Environmental Management Accounting Procedures and Principles

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Environmental Management Accounting Procedures and Principles 4.1.5. Fines and penalties In cases of severe non-compliance, fines and penalties may be charged. Several reporting guidelines request that these are disclosed separately, regardless of their amount in relation to other more significant expenditure. Still, they cannot be found in many reports, probably because the companies at the forefront of voluntary environmental performance reporting are not the ones being charged fines and penalties. 4.1.6. Insurance for environmental liability Firms can cover themselves against liability risks by way of insurance. The annual contributions to insurance against traditional damage to persons, goods and biodiversity caused by dangerous and potentially dangerous activities should be quoted here. Insurance covering higher risks of fire or other damage to the production site or at transport due to dealing with hazardous substances and dangerous processes should also be quoted here. Insurance for environmental liability are generally allocated to the other costs column rather than to specific environmental media. Environmental liability aims at making the agent causing the environmental damage (the polluter) pay for repairing the damage that they have caused. Environmental regulations and accounting standards with regard to liability differ from nation to nation. Often, only dangerous and potentially dangerous activities which cause direct damage to persons (personal injury), goods (property damage) and sometimes biodiversity or contaminated sites are captured under the heading of strict liability. Strict liability means that there is no need to establish a fault on the part of the actor, but merely the fact that an action (or the omission thereof) has actually caused the damage. The EU Commission’s white paper on environmental liability 4 aims to include damage to protected natural resources by non-dangerous fault based activities also. Availability of financial security, such as insurance, is important to ensure that liability is environmentally effective. The effectiveness of any legal liability regime further depends on the capacity of administrative and juridical authorities to treat cases expeditiously, as well as on the proper means of access to justice being available to the public. The experience with U.S. Superfund legislation (liability for cleaning up contaminated sites) shows the need to avoid loopholes enabling polluters to avoid liability by transferring hazardous activities to poorly capitalized firms which become insolvent in the event of significant damage. If firms can cover themselves against liability by way of insurance, they will not tend to resort to this perverse route. Smaller firms, which often lack the resources needed to implement risk management systems that are as effective as those of their larger counterparts, often become responsible for a higher share of damage than their size would predict. When they cause damage, they are also 4 European Commission, White paper on environmental liability, (Brussels, February 2000). -22-
Environmental Management Accounting Procedures and Principles less likely to have the financial resources to pay for redressing the damage. Insurance availability (or even requirement) reduces the risks companies are exposed to. They are thus also less inclined to try to circumvent liability. The annual expenses for insurance are shown in the profit and loss account. But if insurance payments are required, companies must frequently foot part of the bill. Thus, even with risks covered by insurance, there remains damage to be covered by the firm. That is why less tangible liabilities must be quoted under the balance sheet. 4.1.7. Provisions for clean-up costs, remediation, etc. Provisions are a classic instrument for anchoring a company’s risk protection scheme in the balance sheet and must be formed for contingent liabilities and potential losses from abeyant business transactions. The function of provisions is to consider and anticipate future expenditure and obligations and to help the company protect itself against contingent risks. It should be noted that the provisions available under commercial law and those recognized by fiscal authorities may be quite different at times. Provisions for expenditure which are admissible under domestic commercial law and provisions for deferred repairs and maintenance and for deferred removal of excavated material must generally not be carried as liabilities in accordance with International Accounting Standards (IAS) as the International Accounting Standards Committee (IASC) stipulates in its definition of liabilities that these lead to current obligations which will in the future result in an outflow of resources. The above-mentioned provisions, however, constitute internal obligations which do not entail any direct liability vis-à-vis third persons. This means that there is no liability and, hence, no opportunity to plan ahead by forming provisions. A liability is the present obligation of a company, arising from past events, the settlement of which is expected to result in future cash outflow or other use of resources, thus representing future economic burden. The first uncertainty related to it is the occurrence of the liability as such (i.e., will the liability materialize or not?), whereas the second uncertainty concerns its amount (i.e., how much will it cost?). “ A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be confirmed only on the occurrence, or non-occurrence, of one or more future events. 5 ” Examples of (contingent) liabilities which may emerge from a company’s activities include: • Groundwater contamination (e.g., from working with solvent-containing substances); • Surface water contamination (e.g., from spills and transport damage); • Air emissions (e.g., sudden release due to a breakdown of pollution treatment equipment); 5 IASC, International Accounting Standards, (London, 1995) p. 181. -23-
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