Social audits and environmental management accounting — student companion

Accounting Ahead | Original study resource | accountingahead.com.au

Social audits

MODULE 5 | PART E.3 | STUDENT COMPANION

A social audit is the process an organisation uses to find out whether particular stakeholder groups see it as

meeting its social responsibilities: its social contract. It is not the same as independent assurance of a

sustainability report. It covers the organisation and its supply chain.

Area Typical questions

Labour practices Working conditions, health and safety, training

Fair operating practices Fair competition, anti-corruption, and acting responsibly along the value chain

Consumer issues Honest marketing and contracts, safe products, handling complaints, protecting

customer data

Frameworks include: ISO 26000; SA8000 (Social Accountability International); ILO labour standards; the

Ethical Trading Initiative Base Code; Sedex's SMETA audit; the Higg Index; WRAP; and the amfori code of

conduct, whose principles cover freedom of association and collective bargaining, fair pay, health and safety,

young workers, no bonded labour, ethical business behaviour, no discrimination, decent hours, no child labour,

no precarious employment, and protection of the environment.

Case note - Ali Enterprises, Karachi: on 11 September 2012 a fire at the garment factory killed more

than 250 workers; many were trapped, and reports described locked exits and barred windows. On 20

August 2012 the factory had been certified under SA8000, with the audit reportedly carried out by a local

subcontractor of the certifying firm. Lesson: an audit is a snapshot. It works best alongside genuine worker

voice, follow-up and a willingness to act.

Sources: ILO (10 September 2016); Social Accountability International Q&A (December 2012); Clean Clothes Campaign reports.

Governance mechanisms

1

Policy and strategy

Sustainability policies, strategies and risk indicators built into corporate strategy, benchmarked and

reviewed

2 Formal structures

A board sustainability committee; environmental managers reporting to the board

3 Stakeholder engagement

Find out what matters, give feedback on strategy and performance, agree what can change

4

Recognised standards

ISO 14001: policy, then plan, implement, check and correct, review. ISO 26000: social

responsibility guidance

5 Linked pay

Executive pay tied to sustainability targets signals leadership is serious

Why it's hard

Responsible behaviour depends

on culture, so regulation alone

rarely changes much. Disclosure

rules, such as the ASX

recommendation on

environmental and social risk,

are only the start.

ETHICS & GOVERNANCE | M5 PART E.3 | STUDENT COMPANION

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Environmental management accounting

MODULE 5 | PART E.3 | CONCEPTS AND A WORKED EXAMPLE

IFAC describes environmental management accounting as managing environmental and economic performance

through management accounting systems that use physical information (flows of energy, water, materials and

waste) and monetary information (related costs, earnings and savings). It pays special attention to materials,

because they drive most environmental effects.

Prevention

Spent to stop environmental

harm happening

Example: Redesigning a

process to use less solvent

Appraisal

Spent checking compliance

with environmental policies

Example: Testing wastewater

against licence limits

Internal failure

Spent eliminating harm the

organisation caused, before it

leaves the site

Example: Treating

contaminated water on site

External failure

Relating to damage caused

outside the organisation

Example: Restoring a

damaged wetland

downstream

Scope choice

Count only costs recognised today, or extend to externalities as well

Hidden in overheads

$0k

$200k

$400k

$600k

$800k

$400k

Frozen meals

$400k

Dry pasta

Shared equally by volume

$690k

Frozen meals

$110k

Dry pasta

Traced to real drivers

The drivers

Frozen meals use about 90% of

refrigeration energy ($600k) and create

about 75% of trade waste ($200k)

The effect

Pasta was overcharged by $290k;

frozen meals looked more profitable

than they were, and their manager had

no reason to save energy

Bluegum Kitchens is an imagined company; figures are illustrative.

Remedies: separate cost categories for clear environmental activities; label less obvious environmental

costs; use activity-based costing to check allocation bases.

Limits: records rarely hold future environmental costs or intangible costs, such as sales lost to

environmentally aware customers.

ETHICS & GOVERNANCE | M5 PART E.3 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Circular economy and reporting practice

MODULE 5 | PART E.3 | CONCEPTS

Circular economy

Instead of take, make and throw away, a circular economy keeps materials and products in use for as long as

possible. The original three Rs, reduce, reuse and recycle, have widened to include redesign, repair, renew

and recover. Countries such as the Netherlands, China and Japan encourage circular thinking through policy,

and accounting systems that track materials through repeated cycles are still developing.

What surveys and awards tell us

Surveys show sustainability reporting is standard practice among large companies worldwide. But most of it is

voluntary, so organisations can select what they include, and they tend to select favourable information.

Reporting awards try to raise the bar: judges often praise reports that admit disappointing results and explain

how they will be fixed. Financial reporting, by contrast, is tightly regulated and leaves little room to experiment.

ETHICS & GOVERNANCE | M5 PART E.3 | STUDENT COMPANION

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Practice questions

MODULE 5 | PART E.3 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Bluegum Kitchens, next year

Bluegum Kitchens currently shares these environmental costs equally between its two product lines. Work out

(a) the current allocation, (b) the allocation traced to real drivers, and (c) which line is overcosted and why that

matters.

Cost Annual amount Frozen meals' share Dry pasta's share

Refrigeration energy $640,000 85% 15%

Trade waste charges $240,000 70% 30%

Packaging waste disposal $120,000 40% 60%

Frozen meals Dry pasta

(a) Shared equally

(b) Traced to drivers

(c) Which line is overcosted, and why does it matter?

Bluegum Kitchens and all costs in these questions are imagined teaching examples.

Question 2 - Which cost category?

Cost Category

(a) Training staff to handle chemicals safely

(b) An annual independent audit of waste licence compliance

(c) Cleaning up an oil leak in the factory yard before it reaches the drains

(d) Compensating a farmer whose creek was polluted by the factory's runoff

(e) Installing bunded storage to contain any spills

(f) Laboratory testing of stormwater samples

ETHICS & GOVERNANCE | M5 PART E.3 | STUDENT COMPANION

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Worked answers

MODULE 5 | PART E.3 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Bluegum Kitchens, next year

Cost Frozen meals Dry pasta

Refrigeration energy ($640,000) 85% = $544,000 15% = $96,000

Trade waste ($240,000) 70% = $168,000 30% = $72,000

Packaging waste ($120,000) 40% = $48,000 60% = $72,000

(b) Traced to drivers $760,000 $240,000

(a) Shared equally $500,000 $500,000

(c) Dry pasta is overcosted by $260,000 under equal sharing, and frozen meals are undercosted by the same

amount. Prices and profitability judgements are distorted, and the frozen meals manager has little reason to cut

refrigeration energy or trade waste. Note that packaging waste is driven mainly by pasta, so driver-based costing

also shows the pasta team where to act.

Question 2 - Which cost category?

Cost Category Why

(a) Prevention Stops harm before it happens

(b) Appraisal Checks compliance

(c) Internal failure Eliminates harm caused, before it leaves the site

(d) External failure Damage caused outside the organisation

(e) Prevention Stops spills from causing harm

(f) Appraisal Testing against standards

ETHICS & GOVERNANCE | M5 PART E.3 | WORKED ANSWERS

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