Green Accounting: A Primer: Richard K. Fleischman, Karen Schuele

Journal of
Accounting
Education
J. of Acc. Ed. 24 (2006) 35–66
www.elsevier.com/locate/jaccedu
Teaching and educational note

q
Green accounting: A primer
1
Richard K. Fleischman *, Karen Schuele
Boler School of Business, John Carroll University, University Heights, OH 44118, United States
Abstract
This article, intended as a collateral reading assignment for a principles or intermediate account-
ing course, explores the current state and future issues of environmental accounting and reporting.
The primer is divided into two parts: (1) a brief rationale directed to accounting professors for allo-
cating precious class time to environmental reporting, and (2) a much fuller exposition for students
of the associated issues past, present, and future that will serve to generate classroom discussion.
Accounting faculty can use the student portion of the primer to incorporate environmental account-
ing and reporting into their courses without the need for extensive advance preparation.
Ó 2006 Elsevier Ltd. All rights reserved.
Keywords: Environmental accounting; Financial accounting; Green accounting
1. An introduction to green accounting
Irrespective of the warnings about greenhouse gas emissions, global warming, and
impending ecological disaster and despite a spate of literature suggesting how education
can focus accountancy’s contribution to solutions, forward progress toward changing cor-
porate behavior has been slow. A number of suggestions have been advanced as to how
‘‘green accounting’’ may be introduced into the accounting curriculum, ranging from
q
We define ‘‘green accounting’’ as both an awareness of environmental issues on the part of business enterprises
and the forthright disclosure, either in annual or stand-alone reports, of corporate performance in areas suggested
by these issues.
*
Corresponding author. Tel.: +1 216 397 4443.
E-mail addresses: fleischman@jcu.edu (R.K. Fleischman), kschuele@jcu.edu (K. Schuele).
1
Tel.: +1 216 397 4606.
0748-5751/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jaccedu.2006.04.001
36 R.K. Fleischman, K. Schuele / J. of Acc. Ed. 24 (2006) 35–66
incorporating environmental accounting (EA)2 across the curriculum (Gray, Collison,

French, McPhail, & Stevenson, 2001; Sefcik, Suderstrom, & Stinson, 1997), to elective
courses specific to the subject (Mathews, 2001; Grinnell & Hunt, 2000), to substantial
components of a theory course (Gordon, 1996, 1998). Currently, accounting students
receive little or no exposure to EA issues in most institutions of higher learning around
the globe (Gray et al., 2001). This article urges and provides a primer for a modest intro-
duction to EA for undergraduate accounting students.
This article is in two parts – an introduction for educators and a primer on green
accounting for classroom use. The educators’ introduction includes an overview of the rec-
ommendations of governmental and professional societies with respect to the inclusion of
EA in accounting education. Additionally, we examine the academic research that has
been done in the area of environmentalism and its relationship to education. Finally,
we present the results of classroom testing of this primer.
The primer itself, intended for principles and intermediate accounting students, is a
resource that affords instructors an opportunity to incorporate EA into their courses. Min-
imally, the primer provides students a significant, collateral reading assignment. There are
also questions in Appendix B that may serve as the basis for in-class discussion and/or
short writing assignments. Finally, the references that are provided, both to published
materials and to internet sources, could support more extensive student research papers
and projects.
While the education requirements for entry into the accounting profession, the proac-
tivity of government in promoting environmental awareness, and the acceptability of envi-
ronmental research on the part of accounting faculty vary widely between the US and the
world at-large, the end result is, unfortunately, the same. Accounting education has not
successfully communicated the message to students entering the profession, either as pub-
lic or managerial accountants, that environmentalism is an ethical issue which requires
them to consider the interface between the public interest and the well-being of the cli-
ents/stockholders they serve. Moreover, in the event that accounting professionals become
more involved with environmental reporting, it will be necessary for the higher education
system to begin the processes of creating a greater awareness of the issues and the addi-
tional expertise that may be required.
1.1. Environmentalism and education
Governments in Europe have encouraged attention to environmentalism through the

education process. In 2002, the European Commission (EC) established the European
Multi-Stakeholder Forum on Corporate Social Responsibility (CSR) (hereafter, the
Forum). The Forum was charged with promoting CSR and was asked to submit by sum-
mer 2004 a report on its work, including a discussion of its conclusions and recommenda-
tions. The Forum adopted the EC’s definition of CSR, ‘‘a concept whereby companies
integrate social and environmental concerns in their business operations and in their inter-
actions with their stakeholders . . . ’’ In its final report, issued in June 2004, the Forum
(2004, p. 14) noted, ‘‘business schools, universities and other education institutions have
an important role to play in order to build the necessary capacity for relevant CSR strat-
2
Appendix A contains a listing of all the acronyms used in this paper.
R.K. Fleischman, K. Schuele / J. of Acc. Ed. 24 (2006) 35–66 37
egies . . . they need to help future managers and employees improve their capacities to
coherently approach CSR’’, and recommended that ‘‘CSR and related topics be mains-
treamed into traditional courses, in the curricula of future managers’’. While CSR is a
broader, more comprehensive concept than EA, the inclusion of EA in curricula would
be a first step toward providing the requisite educational background called for in the
Forum recommendations.
A call for the inclusion of EA in business school curricula was also contained in a 2004
PricewaterhouseCoopers study contracted by the EC to determine the degree to which
companies’ annual reports reflected the EC’s recommendations on the inclusion of envi-
ronmental issues. The study included surveys of standard setters and national authorities
and interviews with stakeholders in member states. The results suggested the need for
sufficient knowledge about the environment on the part of corporate management, finance
departments, and accountants. A ‘‘multidisciplinary integration in education so that
environmental issues are taught at Business Schools’’ was proposed (PwC, 2004, p. 20).
The British government was even more proactive with the promulgation in 1993 of its
position paper, ‘‘Environmental Responsibility: An Agenda for Further and Higher Edu-
cation’’, commonly referred to as the Toyne Report. It was provided that ‘‘every Further
and Higher Education institution should adopt and implement an appropriately timet-
abled and prioritized strategy for the development of environmental education, and also
a wider strategy for the improvement of all aspects of its environmental performance as
an institution’’ (CUSU, 2005, p. 1). The HE 22 project (‘‘Greening Higher Education’’)
of 1998 extended this initiative to the professions (Gray et al., 2001).
Turning now to the case of the US, Norton Bedford (1970, p. 23) wrote 36 years ago:
The entire concept of an accounting transaction is now bound to the notion of a ‘pri-
vate cost.’ The result is that many social costs in the form of polluted air, water, and
soil, attitudinal views which prevent cooperative effort, and a host of ecological dam-
ages are not recognized by the accounting process.
This vision saw light of day in 1986 with the publication of the Bedford Report, Future
Accounting Education: Preparing for the Expanding Profession, by a joint committee of
the American Accounting Association (AAA) and the American Institute of Certified Pub-
lic Accountants (AICPA). In a section entitled ‘‘The Expanding Profession’’, the Bedford
Report (AICPA, 1988a, 1988b, Part 1, p. 2) observed that the future of the profession
would be characterized by the ‘‘increasingly diverse demands for services’’, which, if not
developed and marketed, would allow other professional groups to avail themselves of
the opportunity. These ideas were seconded two decades later in the recently concluded
CPA Vision Project, jointly undertaken by the AICPA and the state CPA societies. Its fi-
nal report (AICPA CPA Vision Project, 2005, p. 11) identified as one of the highest rated
core services for the year 2010 and beyond the development of ‘‘new, non-traditional
skills, competencies, and services’’.
The AICPA (1988a, 1988b, p. 10), in two pamphlets addressing the educational require-
ments necessary to prepare the next generation of CPAs, stressed in the ethics section, how
‘‘a sense of responsibility to society’’ should be inculcated into students very early in the
education process. Furthermore, under the heading of the legal and social environment of
business, the AICPA allowed that ‘‘attention should be given to social forces that affect
business, such as consumer activism, environmentalism, organized labor, urban blight,
and minority rights’’ (AICPA, 1992, p. 8). While these initiatives of past decades would
suggest a greater inclusion of environmental issues in the accounting curriculum, substan-

tial changes in this area have not been made.
1.2. Environmentalism and the research milieu
The acceptability of environmental research is more evident in Europe and Australia/

New Zealand than in the US. This difference is explained, in part, by governmental fund-
ing policies and more eclectic doctoral programs. Critical scholars have greater standing
outside the US where greater emphasis is placed on empirical, capital markets research.
Thus, the environmental literature tends to be richer apart from the US and underscores
a moral responsibility of practicing accountants to become engaged in the movement.
The education literature stresses the point that critical thinking differentiates a course in
EA from the more technically oriented offerings in the curriculum (Gray & Collison,
2002). Critical scholars have coined colorful jargon to highlight the differences in educa-
tional philosophy needed to instruct an EA course as contrasted to a methods course
based on accounting standards. Mathews (2001, p. 339), as the lead author of a special
issue of Accounting Education dedicated to a discussion of how EA courses should be
structured, argues for an abandonment of highly technical courses based on accounting
standards in favor of a ‘‘deeper learning’’ which demands from students a range of skills
that includes critical thinking and learning for its own sake. Gray and Collison (2002, p.
799) call for ‘‘transcendent’’ rather than ‘‘vocational’’ education with the essential differ-
ence being critical thought. As far as environmental issues are concerned, Gray and Col-
lison argue that students must be convinced to challenge the prevailing orthodoxy
(‘‘structural’’ reactions) rather than to succumb meekly to the status quo (‘‘marginal’’
reactions). Thomson and Bebbington (2004, 2005) adopt an educational model suggested
by Paulo Freire in which ‘‘banking’’ education is decried as representative of the tradi-
tional approach where professors serve as the fonts of all knowledge (almost in an
‘‘oppressive’’, Dickensian sense), while ‘‘dialogic’’ education techniques are supported as
necessary for making EA offerings a ‘‘transformative’’ experience.
Notwithstanding the greater attention paid to environmental issues in accounting edu-
cation evident elsewhere as compared to the US, the results are not much different. A num-
ber of surveys have been undertaken to identify the reasons for the disengagement of both
students and teachers from environmentally related course offerings. Owen, Humphrey,
and Lewis (1994) surveyed UK academics, a majority of whom felt that social and envi-
ronmental issues should not be taught since they do not constitute a component of a tra-
ditional ‘‘core’’ accounting curriculum. Humphrey, Lewis, and Owen (1996) communicate
a rosier view since interviews with British professors generated the conclusion that the cov-
erage of social and environmental issues enhanced students’ perceptions of corporate
responsibilities. Stevenson’s (2002) survey of UK accounting educators reveals their hesi-
tancy to undertake an EA course because they do not feel qualified to teach it (see also,
Gray et al., 2001) and because students doubt its career relevance. Perhaps more to the
point, the time and effort required to prepare for such a course is significantly greater than
preparing for a more traditional offering. Incentives do not exist to induce professors to
make that commitment.
Survey data have shown that many students in Britain do not select an EA elective
because it is not seen as beneficial for their career aspirations and because it is perceived
as difficult and unstructured (Collison, Gray, Owen, Sinclair, & Stevenson, 2000; Gray
et al., 2001; Stevenson, 2002). Students who opt for such a course do so because of the
ethical issues addressed and for other personal reasons, such as the anticipation that the
subject matter will be interesting and thought provoking (Collison et al., 2000). How-
ever, as Collison et al. have further measured, students who do not choose the EA
option have a greater conviction about their decision than those who do. Bebbington
and Thomson (2001) suggest that the issues of faculty and student resistance cannot
be ignored. Similar surveys have not been undertaken in the US where EA courses
are rare since that material is not identified as a subject area to be tested on the CPA
exam (Gray et al., 2001).
Bleak as the past has been, the future appears brighter that accounting education may
become less technically oriented as the profession continues to call for a more diversified
menu of skills. The Enron debacle and other similar fiascos necessitate an introspection
that will heighten the prominence of ethics across the accounting curriculum and the study
of accounting and reporting in a broader business context. This focus alone will augment
the opportunities for case study, critical thinking, and the honing of communication skills.
Within these contexts, as well as the prospective dangers from global warming, ‘‘green
accounting’’ may become more favored within the accounting academic community.
Stevenson’s (2002) survey suggests that accounting educators feel that their willingness
to teach environmentalism is impeded because students are not made aware of environ-
mental issues early in their studies. Were this earlier exposure to EA to occur, the chances
that students would later select an appropriate elective to investigate these issues in greater
depth might be enhanced.
The ‘‘green accounting’’ primer included in this article, as well as the bulk of the envi-
ronmental literature, covers a wide gamut of topics including past and present efforts to
foster environmental awareness and compliance. We will be making arguments in support
of the contention that environmental reporting is good business as well as providing some
basic accounting techniques that practitioners would need to know if involved in EA
engagements or reporting. However, our bottom-line intent is to try to convince tomor-
row’s practitioners (the Y generation) that accountants have compelling moral responsibil-
ities to deal proactively with environmental issues.
1.3. Classroom testing
This ‘‘green accounting’’ primer was tested in seven classes (four sections of accounting
principles I, two sections of intermediate accounting I, and one section of cost accounting).
Students were given one week to read the primer after which one class period was dedi-
cated to discussion. Instructors assigned the questions found at the end of the primer to
individual students for the purpose of leading classroom discussion.
Prior to distributing the primer to students, the class instructors administered a survey
(hereafter referred to as the ‘‘before’’ survey) designed to assess students’ awareness of,
concern for, and past exposure to environmental issues. A second survey was administered
after the students had read the primer, but before class discussion of the material (hereaf-
ter referred to as the ‘‘after reading’’ survey). This instrument was designed to measure any
change in the students’ awareness of and concern for environmental issues, and their per-
ceptions of the primer’s value added. A third survey was administered after the class dis-
cussion (hereafter referred to as the ‘‘after discussion’’ survey) to measure any additional
change in the students’ awareness of and concern for environmental issues. A total of 164
Table 1
Students’ assessment of interest level and comprehension of ‘‘Green Accounting’’ primer
Mean response (n = 164)
How understandable/interesting did you find the following topics in the article?
The moral implications of environmentalism
Understandablea 2.34
Interestingb 2.66
The implications of environmentalism for accountants
Understandable 2.31
Interesting 2.62
The history of past environmental efforts
Understandable 2.23
Interesting 2.65
The case that environmentalism is good for business
Understandable 1.91
Interesting 2.02
To what degree did the class discussion further enhance your understanding of the following issues?c
The moral implications of environmentalism 2.20
The implications of environmentalism for accountants 2.26
The history of past environmental efforts 2.66
The case that environmentalism is good for business 2.28
a
1 = Understandable and 5 = not understandable.
b
1 = Interesting and 5 = not interesting.
c
1 = Enhance understanding a great deal and 5 = not at all.
students completed all three surveys, 92 students from the accounting principles I sections
and 72 students from the other accounting courses in which the primer was class tested.3
On the before survey, students were asked if they had been exposed to environmental issues
in their past education and, if so, to indicate the extent of that exposure. Ninety-nine students
(60.4%) indicated that they had had some previous knowledge of environmental issues, 41 in
high school only, 32 in college only, and 26 in both high school and college. Notwithstanding
the frequency of this exposure to environmental issues, on the after reading survey, only 6.1%
of the responding students indicated knowledge of more than 50% of the primer’s content,
while nearly 65% of the responding students indicated knowledge of 20% or less.
The after reading survey contained a section to elicit student opinion on the primer’s
understandability and interest, while the after discussion survey attempted to measure
the extent to which class discussion enhanced student understanding of the various issues
addressed in the primer. The results of these sections of the surveys are detailed in Table 1.
Students were asked to indicate on a five-point Likert scale whether they found the reading
understandable (1) or not understandable (5) and interesting (1) or not interesting (5). In
general, the students found the information in the primer on each of several identified top-
ics reasonably understandable, with means for all respondents ranging from 1.91 to 2.34,
and fairly interesting, with means for all respondents ranging from 2.02 to 2.66.
3
Prior to administering the first of the three surveys, each student was given an identifying number to place on
each successive survey. The numbering system ensured confidentiality for survey respondents but allowed for data
analysis comparing responses by a particular student across the three successive surveys. A small number of
students did not complete all three surveys; these were not included in the results.
The after reading and after discussion surveys included questions designed to measure
student perceptions of the value of assigning the primer and using class time for discussion
of EA. The after reading survey asked students to rate the value of the primer on a one-
to-five continuum (1 = valuable, 5 = not valuable). The mean rating was 2.20, with only
7.3% of the students indicating a 4 or 5 on the rating scale.
Each of the three surveys contained identical Likert-scaled items designed to measure
student awareness of and concern for environmental issues, and student opinion on the
need for and chance of various parties taking action on these issues. The scale for each
of these survey items ranged from one to five, with one representing the positive end of
the scale. Table 2 contains the results of these surveyed items. The first column of Table
Table 2
Students’ awareness of and concern for environmental issues before reading, after reading but before discussion,
and after discussion
Mean response (n = 164) Mean change in response (n = 164)
Before After After Before After reading Before
reading discussion to after to after to after
reading discussion discussion
How would you rate your 3.17 2.68 2.19 0.49 0.49 0.98
awareness of environmental
concerns (pollution of air and
water, global warming, acid
rain, toxic waste)?b
How would you rate your 2.80 2.56 2.15 0.24 0.41 0.65
personal concern about these
issues?c
Do you feel young people of your 3.42 2.65 2.27 0.77 0.38 1.15
generation are more aware of/
concerned about
environmental issues?d
Do you believe that environmental action should be mandatory ethically fore
Every individual 2.66 2.31 2.10 0.35 0.21 0.56
Business 1.85 1.67 1.59 0.18 0.08a 0.26
Public accountants 2.65 2.16 1.97 0.49 0.19 0.68
Management accountants 2.54 2.02 1.80 0.52 0.22 0.74
Governments 1.40 1.30 1.22 0.10a 0.08a 0.18
How would you rate the chances of the following institutions to achieve a betterment of environmental
conditionsf
Accountants 3.15 2.48 2.26 0.67 0.22 0.89
Big business 2.50 2.18 1.99 0.32 0.19 0.51
US government (EPA) 1.76 1.56 1.42 0.20 0.14 0.34
International organizations 2.26 1.92 1.85 0.34 0.07a 0.41
(UN)
Private agencies (Greenpeace) 2.03 1.87 1.77 0.16 0.10a 0.26
a
Mean change in response not statistically significantly different from zero at 5% level.
b
1 = Very aware and 5 = very unaware.
c
1 = Very concerned and 5 = very unconcerned.
d
1 = Very much and 5 = not at all.
e
1 = Definitely and 5 = no.
f
1 = Good and 5 = poor.
2 details the questions asked. Columns 2–4 report the mean responses to these questions
before reading, after reading but before class discussion, and after class discussion, respec-
tively. Columns 5–7 chart the mean change in the student responses across the three
surveys.
The results reported in Table 2 indicate that, overall, both the reading and class discus-
sion increased students’ awareness of and concern for environmental issues, and strength-
ened their beliefs that the surveyed constituencies should be active in the environmental
arena with some chance of making a difference. After reading the primer and participating
in the class discussion, students reported a statistically significant higher level of belief that
environmental action should be mandatory ethically for all the surveyed constituencies. In
addition, students rated the chance of all surveyed constituencies achieving a betterment of
environmental conditions at a statistically significant higher level after the reading and dis-
cussion. The most substantial changes in means for these two sections of the surveys were
for accountants. Prior to reading the primer, the students, on average, believed that public
and management accountants, as well as individuals, were far less responsible for environ-
mental action than are business and government. The largest increase in mean score asso-
ciated with the issue of whether environmental action should be ethically mandatory
specifically identified accountants. Prior to reading the primer, students, on average, did
not believe accountants could play a significant role in the betterment of environmental
conditions. After completing the reading and discussion, however, the largest increase
in the mean rating related to the perceived chances that accountants could contribute to
the betterment of environmental conditions.
The after reading and after discussion surveys also included sections for the students to
supply written comments on their perceptions on having the article assigned and the use of
class time for discussion of environmental accounting, respectively. Overall, most students
made very favorable comments after reading and after discussion. After reading, 53% of
respondents reported that the primer was interesting and/or informative, and 44% of the
intermediate and cost accounting students indicated that the topic was relevant to the
course. Nine students indicated some level of concern that the topic may not be relevant
for an accounting class; nine students in the accounting principles classes indicated com-
prehension difficulties; and five students thought the topic should be included in a more
advanced accounting class (rather than principles). After discussion, many students indi-
cated that the discussion of the primer was informative (50% of respondents) and an
appropriate use of class time (51% of respondents).4
2. Green accounting: a primer
‘‘Green accounting’’ describes the efforts of academicians, accounting standard setters,

professional organizations, and governmental agencies around the globe to induce corpo-
rations to participate proactively in cleaning and sustaining the environment and, more-
over, to describe fully and forthrightly their environmental activities in either their
annual reports or in stand-alone environmental disclosures. Gray (1993) characterizes par-
ticipants in the movement as ranging from ‘‘light green’’ to ‘‘dark green’’, depending upon
4
Many surveys contained more than one comment; therefore, the total number of comments tabulated exceeds
the number of students responding to the survey.
the magnitude of their commitment to the cause. Mathews (1995) equates ‘‘dark green’’
with sustainability, a much debated term, which was defined in 1987 by the United
Nations World Commission on Environment and Development (1987, p. 8) in a publica-
tion that has become popularly known as the Brundtland Report. Sustainable develop-
ment ‘‘meets the needs of the present without compromising the ability of future
generations to meet their own needs’’. In other words, businesses operating today must
leave the world no worse off environmentally than when they began operations.
Milne (1996) provides an excellent description of various points of environmental com-
mitment and activism that run the gamut from ‘‘exploitationism’’ to ‘‘extentionist preser-
vationism’’. The first step is self-evident; the last is defined as a protection of the interests
of nature for itself, transcending human values. With environmental researchers and schol-
ars coming from so many different directions, it is difficult to avoid confusion about the
state of the art. In the 1980s, the literature focused on reporting issues, specifically health,
safety, and environmental (HSE) reporting. Environmentalism at that point was a junior
partner to the other themes. The stress was on the obligation of business enterprises to
provide evidence of good citizenship by charting their performance in health and safety.
These areas are vastly cheaper than environmental reporting as ways in which a business
can demonstrate a higher morality than its competitors and thereby gain favor with inves-
tors and consumers.
By the 1990s, advances had been made on many health and safety issues, and environ-
mentalism had become the dominant component of HSE (Adams, Frost, & Webber, 2004;
Owen et al., 1994). In point of fact, Elkington coined the phrase ‘‘triple bottom line’’
(TBL) to suggest that financial reporting should expand beyond traditional bottom-line
net income as a measure of success to also include information about social and environ-
mental performance. Elkington (1998) wrote in Cannibals without Forks that TBL
measured economic prosperity, environmental quality, and social justice.
TBL is a buzzword in critical literature today. Critical scholars are typically those whose
agenda is to expose societal wrongs and to protest proactively the status quo. In terms of
environmentalism, the issue being fought for is ‘‘sustainability’’. However, achieving sus-
tainability is very far away in the future; many preliminary steps have to be taken before
this radical, environmental outcome becomes even a remote possibility. Consequently, this
primer will focus on meaningful environmental reporting (ER), which, although a much
lighter shade of green, is currently a more attainable ambition than sustainability. For a
short narrative on the sustainability movement, the reader is referred to Appendix C.
2.1. Environmental overview
Currently, very few countries worldwide have any substantial ER requirements.

Furthermore, there are no standardized formats for the presentation of environmental
information, either in stand-alone reports or as components of annual reports. Very few
reports of either variety are subject to outside verification of any kind. Researchers have
hypothesized that the motivation for voluntary ER by businesses has run the gamut from
self-serving to environmentally responsible. Without reporting standards and outside val-
idation, it is difficult, if not impossible, to gauge the accuracy of these reports or even the
criteria used in their preparation (Deegan, 2002; Harte & Owen, 1991; Larrinaga-Gonzales
& Bebbington, 2001; Larsen, 2000; Milne, 1996). Thus, in addition to more traditional
roles of gathering environmental data and preparing reports, accountants have the
opportunity to move ER forward by lobbying for the articulation of reporting standards

and by developing the expertise necessary to serve as external auditors on reports prepared
according to established standards.
Public and managerial accountants have a role to play in educating corporate manage-
ment with regard to environmental responsibility. Accountants are in a position to help
develop information necessary for managers to make environmentally informed decisions,
those that take into account each firm’s ‘‘environmental footprint’’.
The foregoing discussion is intended as a broad overview of the intersection of account-
ing literature and environmentalism. Many articles have also been written with a greater
micro-level attention to specific components of environmentalism. Some of these articles
will be discussed later in this primer and are detailed by topical area in Appendix D. Stu-
dents who wish to consult more extensive bibliographies are referred to Milne (1996),
Mathews (1997, 2001), and Gray and Collison (2002).
2.2. Today’s environmental reporting
One method for holding businesses responsible for their behavior is to require them to
report on their actions. Numerous constituencies have called for entities to provide stake-
holders with information to enable an evaluation of their environmental (and social) per-
formance. The level and breadth of business reporting on environmental matters has
increased dramatically over the past 20 years or so as a result of governmental regulations,
accounting standard setting, and voluntary reporting. Today, external reporting on envi-
ronmental performance occurs primarily through Pollution Release and Transfer Regis-
ters (PRTR), as components of traditional financial reports or in stand-alone, corporate
environmental reports. The major milestones impacting the current state of external
reporting on environmental performance are presented on a timeline that appears as
Fig. 1.
2.2.1. Pollution release and transfer registers

A PRTR is a publicly accessible database of potentially harmful chemical releases into
the air, water, or land, as well as transfers of waste to treatment or disposal sites by report-
ing entities. The development of national PRTRs has resulted from governmental regula-
tion. PRTR reporting requirements are not uniform in that the system is based on the
needs and reporting environment of each particular country. National databases are com-
piled from annual reports submitted by companies that have released and/or transported
any of the designated chemicals (OECD, 2006).
The US was the first country to create a PRTR, and its system, the Toxic Release
Inventory (TRI), is currently the most sophisticated and broadest in existence. In
1986, following the Bhopal disaster in India, the Emergency Planning and Community
Right-to-Know Act charged the Environmental Protection Agency (EPA) and state
agencies to collect annual information from businesses and federal facilities on the
release and transfer of certain toxic chemicals and to make those data available to
the public. Reporting is currently required for approximately 650 chemicals. The TRI
has provided communities with information to enable them to hold local businesses
accountable for their environmental performance related to chemical release and
transfers.
First ISO 14000 Standard Joint Task Force on

issued Sustainability Reporting
formed
Select company sites in

Denmark required to issue Companies in Denmark and Portugal
"Green Account" required to include environmental
disclosures in annual report
2002
Companies in Sweden required to
include environmental disclosures
in annual report European
Pollutant
Emission
SOP 96-1 Register
issued created UK Reporting Standard 1
Toxic
1996 2000 exposure draft issued
Release
Inventory Companies in Spain
(TRI) Term required to include European
program CERES "triple bottom line" environmental disclosures in PRTR
established formed coined annual report created
1986 1988 1994 1998 2004
1969 1980 1987 1993 1997 2001 2005

EPA Superfund SustainAbility SAB 92 GRI Companies in France EC
established program formed issued 1995 formed required to include environ- Modernisation
enacted mental disclosures in Directive
1989 EMAS program
annual report effective
Select company sites in inaugurated
Sweden required to issue
environmental report EC recommendation
on environmental
disclosures in
annual reports
issued
1999 2003
Selected company sites in SOP 96-1
Netherlands required to issued
produce environmental
report Companies in Finland
required to include environ-
AA1000 Framework mental disclosures in
launched by annual report
AccountAbility
Fig. 1. Major milestones in the development of external reporting on environmental performance.
The development of PRTRs internationally has been slow. An international body, the
Organization for Economic Co-operation and Development (OECD), has attempted to
convince its member countries to develop PRTR systems consistent with the guidance
manual it has developed. Currently, only 13 of 30 OECD member countries (Australia,
Canada, Denmark, France, Ireland, Japan, Korea, The Netherlands, Norway, the Slovak
Republic, Switzerland, the UK, and the US) have PRTR systems in place that conform to
OECD guidelines (OECD, 2006).
As a first step toward the development of a European-wide PRTR, the EC in 2000
created the European Pollutant Emission Register (EPER) which required reporting
every three years on the release of some 50 chemicals into the air and water by com-
panies in member states operating in one of 56 industries. The first reporting cycle for
the EPER occurred in 2003, disclosing 2001 emissions. In October 2004, the EC voted
to replace the EPER with a European PRTR that would require, by 2007, annual
reporting by 65 industries on the release of more than 90 substances to the air, water,
or land.
2.2.2. Stand-alone corporate reports

Currently, no first world country has regulations in place requiring companies to is
sue a company-wide, stand-alone report on environmental performance. Three countries
(Denmark, Sweden, and The Netherlands) do, however, require the preparation of a
stand-alone report at the site level. Since 1996, companies in Denmark with significant
environmental impact have been required to publish a ‘‘green account’’, detailing signifi-
cant consumption of energy, water, and raw materials. Also, the types and quantities of
pollutants discharged into the air, water, or soil, as well as those included in products or
waste, are to be disclosed.
While there is no requirement that the ‘‘green account’’ be subject to attest, the regula-
tions were amended in 2001 to include the requirement that the report contain a statement
by local authorities indicating whether the information in the green account is consistent
with knowledge possessed by that authority, based on its issuance of permits and control
of the work environment. In legislation introduced in 1989 in Sweden, all operations sites
that require special permits due to the presence of environmental hazards must submit an
annual environmental report to the authorities. The Netherlands, in 1999, began requiring
that companies with substantial environmental impacts produce environmental reports for
both the government and public on identified operating sites. The contents of the govern-
ment report, which are verified by governmental authorities, are specified and include
information on emissions, soil pollution, soil clean up, and the company’s environmental
policy. In contrast, the content specifications for the public report are much less detailed.
The number of companies which voluntarily issue stand-alone reports that include envi-
ronmental performance information has been increasing as has the diversity of the types of
reports issued. Many reporting companies prepare a HSE report; however, in recent years,
companies are also focusing on social issues. In a 2002 survey, KPMG (2002) analyzed the
level of reporting health, safety, social, and/or environmental issues by the top 250 com-
panies in the Global Fortune 500 (GFT 250) and the top 100 companies from 19 countries.
Twenty-three percent of the top 100 companies and 43% of the GFT 250 produced some
type of stand-alone corporate report. As seen in Table 3, most companies prepared an
HSE report. Only 27% and 29% of the top 100 and GFT 250 reports, respectively, had
third-party verification.
2.2.3. Mandated ER within traditional annual reports

Information included in traditional, annual financial reports is mandated by national
governments, accounting standard-setting bodies, and, for public companies, stock exchange
regulatory agencies. In the realm of environmental disclosure, intervention by govern-
mental or profession regulators is necessary since, critical scholars (e.g., Gray & Milne,
2004) argue, voluntary ER will just not work. Since the late 1980s, in a number of coun-
tries worldwide, one or more regulating bodies have issued new rules or amended existing
ones requiring some level of ER in the annual report. Nearly all of this additional disclo-
sure has focused on the impact of environmental issues on a company’s financial results
and position, requiring separate reporting on such items as expenditures for pollution
prevention, clean up, and fines; actual and contingent liabilities for environmental clean
Table 3
Type of stand-alone corporate sustainability reports
Type of report GFT 250 Top 100a
HSE reports 73% 65%
Sustainability reports 14 12
Environmental and social reports 10 11
Social reports 3 12
Source. KPMG (2002).
a
Top 100 companies from 19 countries.
ups from past operations; and assets related to the environment. In addition, some coun-
tries also mandate disclosures on resource consumption and pollutant emissions in annual
reports.
In 1980, the EPA5 spearheaded the passage of the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund,
establishing a program to identify and clean up sites where hazardous substances had been
or might be released into the environment.6 One of the steps associated with cleaning up a
site under the Superfund legislation is the identification of potentially responsible parties
(PRP) who, in most cases, ultimately bear the cost (EPA, 2002a). Staff Accounting Bulletin
(SAB) #92, issued by the Securities and Exchange Commission (SEC) in 1993, and State-
ment of Position (SOP) 96-1, issued by the AICPA in 1996, specifically address the finan-
cial reporting issues associated with Superfund clean up. These directives resulted from
large disparities in the timing of the recognition of liabilities for environmental remedia-
tion and the presentation of these liabilities in financial reports (AICPA, 1996; SEC, 1993).
SOP 96-1 requires that if a company is identified as a PRP at a Superfund site, it must
accrue a liability if it is reasonably estimable. The liability should include the direct cost of
remediation efforts as well as the cost of compensation and benefits of employees who will
devote significant time to the project. The amount of the liability can be discounted for the
time value of money if the timing of the payments can be reliably estimated. Potential
recoveries cannot be used to reduce the liability but can be recognized as assets if they
are deemed probable. Expenses related to the remediation should appear in the operating
section of the income statement. If other PRPs have been identified and the company
believes these other PRPs will be unable to pay their portion of the clean up costs, the
company must include these amounts in its liability. Thus, throughout the remediation
process, the company must continually monitor the financial health of other PRPs.
In addition, for publicly-traded companies in the US, reporting related to environmen-
tal issues within a company’s financial reports is also required by Rule S-K, Items 103 and
303 of the Securities Act of 1933. Item 103 mandates that companies disclose either pend-
ing proceedings or those known to be contemplated by governmental authorities related to
environmental issues (SEC, 2003). Item 303 requires a publicly-traded company to disclose
in the management discussion and analysis section of its annual report instances ‘‘where a
trend, demand, commitment, event or uncertainty is both presently known to management
and reasonable likely to have a material effect on the registrant’s financial condition or
results of operation’’ (SEC, 1989, section B, para 5).
Even with these accounting rules in place, inconsistencies in reporting and disclosure by
US firms still exist. For example, in a 1998 study, the EPA’s Office of Enforcement and
Compliance Assurance found that 74% of companies facing potential environmental fines
in excess of $100,000 do not make the necessary disclosures related to these items in their
SEC filings (Ratner, 2002). Further, in its 2004 study of environmental disclosures within
5
Prior to 1970, the US federal government’s environmental efforts were carried out by a hodge-podge of
departments, bureaus, councils, commissions, and offices. In late 1969, a study, commissioned by the president,
recommended that all federal environmental activities be gathered under a single agency, subsequently the EPA,
with the charge to establish and enforce environmental protection standards, to conduct research into the harmful
effects of pollution and on methods to control it, and to advise the president on new policies for the protection of
the environment (US EPA, 2002b).
6
In 1986, CERCLA was amended by the Superfund Amendments and Reauthorization Act (SARA).
reports filed with the SEC, the US Government Accountability Office (GAO) recom-
mended that the SEC take steps to track more efficiently the results of its reviews of com-
panies’ filings to evaluate current environmental disclosures and to explore superior ways
to utilize EPA data for their improvement.
Given this failure to conform to existing accounting rules, what are the possibilities that
accounting standard-setting bodies will endeavor to insure greater compliance? According
to Dennis Beresford, former chair of the Financial Accounting Standards Board (FASB),
the FASB has not been quick to tackle the question of ER for two reasons. First, during
the last decade, the FASB faced too many pressing issues for it to add ER to its agenda.
Second, the most pressing ‘‘accounting issue’’ related to ER was the disclosure of potential
liabilities associated with environmental clean ups, and the AICPA had already embarked
on a project to examine this issue, resulting in the release of SOP 96-1 (discussed above).
The FASB was happy to let the AICPA take the lead since the AICPA committee included
practitioners who were experts in the area. The FASB reviewed the AICPA recommenda-
tion prior to the issuance of SOP 96-1 and concurred with its conclusions.7
The AICPA, however, envisions an active role for accounting standard setters in the
area of environmentalism. The Joint Task Force on Sustainability Reporting of the
AICPA and the Canadian Institute of Chartered Accountants (CICA) was formed in
2002 to explore issues related to sustainability reporting. The initial focus of the task force
was on greenhouse gas (GHG) emissions, and in late 2003, SOP 03-2, ‘‘Attest Engage-
ments on Greenhouse Gas Emissions Information’’, appeared. SOP 03-2 provides CPAs
with guidance for attest engagements examining and reporting on (1) GHG emissions dur-
ing a compliance year, (2) baseline GHG emissions, and/or (3) GHG emissions reductions
recorded in a registry or involved in a trade or credit. This guidance notes that an attest
engagement on GHG emissions requires technical knowledge in a specialized field other
than accounting and auditing. While the CPA may use the work of a specialist with the
requisite specialized knowledge, the CPA must possess sufficient knowledge to evaluate
the specialist’s work. According to Beth Schneider, chair of the joint task force, any poten-
tial SOP on attestation of sustainability reporting lies in the more distant future, if and
when suitable criteria for sustainability reporting exist.8
In 1989, Norway became the first European nation to enact legislation requiring disclo-
sure of environmental matters in annual reports. Currently, a company that is subject to
the Annual Accounts Act is required to include in its directors’ report disclosures on the
environmental impact of the company’s operations and the use and disposal of its prod-
ucts. Additionally, firms are to report those measures in place to prevent or reduce nega-
tive environmental impact, as well as their energy and raw materials usage.
In 1996, based on a recommendation by a committee of the Swedish government, the
Swedish Accounting Act was amended to include reporting on environmental impact by
companies whose operations pose serious environmental threats. Beginning in 1998, all
Spanish companies had to include specific environmental information in the footnotes
to their annual reports. The environmental disclosures included accounting policies related
to the recognition and valuation of environmental current expenses, assets, and liabilities;
7
The authors wish to thank Professor Beresford, now at the University of Georgia, who communicated his
thoughts to us on this subject via e-mail.
8
The authors are grateful to Beth Schneider who kept us informed via telephone communication of the
progress of the joint committee throughout 2003 and 2004.
current expenditures on projects related to environmental protection and energy conserva-

tion; provisions to cover risks and expenses associated with environmental action; and
environmental contingent liabilities. In a study examining the 1999 annual reports of 70
companies, Larrinaga, Carrasco, Correa, Llena, and Moneva (2002) found that nearly
80% of the companies did not include any of the mandatory disclosures, and that those
which did disclose, most frequently reported only on the environmental provisions.
In May 2001, the EC published a recommendation encouraging member states to pro-
mote increased levels of environmental disclosures within conventional annual reports.
The recommendation addressed issues of recognition and measurement of environmental
liabilities, assets, expenses, and contingent liabilities. Disclosures regarding the extent to
which environmental protection formed an integral part of a company’s policies and its
environmental protection improvements, resource consumption, and emissions were also
encouraged. A 2004 study to assess the extent of implementation of the EC recommenda-
tion concludes that legislation in most member countries wholly or partially met the rec-
ognition and measurement portion of the recommendation (PwC, 2004). By contrast, the
study found that only Denmark, Finland, France, and Portugal had introduced legislation
related to the additional disclosure portion of the recommendation. (As noted above, Nor-
way, Sweden, and Spain had legislation in place requiring some disclosure beyond recog-
nition and measurement before the EC recommendation.)
The Danish Financial Statement Act, effective for annual reports beginning in 2002,
requires that each listed company, as well as some other companies, include in its manage-
ment review section a description of the company’s impact on the environment and mea-
sures undertaken for the prevention, reduction, or remediation of environmental damage.
The exact form and nature of the disclosures are intentionally vague with the expectation
that a company’s management, in its assessment of the need for and extent of environmen-
tal disclosures, will take into consideration that Danish annual reports serve the public
interest, as well as investor interests. Further, beginning in 2004, companies must disclose
certain non-financial information including information related to environmental matters
so that annual report users may gain an understanding of the company’s development,
performance, or position in its industry (Hibbit & Collison, 2004; PwC, 2004).
A national accounting standard applicable to all companies implementing the EC rec-
ommendation was issued in 2002 by the standard-setting body in Portugal. In Finland in
2003 similarly, a general statement on the treatment of environmental issues in a com-
pany’s financial statements was issued in response to the EC recommendation. The state-
ment applies to all companies whose financial position and results are impacted by
environmental issues (PwC, 2004).
In 2001, as part of a law passed by the French legislature to update France’s company
law framework, corporations listed on the premier marché are required to include disclo-
sures on environmental issues, effective 2002. The required disclosures include ‘‘emissions
to air, water and ground; consumption of energy, water, and raw materials; implementa-
tion of management systems; and compliance with mainstream standards of practice or
certification’’ (Arese, 2002).
In May 2005, the UK Accounting Standards Board issued Reporting Standard 1: Oper-
ating and Financial Review (OFR). The standard requires the preparation by company
management of an OFR as part of its annual report and accounts beginning with fiscal
years ending on or after April 1, 2005. The standard requires the inclusion of information
about environmental matters where appropriate. The implementation guide accompanying
the standard acknowledges that the appropriate level of disclosure on environmental mat-
ters is industry-specific, but suggests that, minimally, all companies face issues associated
with water and energy use, waste, and climate change (ASB UK, 2005).
The Modernisation Directive 2003/51/EC mandates that by 2005 all European Union
(EU) member states require listed companies to prepare their financial reports in accor-
dance with international accounting standards. The Directive notes that the annual report
must include a ‘‘fair review’’ of the business, and that this review should include, where
appropriate, an analysis of environmental aspects, consistent with the EC’s 2001 recom-
mendation (discussed above).
Australia also has recently passed legislation related to mandatory environmental
reporting within annual reports. Currently, all companies listed on the Australian Stock
Exchange that are subject to environmental regulation are required by law to disclose their
compliance to the regulations in their annual directors’ reports (Burritt, 2002). Meanwhile,
Milne and his co-authors (Chapman & Milne, 2004; Milne, Owen, & Tilt, 2001; Milne,
Tregidga, & Walton, 2003) have kept us apprised of a corresponding lack of progress in
New Zealand.
In summary, the level of mandatory environmental disclosures in traditional annual
reports has increased dramatically in the past ten years. In the US, disclosure requirements
focus primarily on the impact of environmental issues on the financial results and position
of the company, while regulations in many European countries and those mandated by the
EU require disclosure on resource consumption and environmental policy in addition to
the financial disclosures.
2.2.4. Non-governmental organizations and ER initiatives

A number of non-governmental and, in some cases, member-based organizations and
initiatives exist worldwide that require or encourage ER by companies. The Coalition
for Environmentally Responsible Economies (CERES) is a US-based coalition, formed
in 1988, whose goal is to provide a forum for discussion and action on environmental
issues. The group includes environmental organizations, socially responsible investors
and analysts, public interest and community groups, and over 60 companies (including
13 Fortune 500 firms) that have endorsed the ‘‘CERES Principles’’, a ten-point code of
conduct on environmentally responsible behavior. Companies endorsing these principles
submit an annual report that adheres to the CERES Report Form, detailing their progress
toward the environmental goals embodied in the CERES Principles (CERES, 2002).
Established in June 1993 by the EC, the Eco-Management and Audit Scheme (EMAS)
is a voluntary program which provides a management tool for organizations to evaluate,
report, and improve their environmental performance. Initially, the program was available
only to manufacturing companies operating in the EU and the European Economic Area.
To receive EMAS registration, an organization must conduct an environmental review,
establish an effective environmental management system (EMS), carry out an environmen-
tal audit, and prepare a statement of environmental performance outlining its progress on
previously established objectives. The review, EMS, audit, and statement must be
approved by an accredited EMAS verifier (EUROPA, 2003).
In 1996, the International Organization for Standardization (IOS) issued the first of the
ISO 14000 family of standards. The IOS is a worldwide federation that establishes stan-
dards to facilitate the international exchange of goods and services. In 1987, the IOS issued
ISO 9000, a standard primarily concerned with quality management. ISO 9000 compliance
has become a prerequisite worldwide for establishing business relationships. ISO 14000 is
primarily concerned with environmental management, with ISO 14001 addressing envi-
ronment management systems specifically. It remains to be seen whether ISO 14000 stan-
dards will become as well-established for business as is ISO 9000.
AccountAbility, founded in 1996, is an international, member-based organization that
focuses on providing support to encourage social responsibility. In 1999, the organization
launched the AA1000 Framework, which provides guidance on engaging stakeholders in
the process of planning, accounting, auditing, and reporting on sustainability issues. Build-
ing on the AA1000 Framework and recognizing the need for assurance related to social per-
formance disclosures to improve credibility, AccountAbility issued the AA1000S
Assurance Standards in 2003. The standards, the first of their kind worldwide, require
assurance providers to consider to what extent the reporting entity demonstrates compli-
ance in the areas of materiality, completeness, responsiveness, evidence, and credibility.
2.2.5. Standards for ER

Some in the environmental arena suggest that mandatory reporting requirements at this
stage in the development of ER may be premature (Burritt, 2002; Nyquist, 2003). They
argue that while government regulation would certainly increase the level of reporting,
it would most likely serve to stifle creativity in the development of ER best practices.
ER standards are more difficult to develop than standards for financial reporting in that
there are so many stakeholder groups that the information needs are more diverse. In the
current environment where most ER is voluntary, companies are able to experiment with
format and content with a goal of providing information to satisfy the greatest number of
stakeholders. Further, multiple reporting formats allow for the identification of best prac-
tices which could ultimately serve as useful input for the development of standards.
Others have long argued (e.g., Beets & Souther, 1999) that the amount of ER by com-
panies worldwide has reached a level where standardization is necessary in order for these
reports to be credible and comparable. If ER is voluntary and companies are permitted to
select what they report, some companies may opt to report only the ‘‘good news’’, and
firms that present the good with the bad will be disadvantaged. The introduction of stan-
dards into a system of voluntary reporting would serve to level the playing field. Further,
without standards, verification of ER is problematic. The development of standards at an
international level, however, tends to be a slow process as evidenced by the frustrations of
the International Accounting Standards Board in its attempts to achieve agreement on its
financial reporting standards.
The initial establishment of financial accounting standards began at a time when most
business activities did not cross national boundaries. Thus, it was natural that accounting
standards were highly country-specific. The business environment has changed dramati-
cally, and most companies now participate in the global marketplace. As a result, interna-
tional financial accounting standards are being developed, albeit slowly, and, to some
degree, are being accepted worldwide. Is it unrealistic to hope that similar possibilities
for ER may some day eventuate?
2.3. Green accounting and the bottom line
In the US, little ER is done beyond that which is specifically required by the EPA’s reg-
ulatory enactments and by the limited scope of standards provided by professional
accounting bodies. It is not difficult to understand why. Many managers perceive that vol-
untary expenditures made on environmental conservation and ER beyond that which is
mandatory will not be cost-beneficial and will leave environmentally responsible firms
at a competitive disadvantage (Epstein & Birchard, 1999). However, this perception is
reflective of a short-term, financial accounting orientation. Admittedly, the price tag for
voluntary action, irrespective of its positioning on an environmental continuum, is high
and would cause net income to suffer accordingly. In today’s world, with stockholder
focus on earnings per share and with managerial bonuses often based on the bottom line,
environmentalism is a tough sell. It is just as clear, however, that long-term costs for pre-
serving the environment, whether mandated by existing regulation or anticipated for the
future, should be allocated to current products if firms hope to achieve accurate pricing
and product line decision making (Epstein, 1996).
The attitudes of current and potential stockholders are central in a business environ-
ment where the ethos is to place stockholders’ interests above societal needs. Burritt
and Welch (1997, p. 542), citing Gray, Bebbington, and Walters (1993), speak of the ‘‘awe-
some indifference’’ of financial markets to environmental issues. Some academic research,
however, suggests that the magnitude of stockholder apathy may be overstated. Survey
data show that investors want information on firms’ environmental performance, even
though it does not impact their decision making to the extent that traditional financial
measures do (Deegan & Rankin, 1997; Hughes, Anderson, & Golden, 2001). Solomon
(2000) demonstrates with empirical testing that stakeholders such as employees, legisla-
tors, and regulators are more concerned about environmental issues than shareholders
and potential investors.
There are investors, however, whose investment dollars go into the securities of envi-
ronmentally aware companies. Sometimes these investors are participants in investment
clubs (e.g., church groups), pension plans, and mutual funds whose investment deci-
sions are linked to corporate positions on social and environmental issues. Epstein
and Birchard (1999) note that the number of mutual funds with social and/or environ-
mental criteria in their investment strategies tripled from 1995 to 1997. One potent,
international amalgamation of perceived ethical companies is the Dow Jones Sustain-
ability Group Index (DJSGI), a group of 2,000 companies, in 64 industries, from 34
countries, collectively listed since 1999. As Knoepfel (2001) points out, the DJSGI
has outperformed the general stock market (see also, Adams et al., 2004). However,
one wonders whether the success of the DJSGI is linked to the environmental aware-
ness of its members or whether ethical behavior is a function of better managed com-
panies that would attract investment irrespective of their individual commitment to
social issues.
The Alliance for Environmental Innovations concludes, after reviewing 70 research
studies, that companies which outperform their competition environmentally also did so
in terms of stock market returns (Meyer, 2000). The reciprocal (e.g., environmentally
strong firms underperforming their competition) was never found to be true. It is well
known that environmental disasters can precipitate substantial losses of capitalization
for their perpetrators. Examples include the stock market performance of Exxon in the
aftermath of the Exxon Valdez oil spill and Union Carbide following the Bhopal, India
disaster. Firms with low pollution control rankings typically suffer negative returns the
day this information becomes publicly available (Deegan & Rankin, 1997). Meanwhile,
Thomas (2001) finds excess positive stock market returns for firms upon the adoption
of an environmental policy and significantly negative returns for companies upon the
announcement of their prosecution by environmental agencies.
Robert Jonardi, formerly the US Director of Environmental Assurance Services for
Deloitte & Touche LLP, informed us of his knowledge that one prominent Fortune
500 company with a solid reputation for social and environmental responsibility saw
a significant payback in its ability to recruit its most favored candidates for entry-level
positions on the basis of this reputation. The company recognizes that the current gen-
eration of college graduates is environmentally aware and that attracting several of its
top recruits goes a long way toward defraying the costs of doing the ethically right
thing. Meyer (2000) confirms that this company is not alone in its forward thinking
in that environ-
mental responsibility pays dividends in the recruitment process.
Ultimately, it might be argued that environmentalism is good for business if stock-
holders view it as a proxy for good management. A proactive environmental policy con-
notes a management team with a long-term vision and an appreciation for the
complexities of accurate product costing. It also reflects good risk management which
can pay rich dividends in terms of lower insurance costs and a lower cost of capital
(Aston, 2002; Thomas, 2001). Substantial economic benefits can accrue to firms that
bring their pollution under control through the reduction of waste and energy usage.
Effective environmental awareness and reporting can also contribute to reputation build-
ing, although this feature can cut both ways if the firm uses its reporting to legitimize
questionable practices. In these post-Enron days, ER serves as a mechanism by which
a company enhances its visibility, whether it is to stockholders or to less immediate
stakeholders, such as the community in which it operates. Perhaps most importantly,
an honest environmental program identifies an ethical corporation (Epstein & Birchard,
1999).
2.4. The role of the profession in green accounting
Gray and Milne (2004) characterize current ER as virtually meaningless. In their esti-
mation, stand-alone reports are mere glossy, propaganda tools; they are too simplistic
and devoid of content. Adams et al. (2004, p. 25) second that judgment but do hold
out as exceptions those companies (e.g., the chemical industry) that have a ‘‘publicly
observable environment impact’’. We think that the future of ER can be viewed more
optimistically as voiced by Medley’s (1997, p. 599) description of how the roles of three
branches of accounting professionals might some day combine to alleviate this disturb-
ing situation:
For the financial accountant, the vision is to understand environmental assets, liabil-
ities and contingencies, and to be able to identify and report them accurately, using
some standardized process. For the management accountant, the vision is a full
understanding of all the environmental costs and benefits within an organization,
from both an operational and product perspective. This would allow rational deci-
sions to be made about the way that the organization should develop in the future.
For the auditor, the vision is an understanding of environmental management con-
trols, processes and systems, which will enable an auditor to provide a true verifica-
tion of environmental accounts.
2.4.1. Public accountancy

While it is true that the volume of ER, both in terms of stand-alone reports and as com-
ponents of annual reports, has increased in recent years, public accountancy in the US and
many parts of the world has been only tangentially engaged. In three significant ways, the
profession has failed to maximize its potential for leadership – sufficient expertise to par-
ticipate in environmental partnerships remains undeveloped; the attestation to environ-
mental reports is still not regarded solely as an accountant’s function; and official
standards with respect to most ER issues and/or verification engagements continue to
be lacking (Beets & Souther, 1999).
Engineering firms are more directly involved than public accountants in many pro-
cesses related to ER. Consulting engineers are needed to advise firms on how to be in
conformity with regulations. However, these same engineering firms are more fre-
quently preferred for verification because of their greater expertise with the nuts and
bolts of environmental compliance, their lower fees, and their need not to conform
to any required attestation standards (Beets & Souther, 1999). However, there are very
definite independence issues involved when engineering firms advise clients as to what
they need to do to achieve compliance with regulations and then provide assurance that
they have done so.
The Modernisation Directive of the EU and the OFR standard in the UK (both dis-
cussed above) mandate environmental disclosures, albeit unspecified as to content, in
annual reports. These annual reports are required to be subjected to attestation by pub-
lic accountants. As more standard-setting bodies worldwide require the inclusion of
environmental performance information in annual reports, public accountants will need
to develop the necessary expertise to audit these disclosures. Further, in the US, the
recent GHG emissions SOP provides guidance as to how measurement of emission is
to be audited and, as noted above, acknowledges that practitioners must possess spe-
cialized knowledge beyond accounting and auditing to participate in these types of
engagements.
The AICPA’s Committee on Assurance Services suggested in its 1997 report that
accountants needed to think outside the box. In recent years, major public accounting
firms have advertised themselves as ‘‘all-purpose business advisors’’. It would seem that
an expansion of operations into ER would be a natural way in which to ‘‘grow’’ the busi-
ness. At this point in time, however, even the largest firms do not have sufficient expertise
on staff to respond to a substantial increase in demand either for assurance services in the
environmental area or for advising clients as to the information systems required to collect
ER data. The profession has demonstrated in the past (e.g., mergers and acquisitions, lit-
igation support) that it is able to move quickly in hiring in the expertise needed to respond
to demand. The recent expansion of ER requirements abroad will force global accounting
firms to expand operations in this area. When the demands on US-based public account-
ing firms to participate in the Sarbanes-Oxley compliance of their clients diminish, the
development of the required expertise should occur.
An effort to increase public accounting’s share of the ER business would be immeasur-
ably enhanced if external verification becomes required as it is with financial statements.
However, professional accounting organizations and environmental activist groups are
divided on the issue as to whether such validation should be made mandatory in the first
place and, if so, the appropriate professionals to provide the service. The Institute of Char-
tered Accountants of England and Wales and the AICPA have been supportive, as has the
European Federation of Financial Analysts Societies (1994). However, CERES continues

to be satisfied with an annual self-evaluation from its members, while EMAS is content to
limit external validation to certain specific sites. (See Solomon, 2000 for a fuller discussion
of the external validation question.)
Support for external validation is gaining strength among external stakeholders, but
much less so among internal constituents. It is not difficult to understand the disparity.
Verification by internal rather than public auditors would save professional fees. At the
same time, increasing the volume of voluntary environmental disclosures, in the absence
of standards promulgated by regulatory bodies, could lead to litigation, increased regula-
tory scrutiny, and/or an increased demand for further disclosures (Beets & Souther, 1999).
Wallage (2000) makes a strong case in support of the potential for large, financial
accounting firms to develop the expertise needed for environmental assurance. He noted
the following advantages for the task:
Public accounting is organized into large, multidisciplinary firms which could comfort-
ably add competencies without sacrificing their cultures.
Public accounting, on occasions when it has not expanded its expertise internally, has
historically partnered with other firms in joint ventures.
The evidence gathering techniques necessary for ER assurance parallel accounting’s
auditing methodology.
Accounting practitioners are guided by strict independence rules.
Public accountants have developed expertise in the processes of assurance.
Public accounting has the backing of well-developed and influential professional
organizations.
Notwithstanding these seeming advantages, Solomon’s (2000) survey reveals very little
support for accountants being the sole providers of ER verification. Were accountants to
be pressed into greater service in ER, it would either be in partnership with engineering/
environmental consulting firms or with a wide internal expansion of appropriate
expertise.
Many in the ER arena call for the establishment of standards (e.g., Beets & Souther,
1999; Epstein, 1996; Kolk, Walhain, & van de Wateringen, 2001; Larsen, 2000; Li, 2001;
Wallage, 2000). Many of these supporters specify international standard setting in order
to accomplish the comparability of ER worldwide. Theoretically, at least, international
standards would be desirable because current ER varies so markedly from country to coun-
try based upon a panoply of factors such as history, geography, political systems, business
and legal environments, structure of the accounting profession, etc. (Buhr & Freedman,
2001). Even two countries as seemingly homogeneous as the US and Canada are signifi-
cantly different in approach on as basic an issue as which environmental aspects should
be disclosed voluntarily and which should be mandatory.
In today’s business climate, where the ethical priorities of environmentalism are not the
consensus, voluntary accountability will not be successful in either the short- or long-term,
thereby making standard setting all the more imperative. Moreover, even voluntary ER in
the absence of standard specificity is problematic because auditors and clients would need
to reach agreement as to verification criteria. Wallage (2000) claims that the situation
would widen the ‘‘expectations gap’’ in that the public would come to rely on the verifica-
tion of such a report as a guarantee of ethical behavior, typically far transcending the
auditor’s intent. External validation of an environmental report without defining stan-

dards would create an independence dilemma.
2.4.2. Managerial accountancy

Epstein (1996) and Milne (1996) have written extensively about the negative impact on
decision making and product costing when managers fail to take into account environ-
mental costs. A first step along the path toward improved ER lies with the education of
managerial accountants and an effort on their part to inform upper management of
ER’s importance and benefits. Many of the most significant forward strides internationally
in environmental awareness have come in industrial sectors, such as chemicals, paper, and
electronics (Kolk et al., 2001; Krut & Moretz, 2000). To be sure, these sectors are poten-
tially the worst environmental polluters, but the development of environmental codes
across international boundaries is reflective of strong managerial associations. Ultimately,
however, corporate managers are going to be one of the last groups to buy into environ-
mentalism given the current focus on bottom-line economic income and the enhancement
of shareholder wealth.
Management accountants, in many instances, can provide a great service to their
companies if they are able to influence upper management to embrace environmental-
ism. While most cost accounting textbooks do not even address environmental issues,
Hansen and Mowen (2003) have constructed a model for inducing action. They suggest
the preparation of a report in which costs are presented in four categories – environ-
mental prevention costs (those aimed at preventing pollution and waste), environmental
detection costs (those associated with determining compliance with regulations), envi-
ronmental internal failure costs (those incurred in preventing pollution and waste from
being discharged into the environment), and environmental external failure costs (those
incurred in cleaning the environment if pollutants are released). This latter cost cate-
gory is itself divided into two components – costs that the company will have to bear
(e.g., clean ups mandated by Superfund) and costs that are passed on to society (e.g.,
acid rain).
The costs classified above are then transferred to what might be called an environmen-
tal income statement where they are compared to the estimated annual benefits of
expanded environmental action (‘‘eco-efficiency’’). This document would communicate a
number of vital messages to upper management. First, it would reveal the savings forth-
coming from reduced waste, fewer materials required, and less energy utilized. Second, it
would show decision makers that the initial high price tag on prevention could be
recouped by the benefits in a reasonably short period of time. Finally, even if management
is not convinced to undertake the investment, either in response to economic or ethical
arguments, it should recognize that environmental costs are so substantial that they must
be factored into product pricing. For a company with relatively few product lines or ser-
vices, an allocation of these costs may be done in the traditional ways, based on direct
labor or machine hours. For those with a greater diversity of products, activity-based cost-
ing with its greater variety of cost drivers would better differentiate the product lines with
respect to their environmental impacts.
There is one further piece of ammunition available to management accountants trying
to provoke a greater proactivity on environmental issues. In the early 1990s, Kaplan and
Norton (1992) articulated the concept of the ‘‘balanced scorecard’’, wherein a company’s
performance is to be measured across four parameters. More recently, Kaplan and Norton
(1996) have introduced environmentalism as a fifth category within the new managerial
philosophy known popularly as ‘‘total quality management’’.
In summary, the advancement of ER qualitatively and quantitatively necessitates
partnering between public and managerial accountants and their participation on envi-
ronmental teams with expertise beyond what accountants have traditionally possessed.
Laughlin and Varangu (1991) write that accountants cannot hope to do it alone, but
must accept a role as part of a multidisciplinary team that would include engineers, sci-
entists, futurists, etc. Krut and Moretz (2000), likewise urging a joint-venturing
approach, cited British Petroleum as an example of one company that retains both a
major public accounting firm for attestation and a consulting firm to solicit feedback
on its environmental performance.
2.5. Some concluding remarks
It is quite likely that accounting’s recognition of its role in making a meaningful con-
tribution to environmental solutions may be a generation away. A vision for the future
is one in which accountants and other business leaders embrace environmentalism. More
environmentally aware public accountants will come to influence the managers of client
firms to accept responsibility for a greater participation in a worldwide clean up. Internal
accountants, working in concert with environmental engineers, will be schooled in the
methodologies required for environmental accountability and the statistical techniques
needed to measure compliance with ER regulations. Corporate boards of directors
and/or audit committees will be staffed by individuals committed to the TBL concept
where traditional economic measures coexist with social and environmental consider-
ations. The ‘‘balanced score card’’ will come to incorporate measures of environmental
responsibility.
The times have brought accountants’ ethics into question, a threatening development
for a profession whose major product is based on trust. One way in which accountancy
may re-establish its reputation is to serve once again as the moral conscience of business
by moving industry in the direction of ethical behavior with respect to the environment.
The contemporary environment in the US creates some interesting possibilities and
unanswered questions for ER and accountancy’s role. On the positive side, the public’s
outrage at Enron and other fiascos will generate a demand for greater accountability
and a corresponding insistence that businesses pay more attention to societal needs. If
so, ER might be viewed as sufficiently important to the public interest and/or society’s def-
inition of corporate accountability that the public will demand action. Negatively, the
increased accounting fees associated with Sarbanes-Oxley, coupled with the possibility
that deeper fraud investigation will be demanded, will exhaust corporate dollars that
might have been channeled into expanded ER. Likewise, the wide expansion of accounting
services mandated by Sarbanes-Oxley may leave those firms with SEC clients stretched
thin in terms of personnel that expansion into ER assurance is unrealistic, at least in
the short run.
Notwithstanding the current shortage of accountants in the US, what Medley (1997)
wrote several years ago has even greater potential today in both the US and around the
globe. There exists the opportunity for the accounting profession to demonstrate that it
is on top of contemporary issues. It is up to the profession to grab the ball that this
new opportunity provides and run with it.
Acknowledgements
The authors acknowledge with gratitude the substantial contribution of Robert Jonar-
di, formerly with Deloitte & Touche LLP and now founder/principal of Phoenix Environ-
mental Strategy, and Beth Schneider, a Director in Quality Assurance with Deloitte &
Touche LLP. Valuable suggestions for improvement of previous drafts were forthcoming
from Jim Rebele, editor, and two anonymous JAE reviewers. Funding support for this
project was provided by the KPMG Professorship and the Jack Wasmer Fellowship at
John Carroll University.
Appendix A. Acronyms
AICPA American Institute of Certified Public Accountants

ASB Accounting Standards Board
CERES Coalition for Environmentally Responsible Economies
CICA Canadian Institute of Chartered Accountants
EA Environmental accounting
EC European Commission
EMAS Eco-Management and Audit Scheme
EMS Environmental management system
EPA Environmental Protection Agency
ER Environmental reporting
EU European Union
FASB Financial Accounting Standards Board
GHG Greenhouse gas
HSE Health, safety, and environmental
ICAEW Institute of Chartered Accountants in England and Wales
ISO International Organization for Standardization
OECD Organization for Economic Co-operation and Development
PRP Potentially responsible party
PRTR Pollution Release and Transfer Register
SAB Staff Accounting Bulletin
SEC Securities and Exchange Commission
SOP Statement of Position
TBL Triple bottom line
TRI Toxic Release Inventory
Appendix B. Questions on environmentalism
1. Does the urrent ‘‘Y Generation’’ hold out greater hope for a more proactive stance on
environmental responsibility? What has to be done to generate greater concern? Is
meaningful action 20–30 years in the future, if then?
2. Contrast light and dark green environmentalism. What types of issues determine an
individual’s position on the continuum?
3. To what extent is environmental responsibility an ethical issue?
4. Are you personally concerned, looking at the timeline of environmental reform over
the past 30 years, that the pace has been too slow? Are you convinced that issues such
as global warming, pollution, and other threats constitute an impending ecological
disaster?
5. How would you rate the relative chances of effective environmental reform emanating
from the following interested groups: private action groups (e.g., CERES, Account-
Ability, IOS), organizations of professional accountants (e.g., AICPA, CICA,
ICAEW), national standard setters (e.g., FASB, UK ASB), international standard
setters (e.g., IASB), government (e.g., EPA, EC/EMAS)?
6. What information should a company disclose related to its environmental
performance?
7. What are the advantages and disadvantages of environmental reporting for business
enterprises?
8. One major difference that has been identified between financial and environmental
reporting is the breadth of constituent stakeholders. What groups, with little
interest in financial statements, are vitally impacted by environmental
performance?
9. Has regulatory legislation and standard setting been slower in coming in the US than
in some parts of the world such as Scandinavia, the UK, Europe, and Australia? If so,
do you have any idea why?
10. Contrast the quality and quantity of environmental reporting in the US compared to
other countries mentioned in this primer.
11. Can environmental reporting be effective in the absence of standards? What advanta-
ges and disadvantages might be expected if these standards were to be set
internationally?
12. What are the potential roadblocks to the international development of environmental
reporting standards?
13. What roadblocks must be overcome before CPAs can provide services and assurance
related to environmental reporting?
14. Do you think that you personally would be more likely to invest in or go to work for a
company with a good track record of environmental responsibility? How would you
judge a company’s environmental track record?
15. Will corporate managers ever buy into responsible environmental action if such
action does not prove cost-beneficial as measured by bottom-line net income and
available tax incentives?
16. What is the role of accounting and accountants in finding solutions to ecological
problems? With which groups must they partner in efforts to clean up the
environment?
17. What kind of services can CPAs provide in the sustainability area (see the AICPA’s
website)?
18. What will be the long-tem impact of Sarbanes-Oxley on US environmental reporting?
19. What proposals have been made for the introduction of environmentalism into the
accounting curriculum? Which of these have the best chance of success?
20. Compare the opportunities for environmental education in the US and the
UK. Consider factors such as licensure requirements and educational
philosophies.
21. Report to the class on the Sustainability website (www.sustainability.com).

How would you rate the possibilities of achieving sustainability in the foreseeable
future?
Appendix C. A note on sustainability
As defined previously in the words of the Brundtland Report, sustainability is a goal of

those imbued with a deeper shade of green accounting than the degree of commitment this
primer advocates, at least for the short tem. Sustainability as a concept has been around
for decades, but critical scholars (e.g., Wallage, 2000; Gray et al., 2001) seem agreed that it
continues to be an ‘‘exceptionally demanding notion’’, with no real consensus as to what
full sustainability would entail.
Sustainability has become closely linked to the ‘‘triple bottom line’’ (TBL) reporting ini-
tiative, an approach named by John Elkington in 1994. In point of fact, Elkington had
earlier formed in 1987 a consulting practice called SustainAbility which in 1994 partnered
with the United Nations Environment Programme (UNEP) to provide benchmarking
assistance for ‘‘corporate responsibility and sustainable development’’ (www.
sustainability.com).
In 1997, CERES and UNEP joined forces to create the Global Reporting Initiative
(GRI). The goal of the GRI is to develop a globally accepted set of guidelines for sus-
tainability reporting. In 2000, the GRI released Sustainability Reporting Guidelines
(SRG) which provides a company with a set of measures useful for reporting on its eco-
nomic, environmental, and social performance. Following its release, the SRG was used
by over 110 companies worldwide in developing sustainability reports. In April 2002, the
GRI was formally launched as a permanent, independent, global, standard-setting body
whose mandate is to make sustainability reporting as routine as financial reporting. In
July 2002, the GRI released a new version of the SRG based on input from advocacy,
labor, and governmental organizations and feedback from companies using the 2000
version.
Models are out there to be sure, but few companies have even attempted sustainability
reporting. Chapman and Milne (2004) evaluate New Zealand enterprises based upon a
framework for TBL reporting they provide. The results are disappointing, but the authors
hasten to point out that while elsewhere in the world there are more attempts at compli-
ance with TBL models, the quality is universally poor.
Bebbington and Gray (2001) report the case study of a New Zealand firm engaged in
land-care research that attempted a total sustainability program for all phases of its oper-
ations. Not only did the project fail because it was too costly, but the company found that
theoretically sustainable courses of action were unavailable in practice even if the cost data
could be generated to know what those courses of action might be.
In conclusion, Gray and Milne (2004, p. 76) summarize the difficulty of the transition
from environmental to sustainability reporting:
Unfortunately, the TBL report remains something of a mirage, and will continue to
be so as long as the debate about, and the practice of social and environmental
reporting continue to owe more to rhetoric and ignorance than to practice and
transparency.
Appendix D. Additional readings
Topic References
Environmentalism and higher Gordon (1996, 1998)
education Bebbington (1997)
Sefcik et al. (1997)
Collison et al. (2000, 2001)
Grinnell and Hunt (2000)
Mathews (2001)
Gray and Collison (2002)
Stevenson (2002)
Thomson and Bebbington (2004, 2005)
Case studies Harte and Owen (1991)

Burritt and Welch (1997)
Krut and Moretz (2000)
Larrinaga-Gonzales and
Bebbington (2001)
Deegan, Rankin, and Tobin (2002)
Yuen and Yip (2002)
Chapman and Milne (2004)
Cultural/political/social Buhr and Freedman (2001)

differences in national Karagozoglo (2001)
environmental policies Kolk et al. (2001)
Rahaman, Lawrence, and Roper (2004)
Environmental standard setting Lawrence and Khurana (1997)

and government Mishra, Newman, and Stinson (1997)
Shields and Boer (1997)
Beets and Souther (1999)
Li (2001)
Adams (2004)
Everett (2004)
Ball (2005)
Investor reaction to Cormier and Magnan (1997)

environmental reporting Deegan and Rankin (1997)
Hughes et al. (2001)
Knoepfel (2001)
Thomas (2001)
Aston (2002)
The role of public accountants/ Laughlin and Varangu (1991)

auditors Power (1991)
Medley (1997)
(continued on next page)
Appendix D (continued)
Topic References
Solomon (2000)
Wallage (2000)
Mobus (2005)
Environmentalism and Epstein (1996)

managerialism Milne (1996)
Lober, Bynum, Campbell, and Jacques (1997)
Epstein and Birchard (1999)
Meyer (2000)
Thomas (2001)
Environmentalism and the Isenmann and Lenz (2001, 2002)

internet Shepherd, Abkowitz, and Cohen (2001)
Scott and Jackson (2002)
Sustainability Elkington (1998)

Bebbington and Gray (2001)
Ball (2004)
Henriques and Richardson (2004)
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Teaching and educational note

Keywords: Environmental accounting; Financial accounting; Green accounting

1. An introduction to green accounting

incorporating environmental accounting (EA)2 across the curriculum (Gray, Collison,

1.1. Environmentalism and education

Governments in Europe have encouraged attention to environmentalism through the

suggest a greater inclusion of environmental issues in the accounting curriculum, substan-

1.2. Environmentalism and the research milieu

The acceptability of environmental research is more evident in Europe and Australia/

1.3. Classroom testing

2. Green accounting: a primer

‘‘Green accounting’’ describes the eﬀorts of academicians, accounting standard setters,

2.1. Environmental overview

Currently, very few countries worldwide have any substantial ER requirements.

opportunity to move ER forward by lobbying for the articulation of reporting standards

2.2. Today’s environmental reporting

2.2.1. Pollution release and transfer registers

First ISO 14000 Standard Joint Task Force on

Select company sites in

1969 1980 1987 1993 1997 2001 2005

Fig. 1. Major milestones in the development of external reporting on environmental performance.

2.2.2. Stand-alone corporate reports

2.2.3. Mandated ER within traditional annual reports

current expenditures on projects related to environmental protection and energy conserva-

2.2.4. Non-governmental organizations and ER initiatives

2.2.5. Standards for ER

2.3. Green accounting and the bottom line

2.4. The role of the profession in green accounting

2.4.1. Public accountancy

European Federation of Financial Analysts Societies (1994). However, CERES continues

auditor’s intent. External validation of an environmental report without deﬁning stan-

2.4.2. Managerial accountancy

2.5. Some concluding remarks

AICPA American Institute of Certiﬁed Public Accountants

Appendix B. Questions on environmentalism

21. Report to the class on the Sustainability website (www.sustainability.com).

Appendix C. A note on sustainability

As deﬁned previously in the words of the Brundtland Report, sustainability is a goal of

Appendix D. Additional readings

Case studies Harte and Owen (1991)

Cultural/political/social Buhr and Freedman (2001)

Environmental standard setting Lawrence and Khurana (1997)

Investor reaction to Cormier and Magnan (1997)

The role of public accountants/ Laughlin and Varangu (1991)

Environmentalism and Epstein (1996)

Environmentalism and the Isenmann and Lenz (2001, 2002)

Sustainability Elkington (1998)

AccountAbility. (2003). The AA1000 assurance standard. <http://www.accountability.org.uk> Accessed 11.02.03.

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