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Biodiversity is a ‘variation, variety and number’ of living organisms on this ecosystem or on the Earth. It is about the Earth’s eco-system such as mountains, hills, deserts, oceans, forests and other environments where species evolve and live including human-beings, animals, birds etc.

As per Section 2 (b) of the Biological Diversity Act, 2002, “Biological Diversity” means the variability among living organisms from all sources and ecological complexes of which they are part and includes diversity within species or between species and eco-systems.

‘Eco-system’ means a dynamic complex of plant, animal and micro-organism communities and their non-living environment interacting as a functional unit. (Article 2 of Convention on Biodiversity, United Nations, 1992)

As the world population surpassed 7 Billion last year, changes in economic activities all over the world in the past few decades, enormous advancement in science and technology and globalization are leading to changes in the eco-system. Apart from these controllable factors, uncontrollable factors viz., earthquakes, floods, tsunami, volcanic eruptions, wild-fire, hurricanes etc are creating severe impact on the Earth’s eco-system.

Both these controllable and uncontrollable factors cause an undesirable change in the physical, chemical and biological characteristics of the eco-system especially air, water, land etc.  This in-turn adversely affects the human population, wild-life, historical and cultural assets.

India being a party to the United Nations Convention on Biological Diversity (CBD) held in Rio De Janerio on 5th June 1992, enacted ‘The Biological Diversity Act’, 2002 to meet the following main objectives set by the Convention.

  • Conservation of Biological Diversity
  • Fair and equitable sharing of benefits arising out of the utilization of genetic resources
  • Sustainable use of the components of the biodiversity

Sustainable Use’ as per section 2(o) of the Biological Diversity Act, 2002, means ‘the use of components of biological diversity in such manner and at such rate that does not lead to the decline of the biological diversity thereby maintaining its potential to meet the needs and aspirations of present and future generations.’

From the above definition, the thrust is on ‘sustainable use’ of the components of ecological diversity. Sustainable use can be ensured by auditing the use of ecological components. Measuring and accounting these ‘components’ is a pre-requisite to any audit.

Another meaning of Green is eco-friendly or not damaging to the environment. This can acronymically   be called as (GREEN) Global Readiness in Ensuring Ecological Neutrality.

Green Accounting can be defined as ‘systematic identification, quantification, recording, reporting and analysis of components of ecological diversity and expressing the same in financial or social terms.’

The table below shows the differences among Financial Accounting, Cost Accounting and Green Accounting

Particulars

Financial Accounting

Cost Accounting

Green Accounting

Accounting Objective

Reporting the financial position and financial performance of a business entity through financial statements and facilitate audit of the same

To ascertain and report the cost of each product, process, job, operation or service rendered with a view to determine the selling price and to facilitate audit of the same

Identification, prioritization, quantification, qualification, equitable distribution and accounting the environmental or ecological costs and benefits in a scientific manner.

Accounting Records

Journal, ledger, trail balance, Income Statement and Balance Sheet.

Cost center accounting, allocation, apportionment and absorption. Maintenance of cost records, preparation of cost statements.

Quantity in terms of volume and value   of natural resources (both organic and inorganic) and renewable resources.  Quantity of various emissions generated viz., contamination of ground water, surface water, air pollution, noise pollution, land pollution etc

Product Classification

Products or services are classified as ‘profitable’ or ‘non-profitable’ based on their Average Revenue per Unit (ARPU) by using ‘absorption (full) costing’ methodology

Products or services are classified as ‘contributory’ or ‘non-contributory’ based on their contribution per unit by using ‘marginal costing’ methodology.

Products or services are classified as ‘green’ or ‘red’ based on their impact on ‘ecological system’ by using ‘cause and effect relationship’ methodology. (Products or services causing Net Positive Impact (NPI) are often referred  to as ‘green’ and products or services causing Negative Impact (NI) are often referred to as ‘red’)

Though Green Accounting and Cost Accounting are part of Management Accounting, both have different objectives.  The former primarily focuses on ‘sustainable use of ecological components’ and the later focuses on ‘optimum use of economic resources’.  However, Green Accounting largely depends on Cost Accounting in terms of cost data.

Cost Element

Financial Accounting

Cost Accounting

Green Accounting

Raw Material

Purchase of raw material is shown as expenditure in Statement of Profit and Loss subject to adjusting the same for increase or increase in raw material inventory.

Direct material consumed is allocated to cost centers or cost units. Indirect material consumed is apportioned to each cost center or unit that produces a product, generates an activity or renders a service and absorbed as a factory or administration overhead as the case may be.

Direct material consumed is allocated on to cost centers or cost units. Indirect material consumed is apportioned to each cost center or unit based on their ‘cause and effect relationship’ and absorbed by Green and Red products or activities. Direct and indirect material consumed by a non-product activity is treated as Negative Impact Cost.

Personnel Expenses

Salaries, wages and other employee benefits are shown in Statement of Profit and Loss as personnel expenses.

Direct labor costs are allocated to cost centers or cost units.  Indirect wages and salaries are apportioned to each cost center or unit that produces a product or generates an activity or renders service and absorbed as a factory or administration overhead as the case may be.

Direct labor costs are allocated to cost centers or units. Indirect salaries & wages of employees are apportioned to each cost center or unit based on their ‘cause and effect relationship’ and absorbed by Green and Red Products or activities. Direct and indirect labor  employed by a non-product activity is treated as Negative Impact Cost

Power & Fuel

Power and fuel are shown in Statement of Profit and Loss as cost of Power & Fuel

Direct costs of power and fuel are allocated to cost centers or cost units.  Indirect power and fuel costs are apportioned to each cost center or unit that produces a product or generates an activity or renders service and absorbed as factory or administrative overhead as the case may be.

Power and fuel directly identifiable with respective cost centers or units are allocated to respective cost centers or units.  Indirect power and fuel are apportioned to each cost center or unit based on their ‘cause and effect relationship’ and absorbed by Green and Red Products or activities

Depreciation

Depreciation being diminution in value of assets due to wear and tear is shown under the head Depreciation and Amortization in the Statement of Profit and Loss.

Depreciation directly identifiable to assets engaged in production or rendering service are allocated to respective cost centers or units and depreciation on common assets are apportioned to each cost center or unit as that produces product or generates activity or renders service and absorbed as factory or administration overhead as the case may be.

Assets directly engaged in Green and Red Products or activities are identified. Depreciation on such assets is charged directly allocated to Green or Red products or activities as the case may be.  Depreciation of common assets is apportioned on the basis of gross book value of the assets identified above.

General Administration Expenses

Indirect expenses viz., office rent, audit fee, general charges etc are changed to Statement of Profit and Loss as General and Administration expenses

Indirect expenses viz., office rent, audit fee, general charges etc are treated as part of cost of production before adjustment for opening and closing stock of finished goods to arrive Cost of Goods Sold (COGS) in cost sheet

Indirect expenses viz., office rent, audit fee, general charges etc are treated as part of cost of production before adjustment for opening and closing stock of finished goods to arrive Cost of Goods Sold (COGS) of Red and Green Products based on ‘cause and effect relationship’

Selling & Distribution Expenses

Selling and distribution expenses viz., sales men salary, commission, travel, advertisement etc are charged to Income Statement as selling expenses.

Selling and distribution expenses viz., sales men salary, commission, travel, advertisement etc are treated as part of Cost of Sales in cost sheet.

Selling and distribution expenses are treated as part of Cost of Sales of Red and Green products.  Further, the impact of emission expected from advertisement material and other reasons are treated as Negative Impact Cost.

Environment Management Costs

There no separate accounting of these costs as these are part of respective general ledger accounts viz., Salaries, repairs & maintenance, electricity etc.,

Environment Management Department expenses are treated as indirect expenses and absorbed as factory or administrative overhead as the case may be.

Environment Management cost are absorbed to Red Products as these are incurred to avoid imbalances in eco-system created by red products. These are considered as Positive Impact Costs.

Contingent Liabilities

Product warranty, disputed tax case pending before any court are treated as contingent liabilities

Though product warranty costs may categorically be made part of Cost of Sales, others like disputed tax cases etc or not considered in Cost Accounting.

Removal of overburden or back-filling of mines in future.  Waste collection and disposal in future.  Prevention of radioactive emissions.   Emissions due to sudden breakdown of pollution treatment equipment etc are treated as contingent liabilities

Green audit can be defined as an audit of ‘ecological system’ of a particular habitat (country, state, local authority, office, home, school, public place etc) within a given period with an objective of assessing the biodiversity.

Particulars

Financial Audit

Cost Audit

Green Audit

Objective

To ensure that  financial statements reflect true and fair view of the affairs of the company and are prepared in accordance with Generally Accepted Accounting Policies (GAAP)

To ensure that cost statements are complied with the respective Cost Accounting Record Rules (CARR) and are prepared in accordance with Generally Accepted Cost Accounting Policies (GACAP), Cost Accounting Standards  (CAS)

To ensure ecological efficiency of products, processes or services of a business are in accordance with environmental laws and regulations of a particular habitat.

Indicators

Income Statement ratios and Balance Sheet ratios

Cost per unit, Contribution per unit, Margin of Safety and Conversation of resources.

Environmental Performance Indicators showing impact on ecological system such as air pollution levels, water pollution levels, land pollution and sound pollution.  Impact Assessment Results (Negative/Positive)

Assessment

Assesses the financial health of the business and wealth generated

Assesses the cost-effectiveness of the products and services of the business

Assesses the business risk and opportunities associated and sustainable use of the components of biodiversity.  Social Cost Benefit Analysis (SCBA)

Mandatory Provision

Mandatory under section 224 of the Companies Act, 1956

Mandatory under section 233B of the  Companies Act, 1956 to certain classes of industry

Though there is no mandatory provision under Companies Act, 1956, there are several Environmental Laws and regulations viz., Environmental Protection 1986, Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control of Pollution) Act, 1981, Orders issued by Pollution Control Boards (PCBs) from time to time etc.

Green Audit - Challenges

  • There is no standard accounting policy or methodology unlike Financial and Cost Audit
  • Collection of data may be cumbersome and expensive
  • Awareness by the business groups and public is limited
  • It is a long term exercise hence auditing in short term may not yield desired results
  • It is difficult to quantify the entire data in financial terms as most of them are intangible

Green Audit – Contemporary phenomenon

Public awareness of biodiversity loss is increasing, leading to consumer preferences and purchasing decisions.  Some examples may be replacing halogen lamps and fluorescent lamps with Light Emitting Diode (LED), plastic carry bags with jute or paper bags, paper tickets with SMS tickets, electronic filing of  document with government authorities, electronic funds transfer etc.

Financial institutions are also insisting for Environmental Impact Assessment Reports from the corporate before sanctioning loans.

All businesses are directly or indirectly dependent on biodiversity and ecosystem services and they create some impact on the nature whether it is positive or negative.

Commitment to manage biodiversity starts from the corporate culture, vision, mission and values of the business entity. 

Epilogue

Ecological imbalance and economic growth are two different aspects. Ensuring reduction in ecological imbalance without denting economic growth thereby balancing between ecological imbalance and economic growth is an authentic challenge. The key objective of Green Audit is to ensure equilibrium between economic growth and sustainable use of components of biodiversity.

References:

1. The Biological Diversity Act 2002

2. The Economics of Ecosystems & Biodiversity (www.teebweb.org) 

3. International Guidance Document on Environmental Management Accounting issued by International Federation of  Accountants (IFAC)

4. Cost Accounting Standard (CAS) 14 issued by the Institute of Cost Accountants of India (ICAI) (www.icwai.org)

5. Convention on Biological Diversity (CBD) (www.cbd.int), United Nations, 1992

6. Ministry of Environment & Forests, Government of India website (www.envfor.nic.in)

7. Author’s practical experience in the fields of Financial Accounting, Cost & Management Accounting,, Business Analytics, ERP and Six Sigma


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Category Audit, Other Articles by - LAKSHMANARAO UDANDRAO 



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