A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance

Sayedeh Parastoo Saeidi, Saudah Sofian

A Proposed Model of the Relationship between Environmental

Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi1, Saudah Sofian
Faculty of Management, Universiti Teknologi Malaysia, Skudai, 81310, Johor Bahru, Malaysia

Abstract
The aim of this paper is to propose a model of the relationship between Environmental
Management Accounting (EMA) and firm performance through reviewing the related literature. One of
the more significant findings to emerge from this review is that the majority of previous studies in
environmental management area have only focused on non-monetary environmental management
practices such as EMSs, quality control systems, and ISO 14001; and very few empirical studies
focused particularly on accounting aspects of environmental management practices such as EMA.
Moreover, the experimental findings are quite controversial, and there is no universal agreement about
the actual impact of EMA on firm performance. This is because while the positive relationship between
EMA and firm performance has been obtained in most studies, some studies have still found a negative
or neutral relationship. The third obvious finding is that most studies on environmental management
practices have been carried out in developed countries based on European and US data. However, far
little attention has been paid to such studies in developing countries. Review of the related literature on
EMA and performance leads us to establish another conclusion, which is that the majority of studies
have focused only on the monetary aspects of firm performance as a measurement of overall
performance, and non-monetary aspects have been disregarded. Taken together, the lack of study on
EMA in developing countries, lack of a comprehensive approach to firm performance, and
inconclusiveness among findings create enough ground for future empirical study on EMA and firm
performance. Accordingly, based on the suggested association of these factors, this paper proposes a
model that links EMA to both financial and non-financial performance for the empirical research
which is carrying out by the authors in Malaysia as a developing country.
Key Words _ Environmental Management Accounting; Financial performance; Non-financial
performance.

1. Introduction
Since firm performance is widely considered a major organizational goal, environmental
management has become an issue of great concern for industry and administration. Much recent study
has attempted to examine the relationship between environmental management and firm performance
and while many found positive relationship [1-4], others did not [5-7].
From a different perspective, literature shows that while the majority of environmental management
practices have focused only on ethical and non-monetary aspects of environmental management such
as corporate social responsibility, disclosing environmental activities information, or different ISO
certifications [8-12], little attention has been paid to monetary or accounting aspects of environmental
management practices practically as well as academically.
Since the company's success in raising performance is based on correct strategic decisions, and
complete monetary and non-monetary information is the basis for correct decisions, it could be
concluded that the cost of incomplete information would reduce the quality of decision-making and
hence the firms performance evaluation [13]. Unfortunately, a main component of a firms total costs
are known as environmental costs and these have always remained hidden from managers eyes [14].
This may be explained by the fact that many firms as still using weak conventional management
accounting systems. These weaknesses have been largely focused on identifying the environmentrelated costs [15]; producing cost centres to allocate identified environmental costs to the right places;
1

Corresponding author, Email address: pari.saeidi@gmail.com

International Journal of Information Processing and Management(IJIPM)

Volume 5, Number 3, August 2014

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

and finally, weakness in establishing proper communication between accounting and other departments,
especially production departments [14].
Experience has shown that while environmental managers who have a great deal of knowledge
about the environmental impact of the organizations activities have no entry permits into the
companies financial subsystems. On the other hand, accountants or controllers who have a lot of top
down financial information on hand often have little knowledge about the actual physical flow of
materials and energy through production, the related environmental impacts and the environmental
relevance of corporate activities. Subsequently, key decision-makers are seldom able to link physical
information to monetary information properly in making decisions, often resulting in low quality
decisions [16]. Consequently, the outputs of these decisions based on incomplete cost information do
not have an effective impact on organizational performance.
Environmental Management Accounting (EMA) as a new tool in management accounting which
tries to overcome these limitations and weaknesses through merging environmental management
(physical) department with management accounting (monetary) departments [17]. In fact, EMA
incorporates cost accounting information with material flow balances data. This comprehensive
information provides decision makers with a clear picture of joint environmental and economic
outcomes of firms activities leading to more strategic and effective decisions [18, 19].
Therefore, managers in the area of environmental management should be advised and encouraged
to employ EMA. It is possible by providing them more additional experimental evidence of the
potential uses and benefits of EMA on firm performance. Until now, the majority of studies on EMA
have focused only on calculating the firms environmental cost at a given point in time as in case
studies [14, 20]; and only a few studies with inconclusive findings tried to link EMA to firm
performance [21, 22]. However, none of them adequately covered firm performance in detail. This is
because they considered only some limited dimensions of firm performance, unaware of the fact that
there is actually no strict dividing line between a firms financial and non-financial performance, and
measuring and improving overall firm performance should be based on both monetary and nonmonetary aspects of performance [23-25]. Accordingly, this study aims to fulfil the existing gap in
EMA studies through proposing a model which serves as a guide for future empirical investigation into
the relationship between EMA and firm performance in a developing country. It is worth noting that in
this model, firm performance is considered a combination of both financial and non-financial aspects.

2. Environmental Management Accounting

Sustainability accounting can be manifested in organisations through the development of
conventional accounting systems. It is possible by focusing on both monetary and physical resources,
along with other organizational resources [26]. EMA is a prime example of recent innovations in
management accounting and is representative of these new developments.
According to the United Nations Division for Sustainable Development (UN DSD) [27], two types
of information are considered under EMA: physical and monetary information. Physical information
includes data on the use, flow and final destiny of energy, water, materials and waste; and monetary
information includes environment-related costs, earnings and savings. Accordingly, EMA is broadly
defined by UN DSD [28] as identification, collection, analysis and use of two types of monetary and
physical information for internal decision making. Schaltegger & Burritt [29], Burritt [30], and Graff
et al. [31] emphasised the flow of environmental expenditures of EMA as opposed to Jasch [14] who
contended that the main areas of environmental information systems are objective units of energy,
water and material flow rather than monetary information.
In contrast to UN DSD, Bennett and James [32] presented a description which includes both
monetary and non-monetary information regarding environmental and fiscal efficiency, with durable
business objectives in mind. In the same view, Bennett et al. [33] and Deegan [34] also described EMA
as a method that creates, analyses, and utilizes both non-monetary and monetary information to
enhance the fiscal and environmental efficiency of an organization. Therefore, it could be concluded

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

that EMA provides policy makers with non-monetary as well as monetary information with which to
evaluate the companys environmental impact [28, 33, 35].
From a different view of point, Bennett et al. [36] insisted that EMA provides a secure connection
between environmental management and organization accounting. Is it through supplements to existing
environmental management, or supplements to conventional management accounting, through
reinvention of conventional management accounting and environmental management, or through the
introduction of a new system that reflects a change in management philosophy towards concern for the
environment as ongoing issues for business. Taken together, according to UNDSD [28] and Jasch [37],
the most important task of EMA is to make sure that all relevant and significant costs have been
considered when making business decisions.
Despite giving definitions of EMA, a few researches reported that environmental management
activities, coupled with EMA have an affirmative impact on company achievement. Nevertheless, there
are no noticeable similarities in researchers findings on this subject and this relationship is still open to
the question of whether environmental management practices improve the performance of the firm.

3. EMA and firm performance

From recent surveys it is clear that companies today are demonstrating an increased willingness to
address environmental and social responsibility issues and to adopt voluntary environmental practices
to reduce their negative operational impact on the environment and enhance administrative control [38].
Therefore, they adopt different environmental management practices that affect their structure,
responsibilities, procedures, processes and resources for better performance [39, 40]. A study carried
out by Kirk [41] shows that the main reward of environmental management is advanced social
reputation and improved public relationship. Some other scholars [42-44] also confirmed Kisks claim
that paying attention to environmental management practices could further enhance corporate image
enabling the introduction of environmentally-friendly commodities into the market and the
performance of commercial actions with fewer detrimental effects on the surrounding atmosphere.
Finally, it could be concluded that superior organizational reputation and enhanced association with
interested parties are part of the rewards that firms can realize by adopting environmental management
practices. Likewise, Adams and Zutshi [45] claimed that enhancement in corporate image could come
about due to the commissioning of environmentally-friendly products into the market and carrying out
institutional operations with reduced hazardous impacts on atmospheric ecology and achieving a
greater degree of customer satisfaction. Many scholars have reported that a greater degree of customer
satisfaction increases the firm reputation [46-48] and subsequently, an improved corporate image has a
positive impact on economic performance [49-51]. This view is supported by Anderson et al. [52, 53]
who writes improved financial performance is one of the consequences of a high level of customer
satisfaction.
In addition to creating value for consumers through producing and supplying environmentally
friendly products, firms should also be open an honest about their financial performance through the
proper reflection of environmental costs in their cost accounting system. Therefore, some scholars [14,
20] have focused in particular on identifying firms environmental costs through EMA and its various
potential benefits or disadvantages in terms of firm performance. In most cases, authors have claimed
that more accurate environmental cost information through EMA is accompanied by three advantages.
First, firms will have a better and more accurate picture of their real financial performance [19].
Second, complete cost information will enable managers to make better strategic decisions [54]; and
third, discovering all the hidden environmental costs through EMA paints a frightening picture of the
true costs for firms which motivates them to find and innovate new ways and strategies to control and
reduce environmental costs and the impact of their activities [55]. Therefore, EMA has become a
deliberate issue within the recent aggressive situations for businesses [35] and a number of researchers
have tried to understand and explain the affiliation between EMA and different firm performance
indicators such as eco-efficiency (profitability), differentiation and innovation, market performance
(customer satisfaction and reputation), and competitive advantage. However, different research efforts

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

have produced different research findings. This is because some authors have reported a positive link,
while others did not suggest a positive association.

3.1.

EMA and Efficiency

In terms of efficiency, which is divided to profitability and productivity, Burritt & Saka [22] claim
that EMA enables companies to shift manufacturing procedures and the utilization of products towards
durability. Jasch [14] also reports that EMA lessens environmental effects, the risk of firm activities
and increases environmental security. Burritt & Saka [22] discovered that eco-efficiency data is an
important indicator which should be incorporated into EMA applications as well as incorporate green
information. Likewise, Hart [56] found that preventing effluent could allow the company to save
control costs, input, and power usage. Preventing effluent can also allow companies to recycle unused
or waste materials in the process of manufacturing. In another study, Jasch [21] claimed that businesses
that implement EMA could reduce expenditure by yielding to demand pressures for more
manufacturing efficiency and lower excessive effluent, material, and energy utilization. In his analysis
of identifying, assessing and allocating environmental and material flow costs, Jasch [54] revealed that
by EMA managers are able to identify opportunities for cost savings.
In the measurement of inputs and outputs in physical terms such as kilograms, the focus is often
placed on practical procedures, which is referred to as productivity as it is another aspect of efficiency
[57]. Therefore, the creation of waste is seen as a symbol of inefficiency [58]. In his study, Jasch [14]
reported that EMA raises resource productivity. In another major study, Nishitani [59] found that
coupled with attaining green objectives, it is pertinent that environmental management practices
decrease expenditure through an enhancement of productivity, and increase sales through a rise in the
need of green friendly clients. However, through the adoption of a proactive green approach, in
particular EMA, companies could get rid of environmentally dangerous manufacturing procedures,
revamp current manufacturing systems to lower life cycle effects, and build fresh commodities with
lower life cycle expenses [55] and obtain higher levels of productivity. This view is supported by
Elsayed & Paton [60] who wrote that environmental management accounting practices have the
strongest effect on green policy in the maturity phase of the company life cycle. In a similar study by
Masanet-Llodra [61] increased efficiency in the use of raw materials, operating materials, and energy
in non-product output also constitute a main component of environmental costs.
In conclusion, eco-efficiency means manufacturing and supplying commodities while at the same
time lowering environmental effects, material use and reducing expenditure [22, 62]. In seeking to
achieve sustainable eco-efficiency, organisations have been advised to improve and develop new
products and manufacturing processes to reduce their use of resources and the environmental damage
caused by their activities.

3.2.

EMA and Innovation

Organisations today are required to be innovative in terms of environmental issues as evidence

shows that in the growing competitive market, companies with greater emphasis on a business model
based on innovation have faster operating margin growth and higher sales growth [63, 64]. Innovation
in environmental management area has been mostly conceptualised as product and process innovations.
Several attempts have been made to identify the association between EMA and innovation. A recent
study based on 588 German companies set out to determine the impact of environmental management
practices on green innovations by Rennings et al. [65]. A weak positive impact of ISO 14001 and
EMAS was reported only on green product innovation. These findings are consistent with those of US
Environmental Protection, Agency (USEPA) [66], and Hansen & Mowen [67] who found that the
implementation of EMA could result to product innovation in an organization.
In an empirical study, Ferreira, et al [55] aimed to investigate if EMA leads to improvement within
firms. The results of their study indicated that implementation of EMA doesnt have a positive
relationship with product creativity, but the adoption of EMA facilitates the procedure of improvement.
In this way EMA has a positive and significant effect on process innovation. This finding is in line with

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

the researchers opinion that EMA adoption most often leads to the recognition of opportunities, such
as advancement in manufacturing procedures [35, 67, 68] and reduction of expenses of manufacturing
process [69].
In a complementary study, Chang [70] emphasized that environmental product innovation mediates
the positive interconnection between the firms environmental ethics and competitive edge. This view
is supported by Mario [71] who found that new products produced through innovation lead to
competitive edge. This is because the main aim of innovation is meeting consumer expectations, which
is the main interest of stakeholders and the main source of revenue for the organization. Therefore,
some scholars attempted to answer the question of whether the use of EMA actually leads to customer
satisfaction and to enhancement of the reputation of the organization

3.3.

EMA, Customer Satisfaction and Corporate Reputation

Customer satisfaction is a measure of how products and services supplied by a company meet or
surpass customer expectations [72]. Many firms use satisfaction ratings as an important indicator of
performance evaluation [73]. Therefore, it could be claimed that higher levels of performance are
positively affected by higher levels of customer satisfaction [74, 75]. On the other hand, corporate
reputation is a reflection of the degree to which the public is satisfied that firms are meeting their
expectations with their products and services [76].
Since todays consumers demand more durable and eco-friendly commodities [42], firms have a
new reason to be concerned about their customers environmental demands and expectations. As
reported by Csutora & Palma [77], environmental expenditure uncovered by EMA has a positive
indirect linkage to increasing market share through innovating new environmentally friendly products
according to consumer desires. Another report by Staniskis & Stasiskiene [78] indicated that
businesses are supported through the adoption of EMA to lower production expenditure, charge
competitive rates with good quality brands and also to reduce the use of natural resources. Improved
pricing [42] and product superiority [79, 80] may lead to a higher degree of consumer satisfaction.
Thus, Schneider et al. [81] and Simon et al. [82] and Troilo et al. [83] emphasized that firms with
whose customers are satisfied with their ongoing efforts to offer better services and products have
higher levels of business and market efficiencies. Based on this evidence, therefore, it could be
concluded that organizations that offer better environmental ideas will most likely be seen as
possessing a high degree of environmental integrity on behalf of its customers [42, 84, 85]. The
increased integrity consequently results in better community endorsement and greater customer
authenticity through mediating environmental approach such as EMA [86]. Literature shows that it is
mostly accepted that customer satisfaction and reputation are the main components of competitive
advantage [87], especially in corporate environmental responsibility.

3.4.

EMA and Competitive Advantage

Claver et al. [1] suggest that competitive edge comes from an improved product reputation and an
enhanced integrity in business association due to the implementation of eco-friendly administration
operations. This claim was supported by Lindell & Karagozoglu [88]; Yang et al. [89]; Ambec &
Lanoie [90]; Hart [91]; Porter & Vander [92]; and Trung and Kumar [93] who reported that obtained
improvement as a result of environmental management practices may lead to an enhancement in
competitive advantage and consequently, profitability.
Chang [70], Yang et al. [89], Dunk [42], Burritt et al. [94], and Wolters & Jasch [95] claimed that
if companies perceive EMA as an important tool that supports environmental managers in decision
making, they are likely to increase their competitive advantages. This is because EMA assists
businesses to match blueprint and features of their product output with the needs of the customers
which leads to reputation and finally to competitive advantage [42].

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

4. Conclusion and Proposed Model

Reviewing the related literature revealed four gaps among previous studies in the field of
environmental management issues. First, the majority of previous studies in the environmental
management area have focused only on non-monetary environmental management practices such as
EMSs, quality control systems, and ISO 14001; and very few empirical studies focused particularly on
accounting aspects of environmental management practices such as EMA [55, 96]. Comprehensive and
complete cost accounting information including environmental costs plays a critical role in improved
managerial decision making processes and outcomes. Therefore, further study to add substantially to
firms understanding of the real nature of EMA, as well as to increase managers knowledge about
their EMA involvements level would be necessary.
Second, it is noteworthy that most studies on environmental management practices have been
carried out in developed countries based on European and US data. However, far too little attention has
been paid to such studies in developing countries [97, 98]. Therefore, based on Oeyono et al. [99] who
claim that exposing environmental responsibility programs is advantageous for organizations in
developing countries, more studies on EMA are needed in developing countries, especially in Malaysia
where green sustainability is part of the 2020 development plan. An additional factor in the context of
Malaysia is importance of the Environmental Quality Act of 1974 which assesses the environmental
impact of firms activities [98]. Moreover, to date, little evidence has been found associating EMA
with firm performance in Malaysian firms. Therefore, Malaysia as the best option has been selected for
future empirical research.
Third, while a positive relationship between environmental management practices including EMA
and firm performance has prevailed in most studies in this field, results still remain inconclusive and
there is no agreement on this [96, 100]. It is because some found no positive relationship [5-7]. Such
inconclusiveness, therefore, creates a proper ground for further investigation in environmental
management field [25] especially regarding the role of EMA on changes in firm performance that
would be of great help in increasing mangers knowledge about the potential effects of EMA on firm
performance. Relying on these recommendations and given the scarcity of this kind of study in
Malaysia, in addition to measure the level of EMA, future empirical research will try to fill in the
existing gap by examining the relationship between EMA and firm performance in Malaysian
companies.
Fourth, while measuring and improving firm performance should be based on both monetary and
non-monetary aspects of performance, and there are no strict dividing lines between financial and nonfinancial variables in evaluating overall firm performance [25, 101] the majority of scholars have
focused only on financial aspects of performance in the link between environmental management
practices and firm performance; and only a few studies in this field have jointly considered firm
performance as a financial and non-financial concept [5, 25, 87]. Moreover, those researches that have
covered both financial and non-financial performance have been carried out on common environmental
management practices such as TQM, quality control systems, Life cycle analysis, and ISO 14001, and
no single study exists which specifically covers EMA and its relationship with both firm financial and
non-financial performance [19, 96, 102-104]. Accordingly, future empirical research will attempt to
give a comprehensive picture of firm performance through considering both financial and non-financial
performance in examining the relationship between EMA and firm performance. It is worth noting that
non-financial performance in the proposed model has been divided into five indicators including
product innovation, process innovation, customer satisfaction, reputation, and competitive advantage.
Accordingly, the following hypotheses will be tested:
H1) Firms with EMA achieve higher level of financial performance.
H2) Firms with EMA achieve higher level of non-financial performance.
H2a) Firms with EMA application achieve higher level of product innovation.
H2b) Firms with EMA application achieve higher level of process innovation.
H2c) Firms with EMA application achieve higher level of customer satisfaction.
H2d) Firms with EMA application achieve higher level of reputation.
H2e) Firms with EMA application achieve higher level of competitive advantage.

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A Proposed Model of the Relationship between Environmental Management Accounting and Firm Performance
Sayedeh Parastoo Saeidi, Saudah Sofian

Figure 1. Research Model

It is worth noting that the empirical study based on this proposed model is carrying out by the
authors in Malaysia as the only developing country with an explicit timeline to achieve developed
nation status by the year 2020. The only firms which are included in the study are 295 companies in the
industrial product sector and 157 companies in the consumer products sector - a total of 452 listed
companies in 2013. These sectors have been chosen because the activities undertaken by the
manufacturing and consumer product industries have the most negative impact on the environment [94,
105]. The survey approach is using for gathering data. Management accountants and financial
managers are respondents because they are directly involved in the management of organizational
affairs and have first-hand knowledge of organizational improvement processes and cost accounting
information.
The findings from the future empirical study will make several contributions. First, the findings
will extend EMA literature by providing a comprehensive view of firm performance through
considering non-financial performance as well as financial. It could served as a base for future studies
on EMA in Malaysia. The findings further will assist in scholars better understanding of the role of
EMA in firm performance and will provide a new understanding of the underlying concept and nature
of EMA for Malaysian managers.

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