ABSTRACT
Conventional approaches of cost accounting have become inadequate because they have ignored important environmental costs and activities impacting consequences on the environment. Corporate neglect and avoidance of environmental costing have left gap of financial incompleteness and absence of fair view of financial information reporting to users of financial statements, environmental regulatory agencies and the general public. The research instruments utilized in the study were primary data survey and secondary data elucidation. For this purpose, cross-sectional and longitudinal content analyses were carried out. The test statistics applied in this study were the t-test statistics, Pearson Product-Moment correlation tests, ANOVA, and Multivariate Linear Regression Analysis. The study investigated best practice of environmental accounting In Exxon Mobil currently operating in Nigeria. Specifically, the study assessed the level of independence of tracking of costs impacting on the environment; level of efficiency and appropriateness of environmental costs and disclosure reporting. Findings are that environmental operating expenditures are not charged independently of other expenditures. There is also, absence of costing system for tracking of externality costs. Environmental accounting disclosure does not however, take the same pattern among listed companies in Nigeria. Considering the current limited exposure of many organizations to environmental accounting methodology, this study proffers an insight into new bases and design for environmental accounting. Recommendations among others are that corporate organizations should develop Plans and Operating Guidelines expected to meet Industry Operating Standards which should focus on minimizing impact on environment. There should be continued evaluation of new technologies to reduce environmental impacts. Standard cost accounting definitions should be agreed for environmental spending, expenditure and management accounting in the Oil & Gas and manufacturing sectors operating in Nigeria. Both the Nigerian Securities and Exchange Commission (SEC) and accounting practice in Nigeria should consider the urgency of placing demand for mandatory environment disclosure requirement on corporate organizations which impact degradation on the environment.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The need for Environmental Accounting has become the concern and focus of nations and responsible corporate managements. It became one of the foremost issues on the agenda of nations and businesses earlier in the 1990s and the reasons for this were varied emanating from both within and outside of the firm and particularly at the global level (Okoye and Ngwakwe:2004:220-235). A lot of government enactments, laws and regulations on environmental protection have been made in several nations of the world and Nigeria is slowly responding..
In the light of the awakening to environment protection, various laws and regulations such as the Environmental Impact Assessment Act, 1992 and the Department of Petroleum Resources (DPR) Environmental Guidelines and Standards for the Petroleum Industry in Nigeria (EGASPIN: 2002) were enacted. These require corporate managements to consider the environmental implications of all internal decisions of their managements. Also, all organizations monitored by environmental policy agencies in Nigeria are expected to demonstrate much consideration in decision making.
Environmentalists agree that it could be more cost efficient and beneficial for companies to acquire pollution prevention or clean technology than those of pollution clean-up. It is also observed that in environmental regulations, there is a shift from the ‘command and control’ approach to market-driven forms in which pollution prevention alternatives are replacing pollution cleaning approach. It follows therefore, that determining the appropriate pollution prevention approach may lead to additional decisions to be taken by management. Such
decisions may include selecting capital expenditures, and in the opinion of Shield, Beloff and Heller (1996:5), expenditures such ‘as markets for emissions’ allowances development, may require companies to determine whether it is more cost beneficial to buy or sell these allowances, giving the cost of avoiding the covered emissions.’ This is with regard to carbon trading and sequestration.
It is rightly said that the world’s two greatest challenges are poverty and the systematic destruction of the environment. These two challenges have the capacity to destroy the entire world. It is considered that the world’s poverty level, particularly in the less developed nations is largely due to the inability to manage environment which is fast degrading. Whereas industrial emissions and effluence constitute great threat to the atmosphere, the native farmers are no less a threat to the effect of the ozone layer, the seas, oceans and land. Local farmers also systematically destroy the biodiversity through continued crude method of farming, felling of trees and bush burning and non-sustaining fishing methods without replacement of the natural resources.
Environmental issues for purpose of economic and cost accounting have also been controversial even though the topic has been identified for discussions for the past four decades. This is because common criteria for value measurement of non-marketed, non- monetized resources and impact on externalities have not been agreed.
Previously, corporate organizations have ranked business considerations based on profitability. Companies have also recognized all indirect expenditures as overheads without paying attention to the environment. Conventional accounting practice has not recognized environmental accounting for materials, water, energy and other natural resource usage. Besides, conventional accounting has not provided for such practice and particularly for
accounting for impact on externalities. According to B. Field and M. Field (2002:xv), little was recognized of the environmental depletion and degradation to the environment until a few well meaning people in the developed countries realized that it was no good having great corporate profits and material well-being if they come at the cost of large scale of the ecosystem by which we are nourished. It became clear that degradation, pollution and accelerated destruction of the ecosystem and the depletion of non-renewable environment biodiversity would soon become very dangerous to human existence. B. Field and M. Field conclude that, ‘what once were localized environmental impacts, easily rectified, have now become widespread effects that may very well turn out to be irreversible.’
The world at large has need to evaluate, assess and effect accounting reporting for raw materials, energy consumption and use of natural resources which have systematically depleted the environment. Besides, the negative impact on the biodiversity through human and industrial activities and the nations’ need to protect the environment, have made for global regulations. These regulatory environmental laws however require only voluntary disclosure in financial statements of environmental information on industrial emissions, degradations, industrial wastages and all activities which impact negatively on the environment. As a result of the great impact on the ecology of oil and gas producing environment of the Niger Delta in Nigeria, which has caused political unrest in the area, Owolabi (2007:63) is of the opinion that the political unrest in the Niger Delta cannot be wished away until there is a policy to incorporate environmental concerns into the nation’s oil and gas industry planning, management and decision making. On environmental costs, he concludes that ‘Costs and benefits need to be properly attributed, a clear distinction made between the generation of income and the drawing down of capital assets through resource depletion or degradation.’
Notable studies in environmental accounting are the Ontario Hydro Full Cost Accounting (1993) and the AT &T Green Accounting of the U.S. Environmental Protection Agency (1993). Also, the industrial green substance emissions (Carbon dioxide, Methane and Hydro fluorocarbons) and the penalties resulting from the Kyoto Protocol (December 1997) have made it a requirement for corporate organizations to take serious considerations and actions on corporate capital projects and investments.
In the light of the background of increasing environmental attention, and the fact that the oil and gas sector, the mineral extractive and indeed the manufacturing sectors have profound production impact on the environment, the study has explored an assessment of Environmental Accounting in these economic sectors in Nigeria. This is expected to facilitate effective and efficient costs measurement and reporting for corporate decision making.
Aside of the introductory chapter one, chapter two dwells on literature review of environmental accounting contemporary issues, conceptual framework and observed gaps. Chapter three defines the methodology covering research design, population of study, sampling technique, description and measurement of the variables. Whereas data analyses and study presentations are covered in the fourth chapter, the fifth and final chapter presents the summary of findings of study, conclusions and recommendations.
1.2 Statement of the Problem
Canada, Norway, The Netherlands, the United Kingdom and the United States of America have led in the pursuit of degradation and pollution prevention, control and the need for environmental safety (Skillius, A and Wennberg, U: 1998:54-59; IFAC: 2005:9). Also, leading developing nations are Zimbabwe, Namibia, The Philippines and Indonesia. They have
led in championing policies to address need for accounting and accountability for environmental costs. The need for corporate organizations to develop environmental cost responsiveness and to disclose in annual financial reports environmental information has become of great importance.
The statement of the problem is that conventional approaches of cost accounting have become inadequate since conventional accounting practices have ignored important environmental costs and activities impacting consequences on the environment. Corporate neglect and avoidance of environmental costing leave gap in financial information reporting. There is no completeness and correctness of fair view to users of financial information, such as shareholders, environmental regulatory agencies, environmentalists and potential financial investors For example, degradation or other negative impact on the environment could affect corporate financial statement such as create actual or contingent liabilities and may have adverse impact on asset values. Consequential effect on corporate organizations may result in incurring future capital expenditure and cash flows which may impinge on going concern as balance sheet secured loans may not be secure after all if land values for instance are affected by environmental factors. Also, the limited awareness of environmental costing principles and methodology has become an important issue to be addressed. If vital environmental issues and activities are not disclosed, financial statement cannot be said to reveal state of a ‘true and fair view of affairs’. It is important too, to note that ethical investors will only invest in ethical companies and therefore, will watch out for these ethically responsible companies. Ethical companies therefore, have marketing advantage if they strategically position themselves environmentally. Ethical companies stand at advantage for corporate financing. Also, the
challenge of cost and valuation for damage, depletion and degradation of the environment externalities is a critical problem whish continues to demand attention.
Since current requirement for reporting on environmental issues is voluntary, it is observed from most financial statements of corporate organizations that it has engendered disclosures of information which totally exclude environmental issues. At best where reported, are grossly inadequate. Environmental disclosures have become critically important to an informed public and financial stakeholders. Also, pertinent is the difficulty of evaluating environmental remediation for environmental degradation where environmental costs do exist.
According to Salomone and Galluccio (2001:8):
Corporations are recognizing the benefits to their long-term corporate profitability of reducing their environmental impacts. Both the accounting and the environmental areas are concerned about how to identify, measure, report and manage environmental impacts.’ It is further concluded that particularly, ‘the assessment of environmental impacts on company’s financial situation requires improvement in external reporting of environmental data.
The United States Securities Exchange Commission (SEC) has as requirement for listed companies, information impacting on the environment. This is also now the requirement for the European Union countries. It is therefore, considered appropriate for companies impacting on the natural environment, to design and implement environmental accounting in an emerging environmental policy changing environment. This is particularly critical for the Oil & Gas sector (prospecting and producing), the downstream sector (refining and distribution) and the manufacturing sector which impact heavily on the environment in Nigeria. Also, there should
be environmental considerations in corporate decision making for capital projects and investments.
This study focuses on Nigeria Oil & Gas and manufacturing sectors which are recognized as causing heavy degradation on the environment. For emphasis, the problem is that the Nigerian business environment has yet to recognize and design environmental accounting for environmental information and issues of raw materials, energy consumption and use of natural resources which have systematically depleted the environment. This makes for relevance of this study.
1.3 Research Questions
The questions arising which are addressed in this study are:
- To what extent of reasonableness are environmental capital projects and investments integrated into environmental cost consideration for purpose of internal decision in companies in Nigeria?
- To what extent are environmental operating expenses tracked independently of other operating expenditure?
- What internal barriers affect the ability of the Exxon mobil to collect environmental cost information?
- To what extent are there disclosures on environmental issues in Annual Reports and Financial Statements?
- To what extent is environmental costs development in Nigeria attaining prescribed standards?
- To what level of adequacy are policy regulations on environment in Nigeria to ensure control and prevention of environment degradation and pollution?
1.4 Objectives of the Study
The broad objective of the study is to investigate the challenges and solutions to oil and gas accounting in Nigeria using Exxon Mobil as a case study. The specific objectives of the study are to:
- Assess the independence of tracking of all costs impacting on the
- Assess the efficiency and appropriateness of environmental costs reporting and disclosure.
- Ultimately, evolve and provide conceptual bases and design for cost and management accounting and disclosure in financial reporting of environmental information.
1.5 Research Hypotheses
The following Null Hypotheses were tested in order to achieve the stated objectives of this study:
- H0. Environmental expenditures are not charged independently of other expenditures in the Oil & Gas and Manufacturing sectors.
- H0. The non-application of environmental cost accounting has significantly affected the tracking of externality costs in the Oil & Gas and Manufacturing sectors
- H0. The application of environmental accounting practice in the Oil & Gas and Manufacturing sectors does not impact on company performance in
- H0 Environmental accounting disclosure does not take the same pattern among the companies in
1.6 Significance of the Study
The study will assist in efficient cost valuation of environmental remediation and compensation to affected communities particularly the Oil & Gas areas of the Niger Delta in Nigeria by corporate bodies impacting on the environment. A design and conceptual basis for environmental cost accounting and disclosure in corporate financial statement will facilitate efficient valuation of degradation in affected communities. Besides, it is beneficial to corporate organizations as ethical investors and the environmentally conscious general public will watch out for ethical responsible companies.
It is hoped that this study will evaluate the challenges and prospects facing Exxon Mobil with regard to designing environmental accounting concepts and reporting. Ultimately, environmental accounting disclosure is paramount in corporate organizations in Nigeria and elsewhere as it has become an issue of concern at the global level.
1.7 Scope of the Study
In order to carry out this study, a comparison was made between the practices of Exxon Mobil and other companies in Oil & Gas and manufacturing sectors. The study investigated the manufacturing companies among listed companies in the Nigeria Stock Exchange namely the agricultural, breweries, automobile and tyres, building materials, chemicals & paints and conglomerates listed in the Nigeria Stock Exchange Market considered as environmental polluters. The Oil & Gas sector comprised of companies in the upstream as well as marketing and distributions. There are 215 companies in their varied economic sectors from which
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