UNIVERSITY OF MUMBAI PROJECT REPORT ON STRATEGIC MANAHEMENT ENVIRONMENTAL AUDIT AND ACCOUNTING

BY

Mr. OJAS NITIN NARSALE

M.COM (Part-I) (SEM-II) (Roll No.40)

ACADEMIC YEAR 2015-2016

PROJECT GUIDE Dr. KANCHAN FULMALI

PARLE TILAK VIDYALAYA ASSOCIATION’S

M.L. DAHANUKAR COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE (E)

MUMBAI- 400057

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DECLERATION

I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA ASSOCIATION’S M.L. DAHANUKAR COLLEGE OF COMMERCE of M.COM(Part-I) (SEM-II) (Roll No.40) hereby declare that I have completed this project on ENVIRONMENTAL AUDIT AND ACCOUNTING in the ACADEMIC YEAR 2015-2016. This information submitted is true and original to the best of my knowledge.

(Signature of Student)

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ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project.

I would firstly thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dr. Madhavi Pethe for providing the necessary facilities required for completion of this project.

I even will like to thank our co-ordinator, for the moral support that I received.

I would like to thank our College Library, for providing various books and magazines related to my project.

Finally I proudly thank my Parents and Friends for their support throughout the Project.

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INDEX

No Topic Pages

1 Introduction 5

2 What is Environmental Accounting and Auditing 6

3 An Elegant Contrast 7

4 The Terms 8

5 Systems and Metrics for Sustainability Measurement 9

6 Subfields 10

7 Purpose of environmental auditing 11

8 Environmental auditing practice and procedures 12

9 Environmental Auditing and Environmental Management Systems (EMS) 16

10 Trends/future developments 18

11 Five levels of environmental auditing techniques 20

12 International Organisation of Supreme Audit Institutions (INTOSAI) and Environmental Auditing

23

13 Barriers to environmental auditing 24

14 Methodology 25

15 Environmental Audit and India 33

16 The Benefits of Auditing 36

17 How To Become Environmental Auditor 37

18 Conclusion 40

19 Bibliography 41

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IntroductionCurrently, many policymakers lack information needed to understand the potential

environmental impacts of their decisions, and the economic implications of changes to their

environment and natural resources. In contrast, a wealth of economic information is usually

available about production and income, which policymakers use to understand the state of the

economy, monitor trends, and make projections that inform policy debates. Similarly,

environmental accounts have the potential to provide key information that policymakers can use

to understand the state of the environment, how it is changing over time, and the consequences of

various policy options. This report updates a 1998 Working Group on Environmental Auditing

report on this subject. At the time of that report, environmental accounting was a relatively new

discipline. Since then, international organizations have been working to develop internationally

accepted standards for environmental accounting, and many countries have developed and are

refining their environmental accounts. The international statistical community believes that some

of the methodologies are now well advanced and should be elevated to the level of an

international statistical standard on par with the System of National Accounts. It must be noted,

however, that environmental accounting is still a developing discipline with varying approaches

and some debate. See appendix 1 for a timeline of key events in environmental accounting since

1972.

This section discusses environmental accounting, describing in particular what the practice

entails; how the information derived from it can help countries get a better handle on how to

value their resources; and the benefits of environmental accounting to SAIs. Subsequent sections

discuss the status of international efforts since the 1998 report to develop environmental

accounting standards, the efforts of a number of countries from around the world to develop and

expand their use of environmental accounts, and options for how SAIs can use environmental

accounts in their audit work or be otherwise involved in their country’s environmental

accounting efforts.

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What is Environmental Accounting and Auditing?

Generations ago few people were aware of economics beyond their own jobs and expenses, and

few companies thought beyond the economics of their profit and loss statements. Industries were

neither clean nor green, and gave little consideration to the environmental impact of their

business.

In the late 19th century a handful of men passionate about the natural beauty of the country in

which we live advocated for its protection and appreciation, and the environmental movement

was born and supported by the action of a president who established the National Park System,

and a man by the name of John Muir who mused over the beauty of a valley called Yosemite.

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Those simple actions helped grow an awareness of the value of the world in which we live, and

our obligations to it as stewards. As that awareness grew the public and industry alike began to

see the potential for major environmental problems. This realization brought environmentalism

into the world of business.

Today businesses face a ladder of environmental regulations and industries from manufacturing

to technology must now consider their ecologic and social impact. Businesses today are required

to consider their larger footprint, and the smartest of those businesses learn how to do it in away

that is not only ecologically and socially responsible, but also economically feasible and

financially beneficial.

Financial health and profitability seldom happen by accident, and without proper planning and

foresight, navigating environmental legislation and social reporting could drain a business dry.

Environmental and social accounting grew out of an imperative to balance a company’s financial

health with its broader obligations.

An Elegant ContrastWhile the fast-paced, hardworking world of business and industry may seem at odds with the

typical image of environmentalism; the concepts are actually uniquely compatible. Consider the

terms “environmental accounting,” “sustainability accounting” or “social accounting” and

replace the words environmental, sustainability or social with the word “longevity” - and the

concept crystallizes as a business imperative.

While entrepreneurs may not know the life span of the businesses they start, they certainly don’t

plan for imminent extinction. The economics of sustainability, renewable resources, a robust

workforce and global opportunity are essential to businesses that plan for growth. Raw materials

are finite, skilled employees are assets, and fines for unsound environmental practices can eat

away profit margins in a single audit.

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The Terms Environmental Accounting – Environmental accounting is the practice of incorporating

principles of environmental management and conservation into reporting practices and

cost/benefit analyses. Environmental accounting allows a business to see the impact of

ecologically sustainable practices in everything from their supply chain to facility

expansion. It allows accountants to report on the economic impact of those decisions to

stakeholders so as to allow for proactive decision making about processes that

simultaneously meet environmental regulations while adding to the bottom line.

Consumer sophistication with regard to environmentalism and the negative impact of

non-renewable practices creates another dimension of accountability. Businesses that can

point to the integration of environmental management in their business practices have a

leg up in the public relations sphere.

Sustainability Accounting and Measurement – Sustainability is the principle of

engaging in practices that will not deplete a resource, and sustainability accounting and

measurement is to engage in practices that allow a business to measure and assess the

environmental impact of its activities. Sustainability measurement is a quantitative basis

for management of sustainability practices. When a business makes a decision to use

green packaging (a sustainable practice), it needs to know how that increased cost is

offset with decreased waste disposal costs or increased consumer interest, in addition to

the environmental implications (sustainability measurement). Sustainability measurement

and accounting can also be applied to areas of social impact, especially for those

businesses engaging in international commerce where materials and workforce

considerations become a matter of public scrutiny. The United Nations launched an

educational program expressly for promoting sustainability practices, which was aptly

named Sustainable Consumption and Production.This program promotes resource

efficiency while creating opportunity by way of jobs in new and expanding markets.

Social accounting – The new kid on the block, social accounting has only been around

since the 1960’s. Social accounting is the collection of information about an

organization’s interaction with all of its stakeholders. Social accounting identifies

stakeholders broadly, defining them as any person or entity that is influenced by the

organization. This broad definition creates an accounting and reporting strategy that

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incorporates a business operation’s impact on the workforce, the local community, the

business community and so on, and in turn their impact on the business. Where

traditional accounting might not consider the positive financial influence of a city’s

satisfaction with a business as an employer, social accounting will identify that influence

and attempt to measure the financial impact that accompanies community support.

Systems and Metrics for Sustainability Measurement

There are a number of systems of measurement that can be employed on an organizational level

to develop metrics for analyzing the impact of choices made in response to environmental or

social imperatives. Audit and measurement are the backbone of environmental and social

accounting, so adopting proven strategies to learn essential metrics will assist accountants with

effective analysis.

GRI – The Global Reporting Initiative is an international organization based in Amsterdam that

developed a sustainability reporting framework. The framework establishes performance

indictors for measurement of social, environmental and economic impact through business

decision making. Reports based on the GRI Framework can be used as internal measures or as a

means to demonstrate compliance with laws. A business that joins the alliance or participates in

the training process applies the framework’s measurement principles to its accounting practices.

ISO 14000 – Often considered the gold standard for measurement and standardization, The

International Organization for Standardization has evolved from 9000 to 10000 to 14000. The

14000 series includes protocols that assist with development of environmental controls and

measurement systems.

Subfields9

Environmental accounting is organized in three sub-disciplines: global, national, and corporate environmental accounting, respectively. Corporate environmental accounting can be further sub-divided into environmental management accounting and environmental financial accounting.

Global environmental accounting is an accounting methodology that deals areas includes energetics, ecology and economics at a worldwide level.

National environmental accounting is an accounting approach that deals with economics on a country's level.

Internationally, environmental accounting has been formalised into the System of Integrated Environmental and Economic Accounting, known as SEEA. SEEA grows out of the System of National Accounts. The SEEA records the flows of raw materials (water, energy, minerals, wood, etc.) from the environment to the economy, the exchanges of these materials within the economy and the returns of wastes and pollutants to the environment. Also recorded are the prices or shadow prices for these materials as are environment protection expenditures. SEEA is used by 49 countries around the world.

Corporate environmental accounting focuses on the cost structure and environmental performance of a company. 

Environmental management accounting focuses on making internal business strategy decisions. It can be defined as:“the identification, collection, analysis, and use of two types of information for internal decision making: Physical information on the use, flows and fates of energy, water and materials (including wastes) and Monetary information on environmentally related costs, earnings and savings.”  As part of an environmental management accounting project in the State of Victoria, Australia, four case studies were undertaken in 2002 involving a school (Methodist Ladies College, Perth), plastics manufacturing company (Cormack Manufacturing Pty Ltd, Sydney), provider of office services (a service division of AMP, Australia wide) and wool processing (GH Michell & Sons Pty Ltd, Adelaide). Four major accounting professionals and firms were involved in the project; KPMG (Melbourne), Price Waterhouse Coopers(Sydney), Professor Craig Deegan, RMIT University (Melbourne) and BDO Consultants Pty Ltd (Perth). In February 2003, John Thwaites, The Victorian Minister for the Environment launched the report which summarised the results of the studies.

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These studies were supported by the Department of Environment and Heritage of the Australian Federal Government, and appear to have applied some of the principles outlined in the United Nations Division for Sustainable Development publication, Environmental Management Accounting Procedures and Principles (2001).

Environmental financial accounting is used to provide information needed by external stakeholders on a company’s financial performance. This type of accounting allows companies to prepare financial reports for investors, lenders and other interested parties.

Purpose of environmental auditingThere are numerous types and purpose of audits. Humphrey and Hadley (2000) basically divided

environmental auditing into three types of corporate audit:

* Compliance audits e.g. regulatory, EMS and internal standards;

* Single issue audits e.g. waste minimisation, transport; and

* Liability audits e.g. pre-acquisition, divestment and insurance.

Paramasivan (2002) categorised environmental auditing as cyclical auditing programmes and

single audits. He also divided objectives into three broad groups:

• Compliance with regulatory codes, for example legal conformity;

• Assistance in acquisition and disposal valuations, for example sale and acquisition of facility;

• Corporate development towards green missions, for example monitoring of corporate

environmental policy and procedures discussed more detailed objectives of an environmental

audit, including:

1. Verifying compliance

Verifying compliance with standards or best available techniques.

2. Identifying problems

Detecting any leakage, spills or other such problems with the operations and processes.

3. Formulating environmental policy

Formulating the organisation’s environmental policy if there is no existing policy.

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4. Measuring environmental impact

Measuring the environmental impact of each and every process and operation on the air,

water, soil, worker health and safety and society at large.

5. Measuring performance

Measuring the environmental performance of an organisation against best practices.

6. Confirming environmental management system effectiveness

Giving an indication of the effectiveness of the system and suggestions for improvement.

7. Providing a database

Providing a database for corrective action and future plans.

8. Developing the company’s environmental strategy

Enabling management to develop its environmental strategy for moving towards a greener

corporate and performance culture.

9. Communication

Communicating its environmental performance to its stakeholders though reporting will

enhance the image of the company.

Environmental auditing practice and procedures

The more specific type of environmental audit involves the collection, collation, analysis,

interpretation, and presentation of information which is used to:

assess performance against a set of requirements or targets, related to specific issues;

evaluate compliance with environmental legislation and corporate policies; and

measure performance against the requirements of an environmental management system

standard.

The systematic, periodic, documented and objective aspects of environmental auditing are

fundamental to effectiveness. It is fast developing as an important and powerful tool in the

corporate environmental assessment and management toolkit. The requirement periodically to

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repeat audits ensures that there is an ongoing commitment and a systematic process to improve

environmental performance (Grayson, 1992). The scope of repeat audits can also broaden to

become more comprehensive as experience and expertise are accrued or as new issues or

legislation emerge.

Sometimes the terms assessment, appraisal, monitoring or review have been used

interchangeably with audit. Audit implies detailed statistical verification with a periodic cycle

between audits. An assessment or review is usually a one-off event which is carried out in less

detail and with less direct checking of data.

Environmental Reviews provide a baseline overview of current environmental effects or impacts,

relevant environmental legislation and a statement of existing environmental performance. The

Reviews provide a basis for establishing a management action plan. They can become part of an

environmental management system to help implement the plan. When they are undertaken as the

first of a series of periodic environmental audits they have been referred to as a 'Baseline

Environmental Audit'.

Environmental audits should be appropriate to the particular circumstances. As environmental

auditing draws upon various methodologies, each organisation will define its own system

depending upon its size, its activities and its corporate culture. The scope and style of audits

vary, but common stages and activities include:

Pre-audit stage

full management commitment;

setting overall goals, objectives, scope and priorities;

selecting a team to ensure objectivity and professional competence;

The pre-audit activities usually include the following:

The sites that are to be audited need to be determined and selected.

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The auditee should be informed of the date of the audit as soon as possible, enabling them to

adjust and become used to the concept.

The audit scope should be identified. The auditee should usually be consulted when

establishing the scope.

The audit plan should be designed in such a way that it can accommodate changes based on

information gathered during the audit and effective use of resources.

Audit team and assignment of responsibility should be established.

The chosen working papers should be collected. This will facilitate the auditors’

investigations on the sites.

The background information on the facility including the facility’s organisation, layout

and processes, and the relevant regulations and standards, should be collected.

The background information on the site’s historical uses, and the location of soil and

groundwater contamination should be collected.

The pre-audit questionnaire should be sent to auditee (Humphrey and Hadley, (2000).

 

Audit stage

on-site audit, well defined and systematic using protocols or checklists;

review of documents and records;

review of policies;

interviews;

site inspection;

The on-site audit is the most important step of the audit procedure. This includes:

The opening meeting is the first step between the audit team and auditee. In this meeting

the purpose of audit, the procedure and the time schedule are discussed.

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Site inspection is the second step for on-site activity. In this step the audit team may

discover matters which are important to the audit but which are not identified at the

planning stage.

The on-site phase requires the audit team to develop a working understanding of how the

facility manages the activities that influence the environment and how any EMS, if there

is one, works.

Assessing strengths and weaknesses of the auditee’s management controls and risks

associated with their failure need to be established.

Gathering audit evidence involves collecting data and information using audit protocol.

Communicating with the staff of the auditee to obtain most information.

Evaluating the audit evidence against the objectives established for the audit and an

agreed protocol

Post- audit stage

evaluation of findings;

reporting with recommendations;

preparation of an action plan; and

follow-up.

Post-audit activities begin with the preparation of a draft report. The draft report should be reviewed

by the facility personnel directly involved in the audit. The final report should be derived from it and

it should then be distributed to all interested parties within the organisation. Humphrey and Hadley

(2000) confirm that it is important for management to follow-up the report and develop an action

plan to implement those audit findings.

There is an increasing demand for the results of auditing to be disclosed. Recent European

initiatives on access to environmental information (CEC, 1990) and the requirement of the Eco-

Management and Audit Scheme (CEC, 1993) for participants to publish environmental

statements confirm the importance of this.

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Environmental Auditing and Environmental Management Systems (EMS)

An EMS is a tool designed to enable organisations to target, achieve and demonstrate continuous

improvement in environmental performance. It is one integrated management process with a

number of stages, which includes an environmental audit. There are a number of standards (e.g.

the British Standard BS7750 (BS11992), the European Eco-Management and Audit Scheme for

Industry (CEC, 1993) and the DoE Eco-Management and Audit Scheme for UK Local

Authorities (DoE,1995)). These consist of most or all of the following elements depending on the

standard, to:

1. adopt an environmental policy to confirm and promote commitment to continual

improvement in environmental performance;

2. undertake an environmental review to identify significant environmental issues and effects;

3. set up environmental programmes of objectives, targets and actions;

4. establish an environmental management system to ensure the implementation of the

necessary actions to achieve these objectives;

5. undertake periodic environmental audits to assess the performance of such components;

6. prepare an environmental statement on environmental performance; and

7. obtain independent verification of the environmental statement.

Many companies have set up internal environmental standards which are applied world-wide.

These may be more stringent than local legislation.

Public sector environmental auditing

Increasingly, public sector bodies and local authorities are adapting auditing methods to establish

baselines of environmental performance. These then inform management action.

6.2 Interest and action was stimulated in the late 1980s by the Friends of the Earth (1989). A

number of authorities prepared environmental charters, follow-up environmental strategies and

action plans, which are generally referred to as Green Plans (Raemaekers et al.. 1991 and

Raemaekers, 1993). It was not long before leading authorities also realised the greater corporate

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performance and environmental benefits of the broader and deeper approaches of the internal and

external auditing (COSLA, 1992).

In 1989, the first local authority environmental audit was undertaken by Kirklees District

Council with the assistance of Friends of the Earth. Since then a number of Scottish local

authorities have produced environmental audits, notably Fife and Grampian Regional Councils,

Ross and Cromarty, Gordon, Falkirk, Clackmannan and Dundee District Councils. The scope of

public sector audits is different from that of the industrial sector in that the effects of service

provision are considered as well as the direct effects of the activities of the local authority:

Direct effects - environmental impacts that result from the way in which day to day

activities are undertaken. Direct effects are covered by internal management audit.

Service effects - environmental impacts that result from the organisations efforts in

implementing environmental policies and objectives. They would be covered by the

Policy Impact Assessment type of audit.

Additionally, audit techniques have been adapted to prepare State of the Environment Reports.

After several authorities, including Fife Regional Council and Ross and Cromarty District

Council, piloted the approach, the DoE published a guide to implementing environmental

management systems within local authorities. It is referred to as UK-EMAS, as it was derived

from the European Eco-Management and Audit Scheme (DoE, 1993).

Typically public sector audits cover a number of target areas such as:

energy use;

recycling;

hardwoods from sustainable sources;

environmental education;

habitat conservation and creation;

green purchasing; and

traffic calming.

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Inevitably there are issues which may have been overlooked or might be misinterpreted, and

further and clearer guidance will be necessary. SNH along with the Countryside Commission and

the Countryside Council for Wales have commissioned guidance on the treatment of countryside

and conservation issues within State of the Environment Reports (SNH,in prep).

Management System (EMS) standard;

enabling environmental problems and risks to be anticipated and responses planned;

to demonstrate that an organisation is aware of its impact upon the environment through

providing feedback;

increased awareness amongst stakeholders; and

more efficient resource use and financial savings.

Trends/future developments

Audit programmes are becoming a standard environmental management tool and pressures for

the disclosure of audit results are increasing. Public statements of environmental information

with external validation are required by those participating in the European or local authority

Eco-Management and Audit Scheme.

The utility of environmental audits vary from organisation to organisation. It is likely that audits

will be used increasingly to:

provide baseline information to enable

organisations to evaluate and manage

environmental change, threat and risk;

form the basis for initiating and monitoring the performance of Environmental

Management Systems;

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contribute to environmental management approaches which become integrated with

environmental impact assessment and the management of predicted impacts, mitigation

and monitoring measures;

support the implementation and management of integrated pollution control procedures

and assist in the definition of 'best practicable environmental options' (BPEO);

tackle external off-site impacts which consider the broader environmental footprint of an

organisation's activities; and

pass environmentally responsible approaches down the supply chain.

Environmental audits have traditionally dealt with the environmental effects of industrial

processes and, to a lesser extent, with resource consumption. Guided by the legislation and

compliance procedures, the environment has usually been considered in terms of air land and

water. Considerable conservation benefits could be achieved by broadening the focus of auditing

to include natural heritage features and objectives. This would include natural heritage

legislation and by the application of audit techniques to habitats and land use, such as farm units

(Edwards et al.. 1992, LEAF, 1994), forest management units, or sporting estates. Generic

approaches could contribute to the development of conservation management plans.

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Five levels of environmental auditing techniques

Welford (2002) has suggested five levels of environmental auditing techniques based on the

central focus of the approach. This hierarchy proceeds from a static base of compliance audits at

(Welford, 2002). The different levels of audit techniques are shown in Table 1.1.

Level one

The most basic auditing approach is compliance auditing where performance is measured as

conformance with legislation, regulation and codes of conduct. According to Welford (2002)

until the early 1990s the majority of environmental audits were usually little more than

compliance audits.

Level two

Environmental Management Systems (EMS) emerged during the 1990s with international

standards such as ISO 14001 and EMAS. This has extended the auditing process to systems

audits where the focus is whether the EMS has been effectively implemented. An EMS should be

reviewed regularly in order to have continuous improvement in environmental performance. The

targets and objectives at this level are largely self-determined. This auditing is a crucial

component of an

EMS.

Level three

This describes the traditional approach to environmental auditing which takes a snapshot of the

environmental performance of a company at one point in time, usually on one particular site. The

main focus is on the direct impact of an organisation, site or process on water, land and the air,

and therefore concentrates on direct pollution effects, contingency planning and health and safety

In addition, it is important to note that for these three levels the mode of assessment is essentially

static, focusing on direct, easily measurable impacts and conformity to the law and management

system in place, all at one particular point in time.

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Level four

At level four auditing goes beyond traditional environmental auditing techniques which require a

change in emphasis in a number of ways. The concept of ecological auditing has three key

features:

1. The mode of assessment must be dynamic;

2. There needs to be an increased emphasis put on life cycle impacts; and

3. A wider set of ecological issues need to be addressed.

A product life cycle should consider the impact of raw material procurement on biodiversity,

endangered habitats, human and animal rights and non-renewable resources. Wheeler, 1993

argues these issues must not be ignored from an ecological perspective although it may sound

good especially to the agrochemical, petrochemical, chemical and mining industries

Level five

Welford (2002) states that we need to widen the scope of auditing if our ultimate aim is to move

towards sustainability. This (level 5) is a holistic approach predicated on a clear world view.

There should be an understanding of the need for further ‘paradigm shift’ in business culture

(Commoner 1990; Welford 1995; Wheeler 1993 cited in Welford, 2002). More specifically,

waste minimisation, re-use and recycling should be driven by the need to conserve the use of

non-renewable resources. Sourcing of raw materials should not have negative impacts on global

biodiversity, endangered habitats or human and animal rights. Overall corporate policies should

examine the business

impact on both the developed and developing world, both now and into the future .

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22

International Organisation of Supreme Audit Institutions (INTOSAI) and

Environmental AuditingThe INTOSAI is an international body for government auditors in member countries of the

United Nations. It was founded in 1953 in Havana and consists of over 170 Supreme Audit

Institutions (SAIs). The INTOSAI sets the standards and guidelines for public sector auditing

(INTOSAI WGEA, 2003). SAIs play a major role in auditing government accounts and

operations and in promoting sound financial management and accountability in their

governments. INTOSAI supports its members in this task by providing opportunities to share

information, ideas and experiences in the field of government auditing among legislative auditors

of national governments (INTOSAI WGEA, 2003). Every three years INTOSAI organises an

International Congress for Supreme Audit Institutions (INCOSAI), in which representatives of

organisations such as the United Nations and the World Bank also participate. The XVIII

INTOSAI was held in Budapest, Hungary in October 2004 and the next Congress will be hosted

by Mexico in 2007. Within INTOSAI there are seven regional organisations of SAIs: South

America (OLACEFS), Central America and the Caribbean (CAROSAI), Europe (EUROSAI),

Africa (AFROSAI), the Arabic countries (ARABOSAI), Asia (ASOSAI) and the Pacific

(SPASAI).

The INTOSAI WGEA was established during the 14th INCOSAI in Washington in 1992. The

main aims of the Working Group are to assist SAIs in acquiring a better understanding of the

specific issues involved in environmental auditing, to facilitate exchange of information and

experience among SAIs, and to publish guidelines and other informative material for use by the

SAIs. The WGEA is currently the biggest INTOSAI Working Group. It started with 12

members, and there are now 40 members\ from countries all over the world.

Environmental Auditing with Regularity Auditing Practices

The INTOSAI had issued “Guidance on Conducting Audits of Activities with an Environmental

Perspective” at XVII INCOSAI in Seoul, Republic of Korea in October 2001. According to this

guidance, environmental auditing encompasses all types of audit: regularity (financial and

compliance) and performance audits.

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Barriers to environmental auditing

According to the results of the INTOSAI WGEA (2003), 26 percent of the 114 SAIs did not

experience any barriers to conducting environmental audits. The previous surveys have identified

the following barriers:

* Inadequate SAI mandates;

* Insufficient established environmental auditing norms and standards;

* Lack of skills or expertise within the SAI;

* Insufficient data on the state of the environment;

* Insufficient national monitoring and reporting systems; and

* Insufficient formulation of governmental environmental policy (Donald,2004)

.

Of the 114 SAI respondents in the 2003 questionnaire, 40 do not conduct environmental audits

because of lack of skills or expertise

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METHODOLOGY

Introduction

The objective of this research is to assess and measure environmental auditing with regularity

and performance perspectives. This section discusses the various steps used in the methodology

for carrying out this research. In the first place it discusses choosing the sample of SAIs from

developing and developed countries for this study. The reasons for focussing on those SAIs are

explained. The methodological approach such as desk-top study is also discussed. Finally, the

establishment of best practice framework and how this was used is explained.

Methodological approach

A qualitative research method is used for the study. The strategies emphasise words rather than

quantification in the collection and analysis of data Qualitative research is conducted in a natural

setting and involves a process of building a complex and holistic picture of the phenomenon of

interest (Bryman, 2001). In line with this, qualitative research has been used for the study. This

consists of a desktop study using secondary data. Qualitative approach is important for the

following reasons:

• Enables the researcher to explore many themes and subjects;

• Enables the researcher to explore subjects and issues where relationships may be ambiguous;

and

• Enables the researcher to explore both the “how”, “why” questions; and the “what”, “who”

“when” and “where” questions; that is to explore the static and dynamic aspects of the issues

under study.

Various environmental auditing principles have been gathered either from literature review or

global instruments. The principles which appeared more than five times in the various sources

have been adopted for framework. The standards or guidelines of sample SAIs are then

compared against the framework to examine SAIs current status in environmental auditing.

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Choosing sample

In the first stage of data collection, suitable SAIs from developing and developed countries were

identified. It was decided to focus on two SAIs from developing countries, Sri Lanka and

Indonesia, as these are more likely to have conducted some environmental auditing. The SAIs

from two developed countries were also focused on. The Netherlands and Canada were identified

because they have been contributing to the worldwide development and dissemination of best

practices, guidance, and training programs on environmental and sustainable development

matters through their leadership of the Working Group on Environmental Auditing under the

auspices of INTOSAI.

Establishing an audit framework

The basic premise of the guidelines/principles is that internationally agreed principles can help to

prevent misunderstandings. This should help to build an atmosphere of confidence and

predictability among business, labour, governments, and society as a whole. The INTOSAI

guidance on environmental auditing is the primary source for the research. In addition to the

INTOSAI guidance, the following global instruments were reviewed: the Global Reporting

Initiative (GRI), Organisation for Economic Cooperation and Development (OECD) guidelines,

Association of Chartered Certified Accountants (ACCA), Social Accountability 8000 (SA 8000),

EMS auditing guidelines and academic literature. These instruments have been used to build a

framework as they are among the prominent initiatives shaping individual company initiatives.

A framework is developed based on the broad principles of the five global instruments besides

academic literature. Each instrument is briefly explained below:

Global Reporting Initiative

The GRI is generally accepted as a strategy to achieve sustainable development. This process

includes forming commitments to social, environmental and financial performance, and

measuring and reporting on progress in a systematic way (ANAO,2005). It is led by the

Coalition of Environmentally Responsible Economies (CERES) and includes NGOs,

corporations, consultancies, accounting firms, business associations, academics and others

(Gordon, 2001). It has eleven broad principles include:

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* Transparency;

* Inclusiveness;

* Auditability;

* Completeness;

* Relevance;

* Sustainability context;

* Accuracy;

* Neutrality;

* Comparability;

* Clarity; and

* Timeliness.

OECD guideline

The OECD guidelines are recommendations by governments to multinational enterprises

(MNEs) operating in or from 33 countries that comply with the guidelines. The guidelines help

ensure that MNEs act in harmony with the policies of countries in which they operate and with

societal expectations. They cover six key areas of corporate governance:

* ensuring the basis for an effective corporate governance framework;

* the rights of shareholders, the equitable treatment of shareholders;

* the role of stakeholders in corporate governance;

* disclosure and transparency; and

* the responsibilities of the board (Gordon, 2001).

INTOSAI guidance

The Guidance on Conducting Audits of Activities with an Environmental Perspective was

adopted in the XVIIth INCOSAI in Seoul 2001. The guide provides SAIs with a basis for

understanding the nature of environmental auditing. It has nine broad basic postulates, eight

general postulates, six field standards and four reporting standards.

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Field standards

(i) The auditor should plan the audit in a manner which ensures an audit of high quality.

(ii) The work of the audit staff at each level and audit phase should be properly supervised

during the audit.

(iii) The auditor, in determining the extent and scope of the audit, should evaluate the reliability

of internal control.

(iv) In conducting audits, a test should be made of compliance with applicable laws and

regulations.

(v) Competent, relevant and reasonable evidence should be obtained.

(vi) Auditors should analyse the financial statements to establish whether acceptable accounting

standards for financial reporting and disclosure are complied with.

Reporting standards

(i) At the end of each audit the auditor should prepare a written opinion or report.

(ii) With regularity audits, the auditor should prepare a written report.

(iii) It is for the SAI to which the auditor belongs to decide finally on the action to be taken in

relation to fraudulent practices or serious irregularities discovered by the auditor.

(iv) With regard to performance audits, the report should include all significant instances of non-

compliance (Guidance on Conducting Audits of Activities with an Environmental Perspective,

2003).

ACCA Guidelines

In the United Kingdom, the ACCA is the professional body for Chartered Certified Accountants.

Its involvement with environmental issues began in 1989 after the publication of ‘Blueprint for

Green Planet’ followed by the “The Greening of Accountancy: the profession after Pearce” by

Professor Rob Gray. In 1991 the United Kingdom ACCA established a Social and

Environmental Issue Committee with members drawn from variety of organisations. The ACCA

in their publication, Making Values Count: Contemporary Experience in Social and Ethical

Accounting, Auditing, and Reporting by Gonella et al., (1998) outlined eight principles include:

* Completeness;

* Comparability;

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* Inclusivity;

* Regularity and evolution;

* Embeddedness;

* Disclosure;

* External verification; and

* Continuous improvement.

SA 8000

SA 8000 is a voluntary, factory based monitoring and certification standard for assessing labour

conditions in global manufacturing operations. It is modelled after the quality and environmental

auditing process developed through the International Standards Organisation in its ISO 9000 and

ISO 14001 standards. SA 8000 relies on certified monitors to verify factory compliance with the

standard (Gordon, 2001). SA 8000 is sponsored by an alliance of trade unions, NGOs and

business. It is an auditable standard designed to promote external verification of performance in

relation to labour relations and human rights commitments in factories. SA 8000 focuses on

transparency, human rights and labour rights (Gordon, 2001).

EMS auditing guidelines

ISO 14001 and EMAS require that an internal environmental audit must be conducted at regular

and defined intervals by an environmental auditor. The audit programme should cover:

* the activities and areas to be considered in audits;

* the frequency of audits;

* the responsibilities associated with managing and conducting audits;

* the communication of audit results;

* auditor competence; and

* how audits will be conducted (Welford, 2002).

Academic literatures

For the purpose of study a review on academic literature is done in great detail. The literature

review focussed on the principles, elements, and objectives, expounded by Welford (2002),

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Humphrey and Hadley (2000), Millichamp (1996), Donald (2004) and many others which were

discussed in the literature review section.

Criteria for adapted principles

The research was based on the literature review. A comparison of the principles of GRI, OECD,

EMS, ACCA, and SA 8000 was carried out. Table 1.3 showed that the global instruments have

both differences and similarities.

Comparison of actual audit practice against established criteria

The guidelines and principles of the four SAIs were compared against the eleven main criteria.

The result of the comparison is briefly described below

Systematic

The best practice criteria ‘systematic’ was further divided into three sub-criteria such as audit

protocols, well defined methodology, and based on systematic plans and procedures. The study

showed that the two SAIs of developed countries Canada and The Netherlands met these three

criteria whereas the standards of Sri Lanka and Indonesia referenced two criteria in full and one

criterion partially.

Objectivity

Objectivity has three specific issues such as true and fair view, impartial report, and audit

objective. The analysis revealed that the SAIs of Sri Lanka and Indonesia referenced two criteria

in their standards and partial referenced one criterion, the impartial report (Table 1.4). The

Netherlands and Canada satisfied all three criteria.

Documentation

Documentation is divided into three specific issues, fully documented, physical evidence, and

working papers. The finding demonstrated that the SAIs of Indonesia, Canada and The

Netherlands met all criteria whereas the Sri Lankan standard did satisfy one criterion and two

criteria partially, i.e. fully documented and physical evidence.

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Independence

The best practice framework demonstrated that auditor and SAI independence was an essential

criteria. It was found that the Canadian and The Netherlands guidelines satisfied all these criteria

whereas the Sri Lankan and Indonesian standards addressed two criteria and one issue partially .

Transparency

Transparency is further broken down into three issues, freedom of access to information,

participation arrangement, and existence of an explicit ethical framework. The study

demonstrated that the SAIs of Sri Lanka and Indonesia referenced one issue only. Similarly, two

issues were referenced in the Canadian and The Netherlands standards but did not meet the third

criteria, existence of an explicit ethical framework.

Audit capacity

The environmental audit capacity of SAIs includes auditors’ competence, SAIs’ competence, and

specific personnel. Only two SAIs, Canada and The Netherlands, had met all three criteria. The

SAI of Sri Lanka did not meet two criteria and partially satisfied one, specific personnel. The

Indonesian standard had partially met specific personnel and SAIs’ competence, but not auditors’

competence.

Reporting

The study demonstrated that three SAIs, Canada, The Netherlands and Indonesia, have good

reporting, satisfying all three criteria such as regular and timely, concise, and documented

evidence. Sri Lanka did not meet one of the three criteria, concise, and met partially the third

criterion; regular and timely.

Quality assurance

Quality assurance is further divided into three sub criteria, internal review, peer review and

external review. The three SAIs, Sri Lanka, Indonesia and The Netherlands had not addressed

this in the standards. Canada satisfied two criteria, internal review and external review.

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Effective training

The study showed that introductory training was lacking in all SAIs guidelines. The other two

training issues-technical and continuing education were included in the standards of Canada and

The Netherlands. The Indonesian standard did not meet any of criteria whereas Sri Lankan

standard met one criterion, continuing education.

Human rights

Human rights are further divided into three sub-criteria such as health and safety legislation,

dissatisfaction, and fair wage policies. The study showed that the SAIs of Canada and The

Netherlands satisfied these three criteria. The Sri Lankan and Indonesian standards did not meet

two criteria, dissatisfaction and fair wage policies.

Futurity

The study demonstrated that out of three sub-criteria under futurity principle the SAIs of Sri

Lanka and Indonesia did not meet any issues. The guidelines of Canada and The Netherlands

satisfied two criteria such as phase out of non-renewable; and reduce, repair, reuse and recycling.

None of the standards included one criterion research into alternatives for non-renewable.

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Environmental Audit and India

INDIA is the first country in the world to make environmental audits compulsory. The

government of India, by its gazette notification [No. GSR 329 (E)] of March 13, 1992, made it

mandatory for all industries to provide annual environmental audit reports of their operations,

beginning with 1992-93. This required industries to provide details of water, raw materials and

energy resources used, and the products and wastes generated by them. These audit reports were

to be submitted to the concerned State Pollution Control Boards or before September 30 every

year.

Environmental Audit can be defined as a basic management tool comprising a systematic,

documented, periodic and objective evaluation of how well environmental organisations,

management systems and equipment are performing. The aim of the audit is to facilitate

management control o environmental practices and to enable the company to assess compliance

with its policies including meeting regulatory requirements.

This scheme was expected to promote proper monitoring of industrial activities, adoption of low

cost technology and minimisation of resource consumption. But though it has been in force for

more than two years it has not made much headway. Out of the lakhs of industries that exist in

India, only 2,995 audit reports were filed by December 1993.

It has also become obvious that the deadline of September 30 is not adhered to. Due to

widespread non-compliance, this deadline has been extended a number of times.

Champions of this regulation fee that the government has adopted a proactive approach to the

conservation of natural resources, instead of observing the usual command and control method.

Its critics feel that this notification was hurriedly implemented without the prior creation of

necessary infrastructure/experts which would enable its appropriate implementation.

This novel concept of environmental audit was distorted , surprisingly, by the government, when

on April 22, 1993, by a revised notification [No. GSR.386 (E)] the term Audit Report was

replaced by Environmental Statement. This change inevitably toned down the impact of the

regulation.

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The industries were now to fill a form and submit it to the concerned Pollution Control Boards

(PCBs). It made it easy for industries to make statements to the effect that they have taken the

requisite steps in compliance with existing pollution control regulations. These statements might

not be based on actual audit reports. If this becomes a rule, the whole purpose of the

environmental audit regulation would be defeated.

Industries have a list of grouses against environmental audits. They are opposed environmental

audits. They are opposed to the disclosure of their modus operandi to the public, who they feel

are not mature enough to follow the importance of such data. They fear it would lead to legal

wrangles and litigation and that the data would be used by Pollution Control Boards for

prosecution. Publishing details of raw materials used and processes might reveal their trade

secrets.

Another factors which hampers environmental audits in India is the lack of specialised

environmental auditors. Only three or four agencies exist which are qualified to conduct

environmental audits. The setting up of an institute of environmental auditors like the Institute

of Chartered Accountants of India, would have been an apt preamble to the adoption of this

regulation.

Moreover, small industries cannot afford to hire the services of existing environmental audit

agencies. First time environmental auditing will cost an industry between Rs. 75,000 to Rs.

200,000 and 15 months to complete.

The Pollution Control Boards have no follow up plans. The reports submitted are not double-

checked to find out whether the forms hold the correct data. One report has been examined and

acted upon till date. The industries do not get any feedback.

An environment audit programme, if designed and implemented conscientiously, can enhance an

industry’s environmental performance. If an industry sets up its own system in compliance with

existing laws, then conducting audits would be a normal and considerably easier procedure. It

will expose problems that require action. It improves the material and energy efficiency of

production processes, conserves resources, minimises wastes, provides direct economic benefits

to the industry and stimulates growth of the industry as well as the national economy.

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Despite the above most industries are apprehensive about audit reports since pollution control

boards are regarded by them more as an enforcer, a policeman, than as an advisor. The

government has to assure them that an audit report will not be used to instigate prosecution or

litigation.

There is yet another angle to this gamut of environmental auditing. We know that industries can

be taken to court if prescribed pollution limits are exceeded. But after submitting this audit

statement the industries may contend that they cannot be sued since their audit report has been

accepted by the SPCBs. Does the government have any way to counter this?

Environmental audits are vital not just for a clean environment but also because their use is the

best way to correct different problems detected at their source and to minimize wastes and

foresee conservation and maintenance measures needed to prevent major pollution problems.

Industries in developed countries conduct audits as part of their overall drive for quality

assurance to establish a “green edge” over competitors in environmentally sensitive markets.

Moreover, green audits are asked for by investment banks before they pour in money. With the

Indian economy opening up, industries have no option but o go green if they want to remain in

the race.

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The Benefits of Auditing

While environmental audits are designed to identify environmental problems, there may be

widely differing reasons for undertaking them: compliance with legislation, pressure from

suppliers and customers, requirements from insurers or for capital projects, or to demonstrate

environmental activities to the public. The benefits of environmental auditing include:

ensuring compliance, not only with laws, regulations and standards, but also with

company policies and the requirements of an Environmental

Preparation of Environmental management plan.

Assessment of environmental input and risks.

Identifying areas of strength and weakness for improvements.

Evaluation of pollution control.

Verification of compliance with laws.

Assuring safety of plant, environment & human beings.

Enhancement of loss prevention, manpower development and marketing.

Budgeting for pollution control, waste prevention, reduction, recycling and reuse.

Providing an opportunity for management to give credit for good environmental

performance.

As a whole environmental audit plays an important role in minimizing the environmental

problem locally, regionally, nationally and internationally

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How to Become an Environmental Auditor

If you want to become an environmental auditor, you first need to determine if this career is well

suited for you. Are you committed to conserving and protecting the environment? Are you

interested in a lucrative career that allows you to apply your extensive knowledge of

environmental regulations to ensure companies reduce their impact on the environment? If

you’ve answered ‘yes’ to these questions, you may be well suited for a career as an

environmental auditor

Below we've outlined what you'll need to succeed in a career as an environmental auditor. We've

also included helpful information for an environmental auditor career, such as job description,

job duties, salary expectations, a list of possible employers and much more!

Education Needed to Become an Environmental Auditor

To become an environmental auditor, you typically need at least a bachelor’s degree in one of

the following fields:

• Environmental Science

• Environmental Management

• Natural Resource Management

• Environmental Engineering

• Environmental Assessment

Some employers may require environmental auditor candidates to have a master’s degree in one

of these fields in order to be considered for a position. A master’s degree can also help when

trying to advance for senior level or management positions.

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In a career as an environmental auditor, it is beneficial to have working knowledge of

environmental management systems (such as ISO 14001), occupational health and safety

systems, waste & wastewater legislation, statistics, and accounting procedures. This knowledge

is either gained through coursework, or as a result of work experience in the field.

Environmental Auditor Job Description

Environmental auditors are responsible for assessing the environmental performance of

operations in business and industry. They must ensure corporate and government standards

relating to environmental control are being met. The main objective of environmental auditors is

to detect any existing or potential environmental compliance problems or management system

deficiencies, and make recommendations as to their correction.

Environmental auditors can conduct two different types of audits: a compliance audit, which

measures if a business is meeting internal and external environmental guidelines and legislation,

and a management performance audit, which measures if a business is meeting the appropriate

criteria for management systems.

Environmental Auditor Job Duties

• Review the overall operations of the business that’s being assessed

• Select and manage members of the audit team

• Gather data related to business operations, using such methods as on-site inspections, document

reviews and staff interviews

• Examine clients' records for appropriate government permits and requirements, safety

standards, maintenance and inventory control measures

• Review management systems, emergency preparedness and response procedures, employee

training (for compliance with corporate and government standards), environmental monitoring

programs and waste management efforts

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• Prepare final audit reports, which includes results of audit and recommendations for

improvement

• Present findings to the managers and directors of the business

• Assist the business in developing an environmental management plan

• Follow up with the business to ensure process improvements have been successfully

implemented

Who Hires Environmental Auditors?

Environmental auditors may be employed by or work on a contract basis for such organizations

as:

• Engineering and environmental consulting firms

• Federal, provincial/state and municipal government departments

• Utility companies

• Manufacturing firms

• Resource-based companies (agriculture, forestry, mining, oil and gas)

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CONCLUSION

Pollution of environment has assumed serious dimensions. Various laws and regulations

controlling pollution of environment have led the corporate sector to take actions. Though any

type of information regarding investment for pollution control cannot be obtained through

environmental statement, but it serves the purpose of communication with the stakeholders.

Environmental statement is considered the most effective mode of environmental

communication. An environmental statement is a document published by company to make

communication with stakeholders about the relevant environmental issues. Companies are

preparing Environmental Statement to show their responsibility towards the society and

environment. They are submitting Environmental Statement on a regular basis to the concerned

State Pollution control Board.

Environmental audit is carried out to provide an indication to company management about how

the environmental Organization system and equipment’s are performing. As a result the best

practicable means can be applied to preserve air, water, soil, plant and animal life from the

adverse effect.

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Bibliography

Strategic Management (Manan Prakashan)

http://www.snh.org.uk

http://www.accountingedu.org

http://www.envirofocus.net

https://en.wikipedia.org

http://www.environmental-auditing.org

https://www.uea.ac.uk

http://www.issai.org

http://www.devalt.org

http://www.abhinavjournal.com

http://www.academicinvest.com

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