Environmental management accounting and environmental management in manufacturing industries in Uganda Ruth Namakonzi¹ and Eno Inanga² 27 October 2014 The authors, 2014 ¹ P.O. Box 5048, Kampala, Uganda. ² Corresponding author. Maastricht School of Management, Endepolsdomein 150, 6229 EP Maastricht. Postbus 1209, 6201 BE Maastricht The Netherlands.

2 The Maastricht School of Management is a leading provider of management education with worldwide presence. Our mission is to enhance the management capacity of professionals and organizations in and for emerging economies and developing countries with the objective to substantially contribute to the development of these societies. The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the School or its sponsors, of any of the views expressed.

3 ENVIRONMENTAL MANAGEMENT ACCOUNTING AND ENVIRONMENTAL MANAGEMENT IN MANUFACTURING INDUSTRIES IN UGANDA BY Ruth Namakonzi P.O Box 5048, Kampala UGANDA ; And ENO L. INANGA* Maastricht School of Management Endepolsdomein 150, 6229 EP Maastricht Post Bus 1203, 6201 BE Maastricht THE NETHERLANDS * Corresponding author 1

4 ABSTRACT Given the importance of the environment and the attention environmental issues are currently receiving from public and private organisations, it has become crucial for companies, especially in manufacturing industries, to consider the impact of their activities on the environment. This is because the large amount of material, energy and water consumed by these industries constitute a major source of carbon dioxide, waste and effluents emissions. The aim of this study is to find out what actions, if any, manufacturing industries in Uganda are taking to enhance effective environmental management, the extent to which environmental management accounting (EMA) is applied, as well as costs and challenges that these industries face in the process of implementing EMA to achieve effective environmental management.some of the study findings reveal that manufacturing companies in Uganda are, indeed, taking environmental issues seriously. Some companies are adopting internally developed environmental policies, setting environmental goals and objectives. Some manufacturing firms have encountered challenges in achieving set environment management goals. The greatest of these challenges arer difficulties in defining, separating, identifying, classifying, measuring and controlling environmental protection costs. Others include inaccessibility to environmental management technologies, limitknowledge and training, endemic corruption and inadequate legislation. The study ends with recommendations and suggests areas for further research. Keywords: Environmental Management Accounting (EMA); Environmental management; Environmental costs and manufacturing industries.

5 Biographical Notes; Ruth Namakonzi is currently upgrading her Internal Audit skills in International Criminal Court in The Hague, The Netherlands. Prior to this, she was a Tax Auditor in Uganda Revenue Authority in Uganda. She is also currently finalizing her ACCA studies. She also studied in Maastricht School of Management (MsM) in The Netherlands specializing in Accounting and Finance and holds the MBA degree of that institution. Before her studies in MsM, she also studied for the Bachelor of Commerce degree in Accounting in Makerere University in Uganda. Eno L. Inanga is Emeritus Professor and former Head of Accounting and Finance in Maastricht School of Management, The Netherlands. Before then, he was Dean of the faculty of the Social Sciences, and later Head of the Department of Economics at the University of Ibadan in Nigeria. He studied Accountancy at the University of Nigeria as a Federal Government Scholar and Accounting and Finance at The London School of Economics and Political Science in the University of London, as a Commonwealth Scholar. He is an Academic Fellow of the Association of International Accountants in the United Kingdom. 7

6 Section 1: INTRODUCTION 1.1 Issues Environmental issues have become a global concern in the rent decades. Most of the environmental issues and challenges are related to continuous consumption of materials, energy and water by companies, resulting in depletion of these resources. In addition uncontrolled emission of toxic gases, waste and effluents in the water and air by the companies also has adverse effects on the environment. Climate change, global warming, ozone depletion and nitrifications, are some of the well-known consequences of these negative impacts of activities of manufacturing industries on the environment. Environmental impacts by corporations are now attracting serious concern from the public, governments, businesses, media and other stakeholders. This concern became more alarming when such incidents as the Bhopal chemical leak of 1984, the Exxon Valdez oil spill of 1989, began to attract public attention. Need for changes in environmental legislation and standards began to gain more prominence in public debates. Many environmental pressure groups gradually emerged calling for a more healthy environment. Examples of such pressure groups incclude Green Peace, Friends of the earth who have advocated for change in how organisations manage their business activities. Many International organisations like United National Division for Sustainable Development (UNDSD), United Nation Environment Programme (UNEP), United Nations Development Programme (UNDP) and Organisation for Economic Cooperation and Development (OECD) are among International Organisations currently advocating for better and healthier environmental management by promoting more research and initiatives. Recognising the need for change in how they do their business, management of organisations are now voluntarily accepting to address the impact of their organisations activities on the environment. Kevin Clarke and Sharron O Neill, (2006; 115) stated that The concept of sustainable development has become central to the way environmental issues are examined by both business and governments. Organisations are now

7 considering sustainability and environmental management issues to the extent of including them in the objectives and goals of the organisations due to economic and non-economic incentives. Some organisations are now adopting Environmental Management Systems (EMS), while the number of those having International Standards Organisation (ISO) certification is increasing worldwide. Most of these certificates have been issued to companies in developed countries and Asia. Developing countries like Uganda have few ISO or 9001 certifications. For instance, a survey conducted in December, 2008 revealed that out of the world wide 982,832 ISO 9001 certifications; Uganda had 44, compared to Kenya which had 257 and Tanzania which had only 12. The same survey also revealed that out of the 188,815 ISO certifications, Uganda had only 6, compared to Kenya which had 28 and Tanzania had only 3.(Za.dqs-ul.com visited on 24/06/2011). 1.2 Benefits Some organisations, especially manufacturing industries, are now using Environmental Management Accounting (EMA) to promote environmental management and are reaping the benefits from its use. Decision makers need to understand the monetary and physical value of resources like raw materials, water and energy and the value of waste generated and disposed, the cost of environmental protection like pollution reduction and waste management which can be promoted through EMA. Studies of EMA a recent management accounting tool of EMS have attracted vast attention in the recent years. This is because EMA promotes identification, assessment and allocation of Environmental costs in industries which costs have increased in the recent years. Identifying such costs promotes better decision making and better utilisation of resources. In addition, it gives an incentive to management to save on environmental protection costs such as pollution reduction, fines, waste management, legal fees, monitoring, insurance, and regulatory reporting and consequently improve the environment. A recent study by Wei Qian, Roger Burritt and Gary Monroe, (2011) recognised the need for more studies in the area of EMA as expressed by many other authors. This

8 study is intended to discover what manufacturing industries in Uganda are doing to promote effective environmental management and the extent to which EMA is applied in the industries. The motivation for the choice of industry stems from the fact that manufacturing industries consume great amount of resources and are a major source of waste, pollution and other toxic emission which are harmful to the environment. Wendy, Chapple, Richard Harris and Catherine. J. Morrison Paul, (2006) stated that the largest proportion of waste disposed in landfills stems from manufacturing, Fitzpartrick, Doreen D, (1995) adds that of the total material used, only percent is used in production and the rest is waste or pollution. As a major consumer of resources and a major source of waste and pollution, manufacturing industries have a major role to play in environmental management and sustainability Problem Statement K. Clarke et al, (2006:115) stated that the Increasing public awareness of environmental impact of organisations and the need for sustainable development has changed the environmental performance expectations of influential stakeholder groups within society Environmental cost and performance information is now increasingly being demanded from companies and accountants in particular. On the other hand, businesses are finding difficulties in providing this information because of difficulties related to identification, classification, measuring, allocating, controlling and in managing environmental related issues. Deegan and Gordon 1996 cited in Watchaneeporn Setthasakko (2010:316) also support this view and stated that the amount of environmental information reported by companies remains limited and differs widely in terms of quality Conventional management accounting systems can neither fully provide this information nor can they properly deal with the environmental costs. They allocate these costs to overheads thereby making them hidden from management and executives. Consequently, wrong decisions are made due to failure in knowing the extent of these costs which are increasing due to changes in legislation and other factors. This would have a significant impact of the performance of the company as stated that Failure to rely on appropriate accounting information may contribute to ineffective resource

9 management and a gradual decline in organization performance Tuan Zainun Tuan Mat Malcom Smith and Hadrian Djajadikera, (2010:54). Failing to reform management accounting practices to incorporate environmental concerns, makes organizations unaware of the impact on profit and loss accounts and the balance sheet impact of environment-related activities Shane Johnson, (2004) If organizations fail to incorporate the environmental concerns, they may miss out identifying better opportunities for cost reduction and for improvement. They may also employ wrong decisions like product pricing mix decision. This leads to a failure to enhance customer value, while increasing the risk profile of investments and other decisions with long-term consequences. If management accounting as a discipline is to contribute to improving the environmental performance of organizations, then it has to change Shane Johnson, (2004:2). 1.4 Responses This calls for accountants to adopt and understand better environment management and accounting systems that can aid in identification, classification, allocation and control of environmental costs for better decision making and better environmental management among other benefits. Roger Adams, (2002) affirms that much of the interest surrounding environmental issues has been directed at external reporting and financial accounting and less in EMA which is intended for internal decision making. EMA provided both monetary and physical information which can also be a basis and useful for external reporting. Many researchers including Bouma and Van der Veen, (2002), Burritt, (2004) cited in Qian et al, (2011) called for more research in environmental management accounting because accounting researchers have given little attention to EMA. But awareness of environmental issues is increasing which makes EMA a necessary tool for running business. Globalization has changed external environmental factors in developing countries, which in turn affect the internal operations of organization as well as their management accounting practices T. Zainun et al, (2101:54). Many EMA studies that have been written have focused on developed countries and other Asian countries. Few papers have been written on Africa and no study was done on Uganda particularly Uganda s

10 industries. Besides having limited research, limited training causes accountants to have limited knowledge in this area.uganda being a developing country is still facing challenges in developing better environmental management systems due to inaccessibility to environmental technologies, limited enforcement of environmental standards and laws, corruption, limited training, limited funds. Michael G.Faure, (1995:5) states that the population in most of the developing countries have less value to environmental protection. This attitude is however changing as per the, National Environment Management Authority (NEMA) report (2008:1) the overall picture from the report is that following considerable effort at integrated assessment and reporting on the environment, many Ugandans increasingly understand the link between the environment and human well-being. The report also points out that Uganda is highly vulnerable to variability in climate because the economy heavily relies on climate dependent resources. This vulnerability to climate change is likely to increase because of rampart poverty, weak institutional capacity, lack of skills on climate change adaptability, inadequate skills and equipment for disaster management, limited financial resources and an economy which depends entirely on exploitation of its natural resources. NEMA, (2008;2) The recent budget speech, stated that one of the reason for the rising food prices is poor rainfall and drought which have affected food production and supply in the country hence the increasing the prices. Besides climate changes, other problems like land degradation, depletion of natural resources, waste, poor soils, water and air pollution are on the increase. Industries particularly manufacturing industries have a big role to play in conserving the environment by employing better Environmental management systems like EMA to promote effective environmental management and benefit the company as well. This leaves a lot to be desired in the aspect of environment management and call for serious change in the way organisations like the manufacturing industries in Uganda and the world in general do their business since their products and activities could have a serious impact on the environment and the economy.

11 1.5 Objective of Study Environmental management accounting (EMA) and Environmental Financial Accounting (EFA) are the two categories of Environmental accounting. EFA focuses on external reporting while EMA is concerned with internal reporting aspect of environmental management. Whereas many papers have been written on Environmental accounting, most of them have focused on external reporting and few on EMA. This implies that more research is still needed in EMA. Feldman. S. J. P.A. Soyka and P. Ameer, (1997) found a positive correlation between the level of Environmental management and decreases in environmental emissions implying that EMA promotes better environment management in addition to many other benefits. Aldonio Ferreira, C. Moulang and B. Handro, (2010) found out that there is a relationship between the share price of the organisation and the social and environmental activities as indicated by many other authors. Negative environmental impacts related to waste generation and disposal, pollutions and emissions etc, could damage the reputation of the company and cause a loss in its value. For-insistence in 1990, Shell SPDC- Nigeria struggled with a dropping environmental performance, coupled with poor environmental track record and controversial record. Local management got concerned and set environmental targets and policies that successfully changed that bad reputation. Jacob Hottentot, (EMAN Abstracts-2006) The aim of this study is to find out what the manufacturing industries in Uganda are doing to enhance effective environmental management. The extent to which they are implementing EMA and the challenges these industries face in implementing it to achieve effective environmental management. The study explores the benefits, costs and challenges from the use of EMA, and the roles of management accountants with regard to environment management. Furthermore, recommendations are drawn regarding EMA use in Uganda and how the companies and government of Uganda can achieve effective environment management. Findings from this research are expected to provide useful information for companies, the public, accountants and government

12 regulators to guide them in providing policies that improve on accountability and efficiency in environmental management. The study uses convenient sampling, qualitative methods to collect both primary and secondary data. Using existing theories and framework it explains EMA and environmental management issues. Primary data are collected by questionnaires guided by the ISO Hand Book (version 2.02, 1998) and other literature. Secondary data are obtained from published reports, articles and websites among others. 1.6 Structure of the paper The rest of this paper is structured in 5 sections; Section 2; highlights previous studies and relevant literature on the topic in order to specify the contribution that this study intends to make by identifying and closing the knowledge gap.section 3 briefly discusses the structure of the Uganda s economy to understand the nature of the economic amd regulatory environment in which manufacturing industry and firms operate. Section 4 focuses on research methodology and design, discusses how data was collected as well as related problems.section 5 analyses data and repots findings Section 6 concludes the study, makes recommendations and suggests areas for further research.

13 Section2. LITERATURE REVIEW 2.1 Overview This Section reviews the relevant literature on EMA and environmental management. It provides an overview of EMA and Environmental Management; critics of the conventional management accounting systems, Environmental costs, the role, benefits and challenges of implementing EMA and the role of Management Accountants in environmental management. Environmental management can be defined as the planning, implementation and control of strategic, tactical and operational measures for prevention, reduction and elimination of damage caused to the environment and the use of market advantages gained from it. Tatjana Tambovceva, (2010). The general concept of environmental accounting may be classlfied into three accounting systems as shown in Figure 2.1. EMA is part of management accounting which is concerned with physical and monetary measures of environmentally driven aspects intended for internal decision making. Stefan Schaltegger, Tobias Hahn and Roger Burritt, (2000). Insert figure 2.1 here Environmental Financial Accounting is concerned with physical and monetary aspects of the environmental impact for external reporting purposes. Other environmental accounting is concerned with physical and monetary aspects of specific accounting systems like the tax accounting systems, and other regulatory accounting systems. Schaltegger et al, (2000) From the literature, there are many definitions of EMA. It is also stated that EMA has no single universally accepted definition but guidance on the information considered under EMA is offered by UNDSD and EMA experts that suggest including both the physical and monetary information that is considered under EMA.

14 Ferreira et al, (2010:922) defined EMA as a Technique that generates, analyses, and uses both financial and non financial information, to improve the environmental and economic performance of a company and contributes towards a sustainable business. In another study, Christine Jasch, Daniel Ayres and Ludovic Bernaudat, (2010:96) simply defined EMA as management accounting(ma) with a focus on physical information on the flow of energy, water, products and materials as well as monetary information on environmental costs, earnings and savings from projects related to environmental protection. The above definition also brings out the fact that that EMA incorporates both physical and monetary items. This is in agreement with Matteo Bartolomeo, Martin Bennet, Jan Jaap Bouma, Peter Heykamp, Peter James and Teun Wolters, (2000:35) who urged that if management accounting is to take environment seriously, the tracking and analysis of this non-financial information should become as important as the tracking of financial information K. Clark et al, (2006) advises Management Accountants to make environmental performance visible in organizations by incorporating both financial and non-financial information as key performance indicators into the traditional control systems. With the evolution of environmental management in business, there is a growing interest to develop a better understanding of environmental-related financial costs and benefits because of increasing evidence that shows that environmental factors affect profitability and financial position of a business (M. Bartolomeo et al, 2000). 2.2 Limitations of Conventional Accounting Practices Concerns on environmental issues along with their related revenues, costs and benefit are increasing world-wide.. However, many authors have criticized conventional management accounting practices in many respects. The general criticism has been that these traditional practices do not provide adequate information needed for decision making in environmental management related issues. Christine Jasch (2006). UNDSD (2001) and Christine Jasch, (2003) also argue that conventional management accounting systems are ill-equipped to deal adequately with environmental costs. These systems attribute environmental costs to general overheads which makes it impossible for managers to trace. According to. Dits et al (1995); Hansenand Mowan, (2005) and

15 Burrit et al, (2002) cited in A. Ferreira et al(2010), hiding environmental costs from managers makes it difficult for managers to observe the actual environmental costs related to activities, yet there is evidence that these costs can be 20% or more of the total operating costs. UNDSD,(2001:1) explains that costs of industrial protection including pollution reduction, waste management, monitoring, regulatory reporting, legal fees and insurance have increased rapidly in recent years due stringent environmental regulations however, conventional management accounting attribute these costs to overheads and management and executives are unaware of the extent of these costs If mangers have no concrete and complete information regarding these costs, they will not have the incentives and motivation to reduce them. Alternatively, if wrong information is provided, then management will make wrong decisions regarding; product, process, investment appraisal and pricing decisions among others. Stefan Schltegger, Tobias Hahn and Roger Burrit, (2000) criticize conventional corporate accounting for not giving explicit, separate recognition to company related environmental impacts. From UNDSD, (2001) in the production process with the traditional cost accounting systems, as inputs like water energy and materials are processed. The end result is a product output and non-product output like waste or waste water. The non-product material flow is however not quantified and monetized separately within the traditional systems. Yet these material flows are considered as money flows. Therefore, wasted labour costs, material costs and capital must be added. Material and money flow can be illustrated in figure 2.2 Insert figure 2.2 below UNDSD, (2001) emphasizes the limitations of conventional accounting approaches which cannot provide sufficient cost data onmaterials. The incomplete data creates inconsistencies andmakes it difficult for the company to track the point of internal material consumption and identify exact flows and trace the cost materials in each

16 material flow. Linking the physical and monetary material flow data, flow cost accounting eliminates the information gap. 2.3 Definition, Identification and Controlling of Environmental costs The definition of these costs also depends on the intended use of the cost information by the organizations. The United States Environmental Protection Agency (USEPA), in 1998, was able to make a distinction between four types of costs to include; potentially hidden costs, contingent costs, relationship costs and lastly the conventional costs. Potentially hidden costs are those costs that are captured by the accounting systems but their identity is lost in overheads. Conventional costs are such costs of raw material and energy which have relevance to the environment, contingent costs on the other hand are costs to be incurred in future and lastly the image and relationship costs may include such costs incurred in preparing environmental reports. These are intangible in nature. Ann Irons, (2010) According to Christine Jasch, (2003:669) and UNDSD (2001:11) Environmental costs comprise both internal and external costs and relate to all costs incurred in relation to environmental damage and protection costs and costs of inefficiencies in the production process that may include wasted labour, wasted material and wasted capital. UNDSD (2003) and UNDSD, (2001) also explains that protection costs include costs incurred for prevention, planning, disposal, control and damage repairs like emission treatment and pollution prevention etc. that can occur at the companies and can affect government and the people. UNDSD (2001) and C.Jasch (2003) argue that the guidance document on the definition of environmental protection costs and other terms of pollution protection only deals with corporate environmental costs and the external costs that arise from internal activities but are not internalized via regulations and prices are not considered. It is the role of governments to apply political instruments such as eco-taxes and emission control regulations in order to enforce the polluter-pays principle and thus to integrate external costs into corporate calculations UNDSD, (2001: 11)

17 Many studies carried out in Germany and Australia show that of the total environmental costs, costs of waste disposal are only between 1% and 10% while the purchase cost of wasted materials represented 40% to 90%. However, this is dependent on the type of the business (UNDSD 2001). As noted, most of the environment costs are hidden in general overheads, which makes identification of such costs by management very difficult. For organizations to be able to make well informed decisions, the costs should be allocated to products, activities and processed that give rise to these costs. This can be guided by such tools like Activity Based Costing that can help in allocation these costs. Lastly controlling environmental costs can only be effective if these costs have been well defined, identified and allocated. For example costs associated to waste like the fines for pollution, taxes for landfills and costs of unused materials and disposal. For instance the wasted material can be determined by making a comparison between the weight of the material bought and the product yield. With this information, the organization is able to know how to save on such costs. Another example could be reduction on water consumption that would reduce water bills and make a cost saving for the organization. This can only be achieved if the organization is able to measure its water consumption and know where the water is consumed (Ann Irons 2010). Several accounting techniques explained below are useful in identification and allocation of environmental costs: 2.4 Accounting Techniques for Environmental Costing a. The Input/output Analysis; This is basically applied on the flow of materials. It works on the idea that the input must equal the output i.e. what comes in the production process must go out or must be stored. It tries to balance the flow of materials and trace the differences. For instance if 200 kilograms of materials have been bought and only 150kg of materials have been produced, the difference of 50kg must be accounted for in physical and monetary terms part of it may be waste and another part could be scrap This kind

18 of accountability forces businesses to focus on the environmental costs. Ann Irons (2010) and Shane Johnson (2004) UNDSD (2001) goes further to state that the firsts step in setting up the material inputoutput statement at a corporate level is to collect quantitative data from the stockkeeping and accounting systems. The systems provide physical and monetary data on material input and out-put into the company implying that all materials purchased during the year must either leave the company as a product, or waste or emission or stored on site. b. Flow Cost Accounting Ann Irons (2010) and (UNDSD 2001) asserts that flow cost accounting technique aims at reducing the quantity of the material which would have a positive effect on the environment and in the long run should have a positive effect on a business. The technique uses material flow and the organization structure and can only be performed with an appropriate computer support. It looks at the physical quantities, costs and value of material flows thereby promoting material flow transparency. This transparency can contribute to clarifying the complex relationships of effects operating within the material flow system and thus create a comprehensive database for evaluating measures for improvement and realizing saving potentials UNDSD (2001). This is because it promotes efficiency in production and lowers material handling and waste disposal costs. With this technique, the material flows are divided into three categories which include; the material, system and delivery/disposal whose values and costs are then calculated. This approach is supported by technical process flow charts. UNDSD (2001) argues that whereas this method results in better calculation of production costs, it avoids the need to separate the environment- related share and to obtain a complete list of other environmental costs Figure 2.3: below shows a diagrammatical presentation of flow cost accounting. Insert figure 2.3 here

19 (i) Material values and costs UNDSD (2001)The material value and costs can be calculated if the physical quantities of materials involved in various flows and inventories are known and this usually possible by the existing material management systems and production planning systems provide comprehensive database. Based on the flow quantities and inventories, one can proceed to make valuations in terms of prices and thus obtain the material values of these flows and inventories. Material costs can then be determined by defining which material flows is cost relevant UNDSD (2001:83). Material value orientation which involves the possibility of reporting the material purchase values and costs at later stages for material flow and material inventories is the core of flow cost accounting. (ii) System Values And Costs System costs are those costs that are incurred in the process of in-house handling of material flows such as the personnel costs or depreciation. Material movements have to be treated as cost drivers for the purposes of assigning the system values and costs. The system costs that are assigned to material flows are known as system values and the system cost are allocated to the outgoing product flows and these are then passed on as system values to the subsequent flow and inventories. (UNDSD (2001) (iii) Delivery or Disposal Delivery or disposal costs are assigned and allocated for those flows that are leaving the company. These are not part of the system and they may include payments to external third parties and all costs incurred in ensuring that the materials leave the company like transport, costs of disposing waste among others. UNDSD (2001) c. Environmental Activity-Based Costing. Ann Irons (2010) in the environmental accounting context this technique shows the distinction between environmental related costs that are attributed to cost canters and environmental-driven costs that normally tend to be hidden is overheads and these should have adequate allocation keys to obtain correct information.

20 The four main allocation keys include: volume of emissions or waste, toxicity of emission and waste treated, environmental impact added (volume x input per unit of volume) volume of the emissions treated and the relative costs of treating different kinds of emissions Shane Johnson (2004) UNDSD 2001 explains that this approach is focused to deal with allocating costs to products in a correct way, by minimizing the costs hidden in overhead costs categories. UNDSD (2001) states that this approach is advantageous because it improves economic performance and consequently improves environment performance and eliminated distortions in the product pricing, and investment decisions. Distinction should be made between overheads costs and joint environmental costs as illustrated in the figure 2.4 below. Insert Figure 2.4 here In the above diagram a difference is made between environmental costs such as the waste water treatment plant, incinerators etc. From the production process in the manufacturing plant above, all the three production steps produce waste, this waste is treated in an incinerator at a cost of $900 and the remaining general overhead costs is at $9000. d. Life Cycle Costing This incorporates the related cost caused over the life of a product and it requires the full environmental consequences. Ann Irons (2010).This method has however not received much attention UNDSD (2001). 2.4 EMA Roles, Benefits and Challenges Several studies, including Ferreira et al(2010), have shown that EMA use has several potential benefits which range from cost reduction, attraction of better human resources, better stakeholder relationships, improvement of company reputation, improved

21 corporate image, and improvement of product pricing, among others as will be explained later. They also found a relationship between share price and social and environmental activities.ema is applicable in product pricing, budgeting, investment appraisal, assessment of environmental costs/design and implementation of Environmental Management Systems (EMS). Other applications include environmental performance evaluation, calculating costs and savings of environmental projects, benchmarking, cleaner production and eco-design projects, external disclosure of environmental expenditure, external environmental and sustainability reporting and other reporting of environmental data to statistical agencies and local authorities etc UNDSD (2001) and C. Jasch (2003) EMA which uses such standard accounting techniques as Activity Based Costing to identify, analyse, manage and reduce environmental costs mutually benefit both the company and the environment. By identifying, assessing and allocating environmental costs, EMA allows management to identify opportunities for cost savings UNDSD (2001) Shane Johnson Ann Irons (2010) and Ferreira et al, (2010) Rachel Jackson, ACCA's head of social and environmental issues, says that making environmental improvements makes business sense. It makes sense to save money on resources, save on bills and save the environment Richard Willsher (2004). Some companies are able to implement sophisticated environmental cost systems which can report on savings and benefits. Roger Adams (2002). This is in agreement with Porter and Van der Linde (1995) and Reinhardt (1999) cited in Ferreira et al (2010) who found that pollution reduction is likely to produce future cost savings and eliminate future environmental liabilities Most of the authors point on the importance of EMA in providing information for decision making. C.Jasch (2003:670) states that the most important goal of using EMA is to make sure that all relevant, significant cots are considered when making business decisions. EMA is closely related to process costing as well as to environmental performance and Management systems. Well designed and implemented EMA helps to ensure better internal management and decision making for investment appraisal,

22 cleaner production, improving eco-efficiency and calculating savings with in organisations. Ferreira et al (2010:923) adds that economic benefits are likely to flow from better-informed decision making Ferreira et al (2010) found out that among the 15 benefits surveyed, the highest benefit experienced by organisation from use of EMA was that of identifying new opportunities, followed by improvement in reputation and the decision making. The author stated that this was consistent with other authors like Adam, 2002; Anand, 2002; Bernhut, 2002). In addition, other benefits like process innovation, reduction in operating cost and product innovation and little reduction in organisation s perceived risk were also higher than the remaining benefits. However, cost of capital and insurance costs were the lowest level of 17 benefits that were surveyed. Adam (2002) cited in Ferreira et al(2010) also found out that organisations which produce social and environmental reports, are able to develop better internal control systems and lead to better decision making and cost savings are likely to occur as a result of continuous improvement. Therefore this confirms that EMA serves as a basis for external reporting and life cycle assessment of products as reported by C. Jasch et al (2010) K.Clarke et al (2006:118), C. Jasch et al (2010:96) say that focused on the provision of organization-specific performance information for internal decisions-making, management accounting systems are essentially unregulated and individually tailored to meet the needs of an organization. EMA emphasizes costs related to the use of energy, water and material and on the generation of waste and emissions which are related to the organizations impacts on the environment. It also considers the material costs and losses of material in waste and emission which have now become some of the prominent cost drivers in most organizations. In countries with low enforcement of legal compliance and relatively low labor costs, material and energy use and related losses are a significant cost driver. That is why EMA places particular emphasis on material and related costs. Christine Jasch et al (2010:97). Cleaner production which ensures minimal environmental costs with minimum environmental impact can be attained through EMA and this enables

23 firms to produce environmentally friendly products in a more efficient and profitable way. Environment-friendly products are now highly demanded and can gain competitive edge. Ferreira et al (2010) states that good citizenship behavior and offering environmentally friendly products lead to improvement in the organizational reputation. In addition, Adams,(2002) cited in Ferreira et al (2010) adds that organizations may also reduce the risk of consumer boycott by providing information on social and environmental issues which enables stakeholders to understand the way the organization conducts its activities and to assess the environmental performance of the organization. Given that few organizations provide this information, those that provide it, tend to experience improved reputation and are likely to gain competitive advantage. Many authors explain that the main challenges of environmental management accounting are related to defining, separating, identifying and allocating and controlling of environmental costs. Another challenge is related to international standards in management accounting which make environmental issue a challenge to management accountants. The main problem with environmental management accounting is that we lack a standard of environmental costs (UNDSD 2001). This is also in agreement with ACCA & UNEP (2002:34) they stated that there are no international standards dealing with management accounting and thus there is no consistence guidance for companies on how to deal with the various issues. A recent development of EMA is to also include social aspects to enlarge the focus from environment to sustainability C. Jasch (2006) Watchaneeporn Setthasako (2010; 321) findings identified three root causes of barriers to the development of EMA to include lack of building organizational learning due to limited environmental training and team working. Secondly, a narrow focus of economic performance where companies focus on a short term than long term perspective and reject projects like EMA that bring loss today even though they will generate profit in the future. They also do not look beyond the factory wall to see the negative impact of their actions in communities. The third cause is absence of guidance on environmental management accounting where they stated the lack of a uniform framework.

24 2.6 Role of Management Accountants and EMA W. Setthasako, (2010;321) found that in Thailand, even though there is a moderate level of organizational response to environmental improvement, there is a low level of involvement by accountants in environmental management practices. The findings also indicate that accountants are conservative and unable to adjust to new challenges; they are not proactive towards environmental agenda and also perceive their role as simply number crunchers and book keepers. Accountants need to understand the identification, measurement, allocation of environmental costs so that they find means of controlling them so as to achieve the intended benefits since it is proved by most organizations that having concern for the environment saves money in terms of cost saving. Richard Willsher (2004) If accountants portray poor environmental behaviors, this may have adverse impact on the organization and its finances. As a consequence of these poor behaviors, the company may face punishment like loss of sales, fines, loss of insurance cover, contingent liabilities increased liability to environmental taxes, loss in value of land, destruction of brand values, consumer boycotts, inability to secure finance, law suits, and damage to corporate image Shane Johnson (2004). While every accountant will be involved in environmental accounting, management accountants (in particular) will play a key role in assessing environmental costs, liabilities and risks, and in developing the information infrastructure to support an effective EMS ACCA-UNEP (2002:34) 2.7 The EMA Framework. Schaltegger et al (2000) proposed framework for the application of EMA in Table 2.1 below that will be used. This model and why it was chosen will be discussed in details in section four. Insert Table2.1 here

25 2.8 Knowledge Gap in the Reviewed Literature and conclusion. The literature reviewed focused more on application of EMA in industrialized developed countries and in most parts of Asia. Few studies have been conducted in Africa and Uganda in particular. This study aims to fill that gap by exploring what manufacturing industries are doing to promote effective environment management and the extent to which they are applying EMA in their accounting systems.the major challenges and costs that they face regarding environmental management and EMA applicability are also identified. The above discussion clearly shows the importance of differentiating environmental costs from the general overheads. Manufacturing industries consume large amount of resources including water, energy, materials, implying that they are prone to generate large amount of environmental costs. Definition, identification measurement and allocation of these costs is very crucial but it is the most difficult and challenging aspect of environmental costs. EMA with the aid of other techniques like ABC can ease this process. It is important for management to have correct information regarding these costs in order to make better decisions which could benefit the company and also save the environment at the same time. The next section discusses briefly the structure of the Ugandan economy, standards and regulations to enable us to understand the nature of the economic environment in which manufacturing firms operate.

26 Section 3: Ugandan Economy, Standards And Regulations 3.1 Introduction This section discusses briefly the structure of the Uganda s economy, standards and regulations to enable us to understand the nature of the economic environment in which manufacturing firms operate and the role of government and industry in environmental management. Uganda s economy is comprised of different sectors leading by service that contributed to 52% of GDP, followed by industry that contributed to 25%, agriculture forestry and fishing around 15%. Figure 3.1 below summarizes this structure. Insert figure 3.1 here In Figure 3.1, whereas service and industry sectors are the major contributor to the country s GDP, in terms of employment, agriculture sector employs above 70% of the total population visited (10 th July, 2011). Environmental management is very crucial in the economy of Uganda since it will have an impact on the performance of those sectors especially the agriculture sector which is declining because it depends on climate factors like rainfall and other environmental factors like the soil quality. Constance L. Neely (2010:24) also states that Climate change is impacting and will continue to dramatically impact agriculture and productivity. On a regional basis climate change may lead to increased unpredictability, not necessarily global warming. The effect of increased unpredictability can be as damaging to yields and as significant for producers behavior as warming. Food production and Climate change manifests as climate variability, greater incidence and intensity of floods, droughts, and other extreme events; climate change will dramatically shift crop production patterns and yields Agriculture plays a very important role in Uganda s economy not only by providing employment but also boosting the agro-based manufacturing industries like the food processing industries. In addition industry sector is also supported by resources like water availability, fish, and agricultural supplies which are all climate dependant.from PWC Uganda website visited on 17/07/2011, it s indicated that Uganda s industrial

27 manufacturing sector is relatively small and the sector is currently facing some challenges like intermittent power supply and increased cost of electricity for production that have hampered its growth. 3.2 Overview of the Manufacturing Industry in Uganda The manufacturing industry comprises of formal manufacturing, informal manufacturing, and construction among others as shown by figure 3.2 below. Insert figure 3.2 here According to MOFPED (2011), the above figures were computed using GDP numbers for each year in constant 2002 prices. The formal manufacturing is the second largest in the industry sector. From the recent budget speech, it was stated that this sector is growing since it was projected to have grown at 7.2% in 2010/2011 compared to 2009/2010 at 6.1%. It was indicated that this growth is from industries in tobacco and drink processing, paper and printing, chemicals, paint and soap, metal product, brick and cement. The informal manufacturing sector was also seen to have grown by 4.3% in 2010/2011 which was below the 8.3% of 2009/2010 due to poor performance of the grain production. However, long rain seasons in 2011 that favored crop production boosted the food processing industries. MOFPED (Budget 2011) 3.3 Standards and Regulations on Environmental Management and EMA The drive towards environmental management has resulted in an increase in the implementation of environmental Management systems in order for the organisations to improve their environmental performance, reputation and image. Whereas some companies enact voluntary measures, most of them are guided by standards and regulations. OECD (2001:13) identified five factors driving environmental initiatives to include: government policies and regulations, commercial and economic considerations,

28 corporate image, codes of conduct, and growing pressures from the financial/investment community. Deriving the full benefits from these drivers depends in large measure on the knowledge and effectiveness of stakeholders (i.e. the general public, public authorities, the financial/investment communities, NGOs, and other interested parties). The more that these stakeholders know about environmental issues, the better able they will be to advocate and pursue more forward-looking strategies Environmental standards and regulations play a big role in limiting environmental damage. However, standards setting process should take into consideration the costs and benefits analysis. For instance A new, more expensive, technology should be incorporated into a legal standard only if its marginal costs are lower or equal to the marginal benefits of the additional reduction in environmental damage Michael G. Faure (2002:4). OECD (2001:24) states that industry interest in the ISO standard has been rising, for a number of reasons. Customers, for example, are demanding more often that companies and their suppliers be part of a total supply chain which is environmentally sound. In addition, certification can improve the public image of companies, leading to market advantages. In fact, many firms are using certification as part of a proactive environmental communications strategy that showcases environmental commitment. On the cost side, conforming to ISO is requiring firms to view their operations in a more comprehensive fashion. In some cases, this has resulted in the development of more cost-effective procedures and approaches The standards aim at achieving improved environmental performance by organisations and they address environmental aspects by considering what an organisation does to minimise its harmful environmental effects of its activities, products and processes. Firms are being pressured to adhere to these international standards because of globalisation and more awareness of environmental related issues. Besides the customers are increasing their interest and demand for environmentally friendly products and investor interest is also shifting to companies with cleaner production processes. Adoption of the standard in developing countries has been slow as compared to that in industrialized and developed countries. Globally as of 2006, there