Book Reviews

Abstract

Environmental management accounting (EMA) enables a company to analyze its impacts on the natural environment as well as provide information to managers to help them become aware of, and address, environmentally driven monetary impacts on the company (p. 32). Given the internal, proprietary focus of management accounting and the specialized nature of environmental management accounting, there is not a great deal of published material available to describe what companies are actually doing in the EMA area. Thus, this book makes an important contribution by providing 12 concrete examples of how EMA activities are being conducted in small and medium-size enterprises in Southeast Asia. The companies range in size from eight to 1,600 employees and include four cases in the Philippines, four in Vietnam, two in Indonesia, and two in Thailand.The case development was motivated by two research questions (pp. 42–43): (1) “How do different organisational environments and institutional settings influence the implementation of EMA in South East Asia?” and (2) “How do EMA tools interact and complement each other to support managers in decision-making?” The data collection process to develop these cases is best described as action-based research. The authors, with the aid of local resource people, were involved in the EMA process to the extent that “some of the companies would not have succeeded in actually implementing EMA without researcher involvement” (p. 49).The book begins with some general discussion about the subject of EMA. This discussion is based around a very useful, multi-dimensional framework that categorizes decision settings and tools. The dimensions include the following dichotomies: (1) monetary and physical, (2) short-term and long-term, (3) future-oriented and past-oriented, and (4) ad hoc and routinely generated. These dimensions are combined to form a 16-cell framework. So, for example, the monetary, long-term, future-oriented, ad hoc cell refers to the EMA tool of monetary investment appraisal. Every one of these 16 cells is covered by at least one of the cases in the book, and seven of the cells are covered by four or more cases. Space does not permit a full description of each of the 12 cases, but in order to capture the flavor of the cases, each is described briefly, as follows.Chapter 4, EMA for eco-efficiency in a towel production firm, deals with the firm of Indah Jaya in Indonesia. Indah Jaya is ISO 14001 compliant, which is a requirement of many of the company's customers who are large department stores chains. Although Indah Jaya monitors issues such as energy consumption, hazardous substances, and legal requirements, this information has not been linked to production planning and control. A material flow cost accounting (MFCA) is conducted, and the chapter provides the details of the effect of energy and water consumption on product pricing. The results serve to focus attention on the management of product material losses as well as the inclusion of certain production processes in job order costing.Chapter 5, Managing HSE in a mechanical engineering firm, highlights efforts by Bisma Jaya, an engineering and construction firm in Indonesia, to improve health, safety, and environment (HSE) measures in response to HSE audits conducted on the company by customers. Without a satisfactory HSE ranking, the company was facing the risk of being disqualified from the job tender process. An extensive table is provided in the chapter that details the various HSE measures and what achievement of the measures would cost. The HSE measures are ordered according to cost-effectiveness to demonstrate how the company could optimize its HSE ranking as cheaply as possible.Chapter 6, Material flow cost accounting in a snack producer, focuses on the production of peanut snacks at JBC Food Corporation in the Philippines. The company had implemented a software-based environmental performance indicator system that monitored a large number of indicators, including electricity usage and waste and waste water treatment. As is a common issue across several of the cases, these indicators were not linked to monetary measures and financial performance. A physical flow chart was developed, and an MFCA was conducted. These tools demonstrated that about 10 percent of total production costs were caused by material losses, and as a result management understood that a focus on methods for boiling and peeling peanuts had the greatest potential for improving financial performance by reducing waste and energy demand.Chapters 7 and 8 represent a two-part case analysis of Oliver Enterprises, a company in the rice milling industry in the Philippines. Chapter 7, EMA for cleaner rice processing, describes how the company disposed of rice husks by dumping them in open fields and burning them. This led to a number of social and environmental issues: open-field burning is difficult to control; dumping and burning reduced productivity of the land; and the Philippine government had passed new environmental regulation prohibiting such activity. The company used a monetary environmental assessment appraisal to investigate a process to carbonize the rice husks and sell the output to fertilizer manufacturers. As a result of the analysis, the initiative went ahead. Unfortunately, after conducting an ex post assessment of the environmental investment, it became evident that the expectations for technical capacity of the carbonization process as well as the market for carbonized rice husks were too optimistic. Thus, in Chapter 8, EMA for reducing greenhouse gas emissions in rice processing, Oliver Enterprises takes another approach and looks at using rice husks as fuel for co-generation. The chapter describes the utilization of a monetary and a physical investment appraisal to determine which configuration of co-generation would be the most efficient.Chapter 9, Environmental impact assessment, compliance monitoring and reporting in electroplating, describes Well-Ever, a company that was motivated to use EMA because of supply chain pressures and regulatory requirements. The business was relocating and needed the necessary environmental compliance certificate from the government to commence operations in a new location. In addition, local government authorities required ongoing environmental monitoring and reporting. As a result of the EMA analysis, the company understood how to change its production processes to become more cost-efficient and be compliant with regulation at the same time.With Chapter 10, Relevant environmental costing and decision-making in a saa paper manufacturer, the book covers the first of two cases set in Thailand, where it is noted there is an environmental regulatory framework in place but with limited inspection.11 Saa paper is made from the bark of the mulberry tree. The owner of Classic Crafts was concerned about profitability and saw EMA as a way to inform efforts at cost reduction. A description is provided in the chapter of how material and energy flows were charted. This resulted in changes to the job costing system and a reversal of the decision about whether to sell low-quality paper or use it as an input in future production.Chapter 11, Environmental risk assessment at a pulp and paper company, focuses on an ISO 14001 certified paper mill, Thai Cane Paper, which realized that water was no longer a “free” good. The mill was faced with an increased risk of water shortage due to the installation of a power plant and declining rainfall. Analysis consisted of an examination of change in water flows and use, as well as predicting long-term changes in water supply and usage. EMA confirmed that changes were needed in water storage and recycling practices or the company would risk the possibility of being unable to continue operations in the dry season.Chapter 12, Decoupling economic growth from pollution, investigates the application of EMA at Tan Loc Food, a food-processing company in Vietnam. The company, operating in three houses, was in the process of consolidating operations into a single location in an industrial area. The company was going to be faced with a waste water fee for discharge in the new location. Production flow charts were developed to better understand material and energy flows, including the use of water. As a result, employees began separating and collecting solid organic waste as well as organic matter from waste water. By selling these by-products to farmers, the company increased revenue by €2,250 per year and reduced solid food waste by almost 100 percent and organic matter in wastewater by 40 percent.Chapter 13, Supply chain information and EMA in coffee exporting, describes the process of environmental supply chain costing and management in a coffee refining and exporting enterprise called Neumann Vietnam. The company was looking for ways to increase profitability, and the reader is told that the largest environmental cost savings are to be had upstream during the farming process, and downstream during the coffee consumption process. Farmers supplying the coffee beans were using more than twice the fertilizer needed. A positive supply chain effect could be realized if Neumann Vietnam assisted the farmers in using fertilizer more efficiently and more effectively. Such cost-savings would enable the farmers to sell the coffee beans more cheaply.The subject of Chapter 14, Environmental and quality improvements as justification for higher capital expenditure and land use in shrimp farming, is Chau Thanh Tam Shrimp Farm in Vietnam. Here, the owner has adapted the conventional approach to farming by installing an additional fish pond and a recycling pond. This has required higher-than-usual capital investment, and the owner is convinced the method is superior from a financial and environmental point of view. EMA analysis confirms that the owner's gut instincts are correct.The final case in the book, Chapter 15, Material and energy flow accounting in beer production, takes place in an ISO 9001 and ISO 14001 certified beer producer, Sai Gon Beer, in Vietnam. The production manager wanted to reduce water and energy usage because he knew it would improve financial performance. The chapter outlines how he worked with the environmental manager to analyze material and energy flows and associated costs and identify a number of capital investments to reduce costs and improve environmental performance.After the 12 cases, the book has a few closing chapters that are meant to summarize the cases and provide some general comments.The biggest strength of the book lies in its abundance of detailed tables and figures. Such supporting material makes the text come alive and enables the reader to grasp the production process and the EMA technique being used. Indeed, the book is very dense, and the technical details are not for the faint at heart. The book also does a good job of demonstrating that environmental considerations need to be incorporated into management decision-making, and to do so necessitates an understanding of material flows and an ability to integrate the physical and the financial.The emphasis on production processes, the material flow cost accounting, and the detailed supporting material means that the book is extremely practical. The cases are not dramatic or earth-shattering cases, but that is their appeal. The cases are very basic and, despite being located in Southeast Asia, the lessons derived from the cases can be applied to small and medium-size organizations anywhere. The book demonstrates that savings are to be had by pursuing EMA in a local setting and that an organization need not be a large, publicly traded multinational to pursue and benefit from environmental management accounting.This book could have been made even more valuable by using the concluding chapters to re-focus on the research questions and provide a more in-depth synthesis and comparison of the cases studies. Instead, an over-reliance is placed on the 16-cell framework and the ways in which the various cases “fit” the various cells in the framework. A less functionalist summary would have been helpful.Issues that would have benefited from elaboration in the concluding chapters are as follows: (1) measurement difficulties, (2) EMA initiation, (3) interdisciplinary nature of EMA, and (4) regulatory and ISO 14001 context.First are the problems associated with measurement. Although several of the chapters do refer to the difficulties in estimating physical flows and financial costs, this is underplayed in the book. For example, the commitment to regular HSE meetings for all employees responsible for HSE was assigned an annual cost of €150. This was calculated at two hours per month for 20 persons, plus snacks (p. 83). Interestingly, opportunity costs were not considered. The salaries of staff involved were not included in the cost because they were already covered and were not seen to create additional costs (p. 88). A detailed discussion of this and other measuring and costing activities would necessitate turning the case into a book, which is not feasible, but more commentary on the measurement difficulties would have been welcome.A second issue that could have been emphasized is the way in which EMA is initiated in a company. In many of the cases, customers provided the motivation for the company to be more environmentally sensitive. Also, there tended to be a champion (or champions) within the company who sought to improve environmental performance (see, for example, page 98). In some cases, the champion was met with resistance. For example, the saa paper manufacturing case noted that the environmental improvements suggested by the production manager were not initially considered relevant by the owner (p. 175). Only when profitability became an issue did the owner get interested in EMA.Third, it would have been helpful if the summary chapters reflected more substantially on the interdisciplinary nature of EMA and the need for interdisciplinary co-operation. For example, pages 168–169 and 218 comment on the information-gathering process and how it was not necessarily being done by management accountants. Indeed, production people, environmental management people, and management accountants all have a role to play.Fourth, more attention could have been paid to the regulatory and ISO 14001 context in which EMA is used. Several of the cases referred to an unenforced legal framework (see, for example, page 176, where Thailand is discussed). In the Philippines, beginning in February 2004, open rice husk burning was no longer permitted. Yet, two years later, over 700 open dump sites were still operating (p. 120). Also, many of the companies in the cases were ISO 14001 certified or were working to become certified. Some summary comments on this aspect and the role of voluntary environmental certification would have been useful.Finally, some mention is needed on the dominant paradigm of the book—eco-efficiency: saving money by managing environmental resources more prudently. The authors note that economic rationality was the driving factor in most of the cases, with technical and legal issues playing an ancillary role. Thus, action is taken on the basis of EMA because it pays or because the company wants to find a cost-efficient way to meet legal and regulatory obligations. Eco-efficiency should not be confused with environmental sustainability (Gray 2010). While the authors never claim to be accounting for sustainability, the tone of the book becomes overreaching every once in a while when it describes a company as being motivated to improve environmental performance. EMA will provide information on how organizations can be less unsustainable, but eco-efficiency and the adoption of EMA techniques is a long way from managing in an environmentally sustainable manner (Buhr and Gray 2012).Despite these comments suggesting how the book could have been enhanced, the book is without doubt a valuable reference and a welcome addition to the field. I would heartily recommend this book to students at all levels, as well as researchers and practitioners. There is much in the book for all of these audiences.The author presents an easy-to-read book based on her Ph.D. at the University of Sydney, addressing subject matter (solvency), which is topical. It follows the prior work of Frank Clarke and Graeme Dean, who have written extensively on the deficiencies of financial reporting and corporate collapses. Solvency is defined, consistent with the Australian Corporations Act (2001), s95A(1), as the ability of an entity “to pay all ... [its] debts, as and when they become due and payable” (p. 4). In terms of public perceptions, solvency is linked to financial distress and corporate collapse. Business pages of newspapers the world over give prominence to any large company that fails. Frequently, the sub-text of such articles includes perceptions of management greed, governance deficiencies, bungled decision making, accounting manipulation, insider trading, fraud, the plight of employees, and those left out-of-pocket. Jensen (1979) argues that journalists have economic incentives to engage in hype and sensationalism, and corporate collapses appear to be good examples of this type of reporting. However, it is worth remembering that evidence suggests corporate failure among listed companies is rare (Francis 2004).This backdrop is useful in considering the objective of the book. As stated on page 6, “The principal aim is to reconsider the solvency notion and to demonstrate through analysis and case data that conventional financial statements are deficient in terms of establishing the dated financial position of an entity and equally lacking with regard to quantifying an entity's state of solvency.”11 All uses of emphasis in the direct quotes are in the original source document. This objective is stated repeatedly: “Throughout this book, it is demonstrated that accounting as financial instrumentation—proved to be faulty—is in need of repair” (p. 15); “… conventional financial statements are shown throughout this work to provide a distorted view of a firm's financial position” (p. 59); “These investigations, as previously explained, indicate that certain accounting deficiencies have existed from the 1960s throughout the 1990s and continue into the new millennium” (p. 90); “For in spite of the attention apparent, accounting processes, its output and its outcomes have been shown to be lacking” (p. 180); “What society has failed to do, however, is concentrate on the understated role of the output of accounting systems—the quality of the content of financial reports—especially with regard to the effect thereof on the fortunes or misfortunes of business and its stakeholders. Those reports provide an inbuilt ‘check'—an ‘independent' accountability mechanism. In that context, regulators and society alike have somewhat shunned the notion that therein exists systemic problems in reporting on the financial state of business entities internationally” (p. 181); “Then, using case analyses, Chapters 5 through 7 further examined the book's main premise—that conventional financial statements are deficient in quantifying an entity's solvency and equally lacking in establishing its dated financial state” (p. 182); “With specific links highlighted between the cases, this diagnostic part confirmed earlier findings—that financial data prepared under GAAP, using a plethora of accounting conventions, are grossly inadequate in providing stakeholders with quality financial information on an entity's dated financial state” (p. 182); “Given the facts of ‘sudden' corporate collapse and business failures throughout the twentieth century and now into the new millennium, the usefulness (specifically in terms of money and money's worth) of conventional financial statements remains undeniably questionable” (p. 193); and “Business requires and stakeholders should demand radical change to conventional accounting systems. This is long over-due” (p. 194). Thus, the primary aim of the book is to make the case that financial accounting is dysfunctional.Which audience is the book intended for? The author states: “In challenging times, from the many unexpected corporate collapses and related financial dilemmas throughout the twentieth century and beyond, this work is important from a public policy perspective as regulators grapple with a commercial environment heavily influenced by perceived scandalous corporate group activity” (p. xxii, preface); and “These and other similar cases and the financial dilemmas they entail, in Australia and overseas, make this story topical and important from a public interest and a public policy perspective” (p. 5). Consequently, it is clear the book's intended audience is policy makers.Chapter 1, entitled “A crucial aspect of financial accounting,” includes a definition of solvency and describes the research method, which consists, quoting from R. J. Chambers, of “observation—a method of enquiry” (p. 11). I confess that I am no expert in this approach, but essentially it advocates that case studies are the definitive form of data. In Chapter 2, the author defines both the cash flow test of insolvency (the ability of an entity to pay all of its debts as and when they fall due) and the balance sheet test of insolvency (an entity is insolvent if the book value of its assets is less than its reported liabilities). The author provides an informative legal case history and a detailed classification of examples of both the cash flow and balance sheet tests. Absent from this chapter, however, is discussion of the extensive literature on asset sales by distressed firms (Shleifer and Vishny 1992; Brown et al. 1994; Asquith et al. 1994), which might have better contextualized discussion of the balance sheet test.In Chapter 3, the requirements in s295(4)(c) of the Australian Corporations Act, which stipulates that directors must currently make a declaration as to “whether, in the directors' opinion, there are reasonable grounds to believe that the company, registered scheme or disclosing entity will be able to pay its debts as and when they become due and payable” (p. 43) are reviewed. This current practice, referred to as the “declaration of solvency,” is suggested to be insufficient. Rather, the author asserts that directors need to go further by disclosing “the quantification of solvency” (p. 42), which, it is argued, would assist directors in discharging their duties since financial statements are deficient to the extent that directors are uncertain as to the true financial position of firms they run. Absent any anecdotal evidence of directors alluding to this problem, the author might have considered interviewing a sample of directors to ascertain whether any, in fact, felt this way about their companies' financial statements.Chapter 4 begins with a discussion of deficiencies in accounting standards, using AASB 102 as an example, where, in paragraph 9, the standard prescribes, “Inventories shall be measured at the lower of cost and net realisable value.” In paragraph 25, AASB 102 requires that “The cost of inventories shall be assigned by using the FIFO or weighted average cost formula.” The author states, “The standard is convoluted. It demands a technically possible but subjective and perhaps too flexible and confusing a method. It is a method that will only by chance result in an accurate assessment of the inventory's current financial worth. It can hardly assist on average in reliably calculating, in actual money terms, an entity's debt paying capacity” (p. 73; citations omitted). A number of statements supporting fair value accounting are then provided: “Not only is the information relevant, its quality is undisputed. The two ideas—relevance of information and quality—go hand in glove” (p. 73; citation omitted); and “It is arguably silly of directors and managers to believe in a book figure that denotes an inflated asset monetary equivalent when it is essential that they determine their entities' financial capacity to pay its accumulated debt” (p. 74). This is consistent with prior discussion implying that fair value accounting is a superior approach and implicitly would improve the balance sheet insolvency test (p. 19).An informative technical discussion on group accounting and deeds of cross guarantee, where each entity in a group that participates in a deed of cross guarantee is liable for the debts of the others, is provided from page 78. Toward the end of Chapter 4, the case of Westmex Ltd is described in some detail. Table 4.2 (p. 88) depicts balance sheet data in the lead-up to its collapse and shows Westmex having a net working capital deficiency of $15 million three years prior to its collapse and $25 million in the financial year prior to its collapse. These data could be interpreted as an example of accounting information sending the right warning signals.In Chapter 5, the One.Tel case is reviewed and includes an insightful career chronology of the One.Tel CEO, Jodee Rich, found in Appendix A5.1 (pp. 110–13). At times the reader gains the impression the author is almost journalistic in her exposition, with an example found on page 106 where Enron is discussed and is likened to One.Tel: “Such circumstances are reminiscent of a tragic lack of cash that coincided with other traders' early demands for payment, suffered by One.Tel. For Enron, the extent of its debt was a major and crippling factor in its financial structure. The total amount of debt it had incurred was largely unknown, but it was alleged to be relevant to its catastrophic financial state.” Toward the end of the chapter, on page 115, are excerpts from One.Tel's Statement of Consolidated Cash Flows for fiscal years ending in 1999 and 2000. These indicate increasingly negative cash from operations in the two years prior to One.Tel's collapse. Again, inspection of the cash flow statements of One.Tel in the period prior to its collapse would suggest that appropriate accounting red flags were being waved.Chapter 6, “Dilemma in diversity: Continuing issues in quantifying solvency,” contains more case studies, including those of Kia Ora (Duke Group), Budget Corporation, and Burns Philp. In the Kia Ora case, the firm undertook an acquisition of Western United Limited, a Perth-based financial services and merchant banking group. The acquisition was based on a flawed independent valuation provided by the accounting firm Nelson Wheeler. Simply put, Kia Ora overpaid for an asset based on a poor independent valuation, and subsequently went bust, with the accounting firm providing the valuation then being sued. In the case of Budget Corporation, it is unclear what precise implications a reader should draw from this case discussion, since there were ultimately no prosecutions involved.In the case of Burns Philp, at issue was the capitalization of “slotting fees” (payments made to supermarkets by fast-moving consumer goods manufacturers for shelf space) as “Other Assets.” Granted, many would agree that intangible assets are often difficult to value; however, it is worth noting that Burns Philip did not ultimately collapse (it was distressed only for a period). Table 6.5 (p. 139) indicates that accounting, once again, did a good job of reflecting the underlying economics of the business, with the times-interest-earned ratio falling from 4.5 in 1992 to 1.3 in 1998. This interpretation is supported by Table 6.6 (p. 140), which depicts the working capital ratio falling from 1.98 in 1996 to 0.97 in 1998. The ratio of net profit after tax to total assets turned negative during the period from 1996 to 1998, as would be expected if the financial statements were properly reflecting underlying firm performance. I was puzzled by the selection of this (and other previous case examples), since they appear to support a view that financial accounting actually functions, at odds with the author's position. The author summarizes the Burns Philp case as follows, “The major point here is that financial ratios based on conventional accounting numbers provide limited information, the quality of which is disputable, because the constituent parts are not of like kind—particularly in terms of money and its worth” (p. 141). In fact, the value of financial statement ratios in predicting bankruptcy is well known in the literature (Altman 1968), although little, if any, of this literature is cited in the book.In Chapter 7, “Insolvency stats and stories: 2004 to 2011,” the author canvasses the interesting topic of “phoenixing.” Phoenixing refers to a situation where the directors of a distressed company transfer assets into a new company (where they also hold directorships) and then place the original company into administration or liquidation (p. 159). Some statistics are provided on phoenixing, which suggests that this is a material issue in the Australian economy. Given the lack of existing empirical research on phoenixing, the book might have been more focused had it honed in and provided some more in-depth data analysis on an interesting issue like this. Chapter 7 includes a discussion of the Great Southern collapse, where it is suggested, “Reactions included trying to increase asset sales (to recoup money) and to refinance debt. Unfortunately, the banks did not agree” (p. 168). This is the only occasion in the book where banks are referred to, which is puzzling for two reasons. First, banks are obviously central to the issue of solvency—when a bank withdraws credit lines, a firm becomes insolvent. Second, there is an extensive literature on banking and financial distress (Gilson 1990; Gertner and Scharfstein 1991), which again has been overlooked.There could have been more care taken in placing discussion in proper context. An example is page